Can Chase Catch Citigroup With J.P. Morgan Deal?

It's rough seas for most sectors as we near the end of year 2000, and company after company has been tossed overboard. But some industry watchers say Chase Manhattan(CMB Quote), after struggling this year, may be pretty buoyant going forward.

The Chase File

Operations

Business: Retail and investment bank.

1999 Revenue: $33.7 billion

1999 Earnings Per Share: $4.14

2000 Estimated Earnings Growth: - 16%

Stock Snapshot

52-Week Range: $32.4 - $67.2

Percentage Change from Jan. 1: - 12.7%

Market Cap: $55.6 billion

P/E Ratio: 10.6 (trailing)

Shares Outstanding: 1.3 billion

The New York bank's proposed acquisition of J.P. Morgan(JPM Quote) received approval by federal regulators Monday. With antitrust hurdles largely out of the way, the company can focus its efforts on challenging financial services juggernaut Citigroup(C Quote).

So what's the deal with the company's stock? It is off about 13% year to date, bedeviled by concerns about digesting J.P. Morgan, an earnings disappointment and the interest-rate outlook. This week's Stock in the Spotlight focuses on Chase and finds that the stock may be starting a new year rally a little early.

Chase's shares gained 6.25% Monday amid expectations of the deal getting the stamp of approval. The merger of Chase's retail banking and J.P. Morgan's prominent investment-banking services is expected to be carried out early next year to form J.P. Morgan Chase & Co. Some analysts believe that the merger may even be completed before the new year. The all-stock deal, currently valued around $29 billion, is the latest in a series of Chase acquisitions. In 1999, it acquired the smaller-end tech-focused bank Hambrecht & Quist and back in August of this year purchased Robert Fleming Holdings, a U.K. investment bank.

Adding to the brightening outlook are recent comments by Federal Reserve Chairman Alan Greenspan hinting at an easing of interest rates. This is a huge boost for banks -- a lower borrowing rate means more investment. This will not only benefit Chase, which claims first place in the syndicated loans market with a 31.5% share, but the banking industry across the board.

Last week, members of the recently acquired Fleming Holdings were laid off along with about 5,000 members of the Chase staff, due to overlaps from the merger. This is a much larger set of layoffs than had originally been proposed with the merger announcement. According to financial services analyst Diana Yates of A.G. Edwards & Sons, this is still well below the number of layoffs expected by analysts when the merger was first announced. Senior analyst Alyssa Sibley at Morningstar says that the additional layoffs are a great cost-saving device and only make the merged company look stronger for the future.

The company missed last quarter's earnings by a massive margin, reporting 68 cents a share when the Street expected 93 cents. The large miss was blamed on weak performance by Chase's venture capital wing amid the large-scale declines in the general market.

5 Day

5 Year

Earnings for the current fourth quarter of fiscal year 2000 will not be announced till next month, but analyst estimates have already been guided lower to 78 cents a share, with an expected 16% loss in earnings for the year. But looking forward, Chase retains a forward price-to-earnings ratio of 10.5 times and a current price in the low $40s. During the market peak in March, the bank's stock had a forward P/E of 13.8.

Chase's P/E makes it look like a bargain next to its rivals. According to Yates, the acquisition of a strong investment banking division "puts Chase into a new peer group with Citibank, Morgan Stanley Dean Witter(MWD Quote) and Merrill Lynch(MER Quote) now." And among its new peers, Chase has a much lower P/E ratio, while the others have P/Es in the 15 neighborhood, Yates says. She adds, "Even with the slower capital markets and lower trading volume, [Chase's] earnings should be well above the group."

Sibley says that the merged entity will likely rise to the top five in almost all investment-banking services, and definitely boost their combined market share: "Forward looking, it actually looks pretty good." Yates says, "Basically, [Chase] is one of our best picks, and the only one I have with a buy rating." (A.G. Edwards has done no underwriting for Chase Manhattan.)

Funds With the Biggest Stake in Chase Manhattan Bank
Fund	Percentage of Assets in CMB	1-Week Return	YTD Return
(RYKAX Quote)Rydex Banking Adv	7.8%	7.2%	9.3%
(ITAPX Quote)IDEX Dean Asset Allocation A	5.3	2.3	13.1
(NBSSX Quote)Neuberger Berman Focus	4.9	11.2	12.7
(GFSAX Quote)AIM Global Financial Services A	4.6	10.3	25.5
(FSRBX Quote)Fidelity Select Banking	4.5	6.9	13.6
(ICSLX Quote)ICAP Select Equity	4.3	3.1	7.6
(MUSOX Quote)Midas U.S. & Overseas	4.3	11.7	-43.2
(HIEFX Quote)Huntington Income-Equity Tr	4.1	-0.3	-1.6
(MISEX Quote)Midas Special Equities	4.1	12.6	-12.6
(DSIDX Quote)UAM DSI Disciplined Value Instl	4	2.1	8.7
Source: Morningstar. Performance through Dec. 12.

Background Check Check out these recent TheStreet.com stories on CMB

Chase Reports Weak Third Quarter as Venture Arm Suffers (10/18/00) : Chase Manhattan posted third-quarter earnings Wednesday that fell far short of Wall Street's expectations, as the tumbling Nasdaq pressured results at its venture-capital arm . . . more

Update: Chase/J.P. Morgan Reveal Details of Merger (9/13/00) : In a widely expected announcement, Chase Manhattan said Wednesday that it had agreed to acquire J.P. Morgan in an all-stock deal valued at close to $36 billion . . . more

Chase Buys Beacon Group (5/24/00) : Chase Manhattan said Wednesday it had agreed to buy the Beacon Group, a private Manhattan investment and advisory firm that was started in the early 1990s by a group of Goldman Sachs executives . . . more