J.P. Morgan Gets Bumped to Sell as Mayo Clinic on Downgrading Continues

Prudential Securities' banking analyst Mike Mayo dropped J.P. Morgan Chase (JPM) to sell from hold, further cementing his image as Wall Street's resident curmudgeon.

According to Morningstar, 10 analysts rate the stock at strong buy, nine have pegged it at buy and one rates it at hold. Mayo has moved his rating on the blue-chip brokerage from hold to sell. Mayo also dropped his 2001 earnings per share estimate to $3.10 from $3.50 and his 2002 earnings per share estimate to $3.95 from $4.25. Wall Street's consensus estimate calls for J.P. Morgan to post earnings of $3.47 a share in 2001 and $4.25 a share in 2002.

The stock is off $1.49, or 3%, to $49.11 in morning trading.

The latest sell call from Mayo -- best known for his tenure at Credit Suisse First Boston, where he was let go not long after making bearish calls on banking stocks -- highlights his firm's effort to take the sell call off Wall Street's endangered species list. Prudential stepped away from investment banking back in December, becoming a retail-focused shop able to call companies as it sees them, leading to a slew of bearish calls.

Mayo has been at the forefront of this move. On March 8, in his first act as a Prudential analyst, he issued nine sell ratings and seven hold ratings -- tagging Fleet Boston Financial (FBF), Bank of New York (BK) and U.S. Bancorp (UBS) with scarlet letters. In later weeks, two of his deputies, David Trone and Kevin Fitsimmons, followed suit with sell calls of their own. All in all, his department has 18 sell ratings and only 9 strong buys -- a spread unequaled anywhere else on Wall Street.

Mayo's latest contrarian call works against both Wall Street's bullish opinion on the stock and also against the good cheer toward the sector stoked by the Federal Reserve's rate-cutting zeal. Conventional wisdom maintains that the increase in liquidity by tweaking rates will result in more business for financials, which will lend more money and rack up underwriting fees. But Mayo believes that the slowing economy will result in more defaults, not profits.

"A slower economy should cause problem loans to continue to increase," Mayo wrote. "The chief credit officer left his position after only a few months. Off-balance sheet exposure is higher than average."

The new J.P. Morgan Chase, post merger, is another trouble spot, the analyst says. Where others see a massive banking and brokerage business that trades at 21 times earnings, Mayo sees a bloated juggernaut that has not yet capitalized on its combined strength. "It will likely take longer than expected for the firm to synchronize its many parts to deliver the revenue clout the merger was predicated on. For the first four months, its ranking in global debt and equity underwriting fees declined from number six to number seven," he wrote.

With a price target of $40, Mayo expects J.P. Morgan Chase to have a difficult time. His target is more than $10 lower than where the company ended trading on Friday -- at $50.60. That said, since the stock hit a 2001 low of $37.58 on March 22, it has rallied 35%, meaning that some downside risk could be in store for the stock.

Mayo expects near-term weakness to continue and isn't betting that the merged houses of Chase and Morgan will get on the same page anytime soon. "In our view, cyclical weakness is more certain and front-ended, whereas the structural pick-up from the merger is less certain and back-ended," he wrote.

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