Cramer: Why JP Morgan is a Buy
A Jamie Dimon-run JPMorgan Chase ( JPM) missed analysts' fourth-quarter estimates and saw $1.3 billion in writedowns from mortgage-related investments, but on a relative scale the firm is still outstripping its peers. The nation's third-largest bank saw profits fall by 34% to $2.97 billion from $4.53 billion during the same period a year ago. On a per-share basis, JPMorgan earned 86 cents a share, while analysts polled by Bloomberg and Thomson Financial had estimated that the firm would see net income about 6 cents higher. Compared with its rivals, JPMorgan has dodged many of the subprime bullets that have forced others to turn to foreign and domestic investors to buffet their cash-strapped businesses.
On Tuesday, Citigroup ( C) reported a whopping $18.1 billion writedown and announced that it would be raising $14.5 billion in much-needed funding from investors including ex-CEO Sandy Weill and Saudi billionaire Prince Alwaleed. Merrill Lynch ( MER) also disclosed plans to raise some $6.6 billion from foreign investors, including Korean Investment Corp. and Japan's Mizuho Financial Group. Citi's fourth-quarter results highlighted consumer credit problems in areas including auto loans, mortgages and credit cards and suggested that those issues may begin to put a strain on the U.S. economy. The largest U.S. bank increased its loan loss reserves to $5.2 billion in anticipation of a shaky credit environment and said that it recorded $9.83 billion in losses due to the deterioration in consumer credit.
On the heels of Citi's report, analyst Michael Mayo of Deutsche Bank downgraded JPMorgan from buy to hold based on the belief that the company could face similar issues in its consumer credit platform. Indeed, JPMorgan did boost its provision for losses in credit to $1.8 billion and revealed that consumer delinquencies overall were on the rise. "We remain extremely cautious as we enter 2008," Dimon wrote in a prepared statement. "If the economy weakens substantially from here -- for which, as a company, we need to be prepared -- it will negatively affect business volumes and drive credit costs higher." Still, JPMorgan saw its revenue increase 7% to $17.4 billion, compared with estimates of $17.2 billion. The bank's relatively stable financial footing has made it a candidate to purchase a host of troubled regional banks and smaller rival financial institutions. In past quarters, Dimon has stated that JPMorgan would look to grow in the mortgage business in the wake of the subprime collapse, and financial sector analyst Dick Bove has suggested that firms including beleaguered Washington Mutual ( WM) could be on its radar. Last week, CNBC and other media outlets said that Dimon and Washington Mutual executives were in very early talks to merge the two organizations. Neither firm has commented on those rumors. Shares of JPMorgan were tacking on 8 cents at $39.25 in premarket trading.