Keep the JPMorgan Faith: Miller

NEW YORK ( TheStreet) -- Saying he expects the company "to continue to take market share and buy back stock with excess cash flow," FBR Capital Markets analyst Paul Miller on Friday reiterated his "Outperform" or "Buy" rating for JPMorgan Chase ( JPM).

Following a disappointing start to bank earnings season, with JPMorgan Chase reporting an 11% quarter-over-quarter revenue decline, Miller lowered his 2012 earnings estimate for the company to $5.00 a share from $5.65, but kept his price target for JPMorgan's shares at $46.00, implying 46% upside for the shares.
JPMorgan Chase CEO Jamie Dimon

Miller lowered his "normalized earnings estimate" for JPMorgan to $6.86 from $7.23 a share per year, "due to a sluggish capital markets outlook," and estimated that for the fourth quarter, JPM would post EPS of "$1.07 on an operating basis and $0.91 on a GAAP basis in 4Q11, after taking into account litigation expenses."

After $4.4 billion in share buybacks during the fourth quarter -- with JPMorgan CEO James Dimon apologizing during the company's conference call over poor market timing -- Miller said the company was "well positioned with a 7.7% Tier 1 common ratio per Basel III requirements."

Over the previous several quarters, the release of loan loss reserves was a common theme for the largest U.S. banks, propping up earnings, or in the case of Bank of America ( BAC) in the second quarter, mitigating losses.

During the second quarter, JPMorgan's loan loss reserves declined by $1.2 billion, while Bank of America released $2.5 billion in reserves, Citigroup ( C) released $2.2 billion in reserves and Wells Fargo ( WFC) released $1.1 billion.

Despite a continued improvement in credit quality, JPMorgan took a much more conservative approach on credit during the fourth quarter, releasing just $150 million in loan loss reserves. Miller said the company was "on the conservative side," with reserves covering "2.4x NPAs or 4.16% of loans," and that the company "should release reserves over the next several quarters."

While Miller said that JPM's worst-case estimate of $3 billion in losses "if the peripheral European nations do end up defaulting," seemed "trivial in the grand scheme of business done in Europe," the analyst said his firm hesitated "to assume $3 billion is the amount the company would lose given the contagion risk from other European banks and other financial intermediaries."

Miller's "Buy" recommendation on JPMorgan is based on the stock's low valuation relative to earnings estimates, with FBR giving the shares "a premium to the peer group due to its diverse revenue platform and its ability to deploy its relatively large level of excess capital."

The analyst concluded by saying JPMorgan was "the best positioned out of the big four U.S. banks to take advantage of dislocation in the market, but in the end, it may struggle to truly grow its balance sheet in a weak economic environment."

RELATED STORIES:






-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.