JPMorgan Has Double Digit Downside: Analyst

NEW YORK ( TheStreet) -- Sterne Agee analyst Todd Hagerman on Monday said that he saw "10-15% further downside risk" to broker/dealer stocks, with "perhaps more for JPM as the review of the company's trading losses unfolds."

As the intense reaction continued, following JPMorgan Chase ( JPM) CEO James Dimon's announcement late Thursday of a $2 billion second-quarter trading loss, the company announced on Monday that Chief Investment Officer Ina Drew had resigned.

Following a 9% decline on Friday, to $36.96, JPMorgan Chase's shares down another 3% in early trading Monday, to $35.98.

Hagerman said that investors were "stunned by the announcement, particularly considering most investors have some ownership position in JPMorgan Chase, particularly as a hedge against other potential risks tied to the broker/dealers as a whole," and that aside from some investors who were "more optimistic on the company, looking for a buying opportunity at or below tangible book value ($34.19)," most investors "most investors were decidingly more negative on not only JPM, but also the broker/dealers as a whole."

The increased risks for the broker/dealer space, according to Hagerman, include "the likelihood of more severe downgrades by Moody's next month, ongoing Eurozone risks, accelerating rules and toughened Fed position towards policy surrounding the Volker Rule, as well as likely diminishing revenues and profitability."

Hagerman added that "the outsized trading loss and break-down in internal controls could potentially place JPM under some form of supervisory action down the road following the completion of various regulatory reviews of the loss and associated enterprise risk management processes/controls," and that "the ongoing review and/or the possibility of supervisory action could possibly curtail, or even cease the company's capital buyback abilities sooner rather than later."

In March, following the completion of the Federal Reserve's annual stress tests, JPMorgan's board of directors authorized $12 billion in common share repurchases for 2012, with another $3 billion in buybacks authorized for the first quarter of 2013.

Hagerman has a neutral rating on JPMorgan Chase, with a $50 price target, estimating the company will earn $4.90 a share this year, followed by 2013 EPS of $5.50.

Citigroup analyst Keith Horowitz has a different take on JPMorgan Chase, saying on Friday that the shares offered investors the "best potential absolute returns in the space," among the largest U.S. bank holding companies, although he also said that he was "assuming lower buyback activity of $5 bln in 2012 to be conservative."

While Horowitz also said that the timing of JPMorgan's loss "could not have been worse, and will likely impact all capital market sensitive stocks due to increased concerns of a more restrictive Volker rule," he was "not convinced this will necessarily lead to a much stricter rule that will significantly impact" trading returns, "since the other side of the coin is that it would severely impact liquidity in the markets."

Horowitz rates JPMorgan Chase a "Buy," with a $45 price target, estimating the company will earn $$4.35 a share this year, followed by EPS of $5.20 during 2013.

JPMorgan Chase's shares returned 13% year-to-date through Friday's close, pulling back 20% from their year-to-date closing high of $46.49 on March 27.

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At Friday's close, JPMorgan's shares traded for 1.2 times tangible book value, according to Thomson Reuters Bank Insight, and for less than seven times the consensus 2013 earnings estimate of $5.54 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate was $4.68.

Hagerman suggested that investors "stick w/quality regionals, particularly as a safety trade for the time being," with Sterne Agee's "favorite names" remaining Wells Fargo ( WFC) and PNC Financial Services Group ( PNC), with "favorite momentum plays" including BB&T ( BBT) and PacWest Bancorp ( PACW).
  • Shares of Wells Fargo closed at $33.31 Friday, returning 23% year-to-date, following a 10% decline during 2011. The shares trade for twice their tangible book value and nine times the consensus 2013 EPS estimate of $3.68. The consensus 2012 EPS estimate is $3.28. Hagerman rates Wells Fargo a "Buy," with a $38 price target.
  • Shares of PNC closed at $65.48 Friday, returning 15% year-to-date, following a 3% decline last year. The shares trade for 1.4 times tangible book value and 9.5 times the consensus 2013 EPS estimate of $6.89. The consensus 2012 EPS estimate is $6.19. Hagerman rates PNC a "Buy," with a $74 price target.
  • BB&T of Winston-Salem, N.C., closed at $31.75 Friday, returning 28% year-to-date, following a 2% decline during 2011. The shares trade for 2.1 times tangible book value and 10.5 times the consensus 2013 EPS estimate of $3.02. The consensus 2012 EPS estimate is $2.68. Hagerman rates BB&T a "Buy," with a $35 price target.
  • Shares of PacWest Bancorp of Los Angeles closed at $24.55 Friday, returning 31% year-to-date, following a 10% decline last year. The shares trade for 1.9 times tangible book value, according to Worldscope data provided by Thomson Reuters, and 13 times the consensus 2013 EPS estimate of 1.89. The consensus 2012 EPS estimate is $1.80. Hagerman has a "Hold" rating on PacWest, with a $28 price target.

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

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

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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.

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