JPMorgan Has 35% Upside: Credit Suisse

NEW YORK ( TheStreet) -- Credit Suisse analyst Moshe Orenbuch said on Tuesday said that JPMorgan Chase ( JPM) has "an intense focus on investing in the business to ensure technology advances keep pace with globalization of the industry," and that the firm's "cost structure allows for solid returns even in less favorable market settings."

Following a meeting with CEO of JPMorgan investment bank CEO Jes Staley, Orenbuch reiterated his 12-month price target of $50 for the company's shares, citing the bank's "competitive positioning, ability to gain market share, and strong balance sheet."

The analyst said that "overall, management's tone was positive regarding the company's strategic positioning and the ability to earn good returns in a choppy environment." The investment bank is making major investments in technology, "particularly given the complexity and globalization of the industry, with the IT improvements expected to "yield more advanced, efficient and safer trading systems," as well as "cost saves at about $300 million per annum."

While JPMorgan's second-quarter core trading revenue declined 30% from the first quarter, peer banks saw a 39% decline on average, according to Orenbuch, who said that JPM attributed its better performance "to the strength and diversification of their franchise and benefits of recent investments."

JPMorgan's management also indicated that although "the Eurozone crisis will likely affect results over the next few quarters and if there were to be a positive surprise, management believes it would be from a sooner than expected recovery in the U.S."

The three main growth strategies for JPMorgan's investment bank include international growth, with "measured investments in Asia although the revenue environment remains challenging in the region," growth "in several LatAm countries... with local currency capabilities in Brazil;" physical commodities trading, where "JPM is the largest player" and improvement in trading technology.

Orenbuch said that JPMorgan expects the technology improvements to reduce the number of trading systems used by the investment bank from eight to two, with the unit reducing its headcount by "700+."

The analyst also said that JPMorgan remained committed to the universal banking model, in the "belief that it lowers risk and adds to shareholder value," since "volatility of revenues is lower attributable to their economies of scale," and because the company's "broader distribution" gives it the ability "to invest in growth more consistently than peers who are more narrowly focused."

JPMorgan's shares closed at $37.01, returning 14% year-to-date, following a 20% decline during 2011. The shares are down 9% since closing at $40.74 on May 10, when CEO James Dimon estimated $2 billion in trading losses from hedging activity by the company's Chief Investment Office. While the CIO's second-quarter trading losses ended up totaling $4.4 billion, JPMorgan reported second-quarter earnings of $5 billion, and Dimon said the company had "significantly reduced the total synthetic credit risk in CIO," and that "hopefully, if all goes well, we can start buying back stock early in the fourth quarter."

The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for seven times the consensus 2013 earnings estimate of $5.21 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.66.

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

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

>Contact by Email.

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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