JPMorgan Is 'Value Investors' Dream': Sterne Agee

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) "remains on track to increase tangible book at a double-digit pace and deliver a mid-teens return on tangible equity," according to Sterne Agee analyst Todd Hagerman.

The analyst on Wednesday increased his 12-month price target for JPMorgan's shares to $64 from $54, showing potential upside of 20% from Tuesday's closing price of $53.49.

Hagerman in a note to clients raised his 2013 operating earnings estimate for JPMorgan to $5.80 a share from $5.50, and raised his 2014 EPS estimate to $6.15 from $5.85. "After a relatively soft and erratic April, capital markets activity, consumer confidence, and housing have thus far registered ahead of expectations this quarter," he wrote.

Sterne Agee is out in front of the consensus EPS estimates among analysts polled by Thomson Reuters of $5.70 for 2013 and $5.95 for 2014.

JPMorgan earned $6.5 billion, or $1.59 a share during the first quarter, increasing from $5.7 billion, or $1.39 a share, in the fourth quarter, and $4.9 billion, or $1.19 a share, during the first quarter of 2012. Results during the most recent quarter were boosted by a $1.2 billion release of loan loss reserves in the company's Consumer & Community Banking segment.

Hagerman expects a continued lift to earnings from credit leverage, as "credit quality improvement continues to outpace expectations following the severity of the financial downturn."

A major challenge for JPMorgan Chase and most other large mortgage lenders is the slowdown in refinancing activity and the narrowing of gain-on-sale spreads as long-term interest rates rise. JPMorgan's first-quarter mortgage production revenue, which excludes loan repurchase losses, was $401 million, declining from 25% from a year earlier.

Despite that challenge, along with low overall loan growth, "JPM's core business asset management, large corporate / middle market lending and investment banking units remains strong," according to Hagerman.

"We find it difficult to ignore JPM's discounted valuation given its proven ability to generate excess capital," Hagerman wrote.

While the Federal Reserve in March only gave conditional approval for JPMorgan Chase's 2013 capital plan, the regulator did approve common share repurchases of up to $6 billion through the first quarter of 2014. The Fed also approved an increase in JPMorgan's quarterly dividend to 38 cents a share from 30 cents, for a yield of 2.84%, based on Tuesday's closing share price.

"Notwithstanding the challenges, with JPM trading at a discounted ~8.5-9x forward earnings, we believe the shares are poised for multiple expansion given the tailwinds tied to housing, employment and our sense of a diminishing regulatory overhang heading into 2014," Hagerman wrote.

Strong Words from Dimon

The "regulatory overhang" refers to the company's "London Whale" hedge trading debacle within the company's Chief Investment Office (CIO) last year, which led to reported losses of $6.4 billion. When discussing the CIO losses at a conference on Tuesday, JPMorgan CEO James Dimon said "there was no hiding, there was no lying, there was no bullshit, period. But we were wrong about stuff." He added that "nothing was done that was deliberate in any way, shape or form."

Dimon also said that if the firm is sued over the CIO losses, "we are going to fight that one to the end too, by the way, so keep that in mind."

On a much more positive note, Dimon said JPMorgan was well-positioned for a rise in interest rates. In anticipation of the eventual curtailment of long-term securities purchases by the Federal Reserve, the market pushed the rate on 10-year U.S. Treasury bonds to 2.20% on Tuesday, an increase of 50 basis points from the end of April.

Dimon said if the market yield on the 10-year U.S Treasury bonds were to rise by 100 basis points, the bank's annual earnings would increase by an additional $2 billion, "all else being equal." The bank's annual earnings could increase by $5 billion if rates were to rise by 300 basis points, he said.

JPM Chart JPM data by YCharts

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

-- 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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