Goldman Adds JPM to Conviction List

Shares of JPMorgan Chase ($JPM) still haven’t fully recovered from the news of the trading losses. Wall Street, however, is starting to realize what a bargain the stock is:

Goldman Sachs added JPMorgan Chase & Co to its America’s conviction buy list, saying the U.S. bank’s capital position and earnings power can offset its recent hedging loss of at least $2 billion.

Goldman downgraded Morgan Stanley to “neutral” from “buy,” and removed the stock from its conviction buy list, saying earnings could be hurt by muted capital markets activity.

While Goldman sees value in Morgan Stanley’s shares at current depressed levels, it expects better returns at JPMorgan.

The 15 percent decline in JPMorgan share price since the largest U.S. lender by assets announced trading losses at its chief investment office has been “drastic,” given the unit’s 5 percent average earnings per share contribution, Goldman said.

JPMorgan, which has temporarily halted its $15 billion share repurchase program, may also resume buybacks this year, lending further support to the stock, Goldman analysts said.

Goldman, however, cut its second-quarter earnings estimates for JPMorgan to 60 cents from 75 cents to reflect a quicker recognition of its trading losses.

Second-quarter earnings of 60 cents per share is still below Wall Street’s consensus. The view on the Street is for JPM to earn 85 cents per share for the second quarter. Two months ago, the expectation was for $1.24 per share.

Let’s look at the larger picture. Wall Street expects JPM to earn $5.32 per share for 2013. I’m a little hesitant to make forecasts that far out but you can see that Wall Street has high hopes for Dimon & Co. That means that JPM is going for 6.6 times next year’s estimate. The earnings yield works out to 16%.

The figure of $5.32 would top what JPM earned in 2006 or 2007 when the stock was over $53 per share. Yesterday, it closed at $35.32.

Posted by on June 26th, 2012 at 8:27 am

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