JPM: Ambitious CEO to take the bank to another level.

About 13 months ago, I named JPM as a top pick for 2006. At that time, the stock was lagging the market with a share price of around $36. Today JPM is hovering around another 52 week high level, trading at $48.28. The stock is posting solid 34% gain to date. The investment thesis behind JPM was better risk to award scenario. I anticipated somewhat choppy 2006 in 2005 due to Fed prolonged rate hike throughout 2005. I thought that this would have some effect on the growth rate of the economy, causing earning deceleration in certain sectors. As financials have lagged the market, I went with financials as the area to focus due to improved risk to award ratio. Financials have been fighting tough business climates. Shrinking interest margin due to yield inversion, difficult mortgage business, and change in personal bankruptcy policy all weighed negatively on the bank stocks.

So what do I think about JPM now after one year? JPM business outlook is better than ever. I continue to believe that JPM is going to further improve its financial metrics, notably ROE and net profit margin. Although JPM continues to make solid progress on its ability to generate higher net profit margin, it is still lagging its primary competitors such as BAC and C. New CEO Jamie Dimon recently took the full control of JPM after being promoted to both Chairman and the CEO of the company. He vows that he can take the company ROE metrics to 20% level but many analysts are still skeptical of his view. At most optimistic case, the analysts believe that ROE for the company will be around 17% at best, about 4 to 5% below the well run large integrated bank such as C and BAC. However, even if the analysts are right, I believe that the company can still achieve 15% growth in EPS over next 5 years. Folks, JPM is a low risk, extremely sound investment that will show steady growth over next 5 years. I believe that the company will generate EPS exceeding $4.50 in 07, $5.15 in 08, and $5.9 in 09. Therefore, even if the conservative PE of 12 is applied, the stock will be trading around $62 in 07 on a forward PE basis. If Jamie Dimon is correct about generating 20% ROE for the company, the upside for the share price is even greater.

I also expect that Jamie Dimon will raise the company dividend sometime in 07. The company has not raised the dividend in last 3 years and I believe that this will bring more investor enthusiasm to the stock, especially for those who are seeking a balance between the aggressive growth strategy and value approach.

You have noted lately that Citibank's financial performance has been lagging BAC. There is much talk in the market that C will spin off several branches of the business or outright sell some of wealth management asset to the interested parties. Don't be surprised if JPM shows a lot of interest in what is coming out of Citi. While C may cut its investment on expanding business scale, Jamie Dimon who has been cleaning up its house and improving the operation may show aggressiveness in expanding business scale in 07. In my opinion, JPM has really consolidated its business operations well under common data management platform and may handle additional M&A activities with better than expected business synergies. Finally, I also expect the company may be a little bit more aggressive with its Investment banking; the company spent most its time to establish steadiness and consistency in 06 for Investment Banking area.

Turnaround for JPM is no where near complete. This implies plenty of earning leverage that you will see from the company. 2006 was the year for the company to demonstrate the ability to improve operational performance and build the organization for more consistent growth. 2007 will be the year for the company to leverage on the operational improvements that it has achieved to date and become more aggressive on expanding business scale. I expect as the company exits 07, the company will have largely finished the operational improvements and establish the business scale to compete effectively with C and BAC. This sets up the company to become lean, mean cash generating machine in 08 (of course with the economy not in recession).

As such, I see JPM as the core holding in my portfolio. Despite the solid gain we had to date, I will continue to hold onto the shares as I see far higher share price in the future. CTRP now has the best pick status for 07 for FilthyRich group. However, JPM has not disappointed us with 06 performance. While other tech, biotech and china stocks have been all over the map in 06 and gave stomach aches every now and then, JPM has been steady and consistent in 06 and I believe it will be the same in 07. So congrats to JPM shareholders in 06 and we look for even better things to come in 07.