With Dow’s advance this morning, DOW is now 15 points below record close. When the market corrected in late Feb/early March, people sold everything in sight. However, all emerging markets that include China have not only recovered but are trading at a record level. The US DOW now sees record close in sight. Heading into the April earning, I expressed my opinion that the market bottomed and asked you to start buying back shares more agressively.
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JPM amid the concern over the sub-prime loans fell during the corrective period. Also the banking sector in general has lagged this recovery. With Citi beating the consensus estimate yesterday and giving some support to the theory that financials earning outlook is not as grim as it is feared, I believe the financials will finally catch up with the rest of the market. I emphasize that not all financials are created equal. I do believe that sub-prime loan is a serious earning concern for specialty names in mortgage loan business. However, large integrated bank/ brokerage names will continue to see modest growth environment. As the street has discounted the steep earning drop into the share price, these names can surrpise/comfort the street by simply coming inline and the share price can rally thereafter. This is what happened to Citi yesterday.
JPM will report its earning before the market open tomorrow. I continue to love JPM's outlook. The consensus number for JPM tomorrow is $1.02. I expect JPM is one of only a few numbers that will actually beat the consensus estimate meaningfully. I expect the company to deliver 3 to 4 cents above the estimate. I believe that this performance will force several firms to hike 07 and 08 estimate despite difficult business environment of the financial sector. This is likely to lead to TP revision by analysts and the stock could be set to show nice buying interest.
Why am I bullish on the firm? JPM's earning leverage is just unfolding from many ROE metric improvement initiatives that have been implemented under the leadership of Jamie Dimon. JPM in my opinion will grow the revenue and EPS will grow faster than the revenue due to much improved bottom-line structure just after Bank One acquisition period.
Investment Bank is likely to deliver another exceptional Q for JPM. C, GS, Morgan Stanley and UBS earning all supports robust environment in the IB sector and I see no reason why it should not be the case for JPM. Furthermore, JPM has been emphasizing trading investment opportunities in energy/commodity. As oil and commodity price once again soared this Q, JPM IB business could deliver elements of surprise from trading revenue.
Retail banking segment of JPM is heading into Q with much lower expectation. Last Q. JPM sold large portion of sub-prime loans, taking some loss. This action was smart as it has lowered the exposure to the sub-prime market and stabilizing the business outlook in this sector. JPM has one of the lowest sub-prime exposures of all large/mid size banks and given the bad sub-prime market hangover, the bank is poised to outperform others.
The firm has bought back 21 mil shares in last Q and currently has authorized cash to buy additional 107 mil shares (3% of outstanding). I expect JPM will work this cash continuously throughout the Q shrinking share count basis and accelerating EPS performance. In addition, better performance in generating cash is likely to result in hike in dividend and I believe this may be imminent any day.
In conclusion, JPM has another 30 to 40% upside from here. I think the stock is headed to mid-60 level towards the year end. As people continue to worry about the mortgage and sub-prime market and as the market continue to climb a wall of worries, JPM is poised to ser new highs throughout 07 and love the stock at current level.
I would be a buyer heading into the earning tomorrow morning.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
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