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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

JP Morgan

July 17th 2009 JP Morgan Chase
Stock Symbol: JPM
Industry: Banking
Price as of 7/17: $36.89


Thanks to better than expected earnings, the broader markets performed great this week. Case in point, Metlife which we featured last week, rose 11% this week. Not bad. A lot of good earnings this week from the likes of Intel, Goldman Sachs, IBM, Google, and more. Another company that performed well this week after solid earnings was this weeks' featured stock, JP Morgan Chase. Led by CEO Jamie Dimon, JP Morgan has done a great job of avoiding most of the pitfalls that the other financials succumbed to. As a result, JP Morgan was able to gobble up Bear Stearns and Washington Mutual on the cheap while the rest of the industry focused on their own survival. These two mergers will pay off well in the future once the economy gets back on solid footing. In the mean time, JP Morgan's stock provides attractive value without many of the risks that other financial stocks still pose.
Thursday morning JP Morgan Chase reported earnings. The company easily beat estimates by 24 cents even after the company took a charge of 27 cents to repay the TARP money. Revenues rose 2.9% to $27 billion, easily beating estimates. JP Morgan eased any shareholder fears with a number of positive comments. First they indicated that while the economy will deteriorate further, they feel confident that, with their strong capital and reserve levels and significant earnings power, they will can continue to reinvest in their businesses and do well for their clients, communities and shareholders over the long term. CEO Dimon noted that company maintained the fortress balance sheet with Tier 1 Capital of $122.2 billion, resulting in 9.7% Tier 1 Capital ratio and 7.7% Tier 1 Common ratio. JP Morgan added $2 billion to credit reserves, bringing the total to $30 billion. During the quarter, the company actively modifyied mortgages. The good news is that the dollar value for delinquency reserves is slowing and hopefully will stabilize soon. JP Morgan indicated that commercial real estate will get worse but they don't expect it to be materially significant to their numbers, indicating that it's a bigger deal for regional banks. The stock pulled back following the earnings, but the news was clearly positive for the company and the future for JP Morgan.
A lot of the good news has been priced into JP Morgan's shares. The stock is up 145% from the March lows, but the stock still has plenty of upside potential over the next several years when the Washington Mutual and Bear Stearns mergers start to pay off. Even with the recent run up, JP Morgan's stock still trades in line with its' book value of $36.77 a share. The stock also trades for 12 times next years earnings with the potential for $5 to $6 in earnings over the next several years. The stock also trades for 1.3 times sales. Like all the big banks, JP Morgan cut their dividend, but now that the company has paid back its' TARP money, JP Morgan has indicated they will reassess the dividend at the end of the year, hopefully raising it sometime in 2010. JP Morgan doesn't have the upside potential of some other banks like Bank of America, but its' one of the safest plays in the financial industry with plenty of upside when the economy recovers.