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Regions: Financial Winner (Update 1)

Written by: Philip van Doorn 06/22/12 - 4:36 PM EDT
Tickers in this article: RF JPM I:BKX MS GS

Chen said "we continue to recommend purchase of the major U.S. bank stocks," highlighting "Outperform-rated" Goldman Sachs (GS) and JPMorgan Chase (JPM) "as among the best positioned to win share in the event that impact from ratings actions are more extreme and drive material share shifts," and adding that "over the near-term, we believe Morgan Stanley should be a relative outperformer given the better than expected two-notch downgrade."

Low stock valuations support Chen's recommendations:

  • Shares of Goldman Sachs declined slightly to close at $93.63. The shares trade for 0.8 times their reported March 31 tangible book value of $123.94, and for seven times the consensus 2013 EPS estimate of $12.93, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $11.28. At the holding company level, Moody's lowered Goldman's long-term senior unsecured debt rating by two notches to A3 from A1. Deutsche Bank analyst Michael Carrier on Wednesday cut his price target for Goldman's shares to $135 from $145, but reiterated his "Buy" rating for the shares, seeing 40% upside for the shares.
  • Shares of JPMorgan Chase rose 2% to close at $36.10, trading just above their reported March 31 tangible book value of $34.91, and for less than seven times the consensus 2013 earnings estimate of $5.32 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $4.36.
  • Morgan Stanley (MS) -- which Chen also rates "Outperform" -- rose over 1% to close at $14.14. The shares trade for just over half their reported March 31 tangible book value of $27.37 and for six times the consensus 2013 EPS estimate of $2.25. The consensus 2012 EPS estimate is $1.39.

Morgan Stanley previously disclosing in its first-quarter 10-Q filing that according to the company's stress tests of its March 31 trading positions, its trading counterparties could call "additional collateral, termination payments or other contractual amounts" of $7.2 billion, in the event of a three-notch downgrade of its long-term credit rating by Moody's Investor Service and a subsequent downgrade by Standard and Poor's, along with another $2.4 billion in "increased collateral requirement at certain exchanges and clearing organizations," for total potential collateral calls of $9.6 billion.

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