Prudential cuts JPM to 'sell'

May 7, 2001: 12:58 p.m. ET

U.S. No. 2 brokerage firm gets a rare 'sell' downgrade; stock takes a hit

NEW YORK (CNNfn) - Prudential Securities made a rare call Monday, downgrading its investment rating of J.P. Morgan Chase to "sell" from "hold," and lowered 2001 earnings estimates for the nation's No. 2 bank holding company.

In a research note, Prudential banking analyst Mike Mayo dropped the blue-chip brokerage rating, and reduced the 2001 earnings estimate to $3.10 a share from a previous $3.50. He also dropped his 2002 earnings-per-share estimate to $3.95 from $4.25.

Wall Street's consensus earnings estimate for J.P. Morgan is $3.47 a share in 2001 and $4.25 a share in 2002.

"The stock is back to our initiation price, but core earnings and asset quality have been worse than expected," the note said.

"Prudential's downgrade is extremely rare, " said Tom O'Keefe, research analyst at First Call, which tracks profit estimates and other forecasts on Wall Street. "In the last five months, despite the market downturn, ratings have been fairly optimistic. This is very rare, especially for a company as big and as popular as J.P. Morgan Chase. It's also a tricky scenario in which J.P. Morgan also covers Prudential."

J.P. Morgan (JPM: down $1.40 to $49.20, Research, Estimates) which merged last year with Chase Manhattan, was down $1.70 to $48.90 in early afternoon trading on the New York Stock Exchange.

According to O'Keefe, "sell" ratings make up less than 1 percent of all recommendations. A total of 300 companies currently have a "sell" rating, compared with more than 10,000 with a "buy" rating, said O'Keefe.

The note also said a slower economy should cause problem loans to continue to increase, and noted that the chief credit officer of J.P. Morgan Chase left his position after only a few months.

Prudential also said it will likely take longer than expected for the new J.P. Morgan Chase to synchronize its many parts to deliver the revenue clout the merger was predicated on. "For the first 4 months, its ranking in global debt/equity underwriting fees declined from number 6 to number 7," it said.

Setting his price target at $40, Mayo said he expects J.P. Morgan Chase to face weakness in the near-term and continuing long-term restructuring post-merger process.