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The Zacks Analyst Blog Highlights: JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs Group and American Public Education

Zacks Equity Research

For Immediate Release

Chicago, IL – May 2, 2013 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include JPMorgan Chase & Co. (JPM), Citigroup, Inc. (C), Morgan Stanley (MS), The Goldman Sachs Group, Inc. (GS) and American Public Education, Inc. (APEI).

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Here are highlights from Wednesday’s Analyst Blog:

Legal Tussle for JPMorgan & Citi


Washington Mutual Inc. – acquired by JPMorgan Chase & Co. (JPM) in 2008 – and Citigroup, Inc. (C) are encountering legal charges in connection with issues arising out of the sale of mortgage-backed securities (:MBS). Integer Program LLC sued these two firms for incurring huge losses from mortgage loans.

Integer has accused Washington Mutual and Citi of breaching an agreement related to mortgage loan purchase entered by these two institutions in 2007. As a result of this agreement, Integer incurred a total loss exceeding $301 million.

As per the lawsuit filed by Integer, residential mortgage loans, in excess of 4600, were securitized by Washington Mutual. Consequently, these mortgage-backed securities were sold to Integer. Of these, the alleged breaches took place on over 1,400 loans.

Prior to the closing of the offer date of the certificates to the public, more than 60 mortgage loans were delinquent. Further, it is alleged that both JPMorgan and Citi were well aware of the associated risks. However, despite being acquainted with the existing breaches in the securities, JPMorgan and Citi did not take any steps to rectify them.

Similar Charges Earlier

Earlier in 2013, JPMorgan was sued by National Credit Union Administration (:NCUA), the U.S. regulator for credit unions, for misrepresentation in the underwriting and sale of MBS worth over $2.2 billion, which were sold to the U.S. Central, Western Corporate and Southwest Corporate federal credit unions (FCUs) by Washington Mutual.

Further, many other global giants, including Morgan Stanley (MS) and The Goldman Sachs Group, Inc. (GS), are battling similar lawsuits related to MBS.

Our Viewpoint

Such charges are expected to result in increased legal risks, which might pose a threat to the companies’ financials going forward. Moreover, it is apprehended that litigation overhangs might tarnish the image of these banking majors.

JPMorgan currently carries a Zacks Rank #2 (Buy), while Citi carries a Zacks Rank #3 (Hold).


APEI Downgraded to Neutral


We recently reverted back to a Neutral recommendation on American Public Education, Inc. (APEI) from Outperform due to weak new student starts in the fourth quarter of 2012. American Public Education carries a Zacks Rank #3 (Hold).

Why the Downgrade?

Even though, American Public beat the Zacks Consensus Estimate for revenues and earnings in the fourth quarter of 2012, its new student starts were weak and operating margins declined in the quarter. American Public, an online provider of higher education, released its fourth quarter of 2012 earnings results on Feb 28.

New student enrollments declined 8% in the quarter, higher than management’s expectations of a 3% to 7% decline. Management believes that the company’s fraud prevention initiatives are reducing enrollment of students who abuse funds, which explains the decline in new student starts for the quarter.

Moreover, the company also provided a bleak outlook for student starts in the upcoming quarter. We believe the declining trend of new student starts could eventually impact total enrollment in future quarters.

Operating margins also declined in the quarter by around 130 basis points to 25% due to the company’s increased marketing efforts, which resulted in higher selling and promotional expenses.

A tough regulatory environment also remains a persistent overhang.

Despite the fourth-quarter beat, estimates have mostly moved downwards for 2013 and 2014.  The Zacks Consensus Estimate for 2013 moved down by 1.9% to $2.58 and 7.0% to $2.80 for 2014 over the last 60 days.

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