KBW Downgrades Piper Jaffray And JMP, Cautiously Optimistic On Capital Market Stocks After Rate Hike

• Shares of Piper Jaffray Companies PJC are up 17 percent since November 11, while JMP Group Inc. JMP shares are down 12 percent over the same period.
• Keefe, Bruyette & Woods’ Joel Jeffrey downgraded the ratings on both the companies from Outperform to Market Perform.
• While Piper Jaffray’s stock is trading within 2 percent of the price target, challenging market conditions are expected to restrict JMP’s share price in the near future, Jeffrey stated.

Analyst Joel Jeffrey said that an expected increase in the short-term interest rates by the Federal Reserve may restrict the performance of capital market stocks in 2016. On the other hand, brokerage stocks may benefit from higher interest rates as their earnings are positively correlated to the higher rates.

“However, we expect the pace of rate increases to be slower than in previous cycles, which could limit growth in the primary business lines for capital markets stocks,” Jeffrey added.

The analyst believes that the operating environment for broker dealers may witness improve modestly in 2016.

“We are forecasting 10% growth in M&A as the large announced transactions close, a 5% increase in equity capital markets (ECM) volumes, 6% increase in equity average daily volume (ADV) and a 7% increase in fixed income ADV,” the Keefe, Bruyette & Woods report noted.

Piper Jaffray

Jeffrey maintained the price target for Piper Jaffray at $43. He said that the company’s shares are fully valued and trading within 2 percent of the price target.

“A tenet of our Outperform thesis was that the stock was trading at a discount to tangible book value (TBV), and with the announced acquisition of Simmons & Co. on 11/17, we estimate TBV was diluted by roughly 18% to $32 on a pro forma Basis,” the analyst wrote.

JMP

Jeffrey reduced the price target for JMP from $8.50 to $6.75. He believes that challenging market conditions, especially related to the company’s investment banking operations, will weigh on its shares.

Although JMP continues to benefit from the robust primary equity issuance in the healthcare vertical, no other near-term catalysts are visible, Jeffrey noted.