J.P Morgan Comments On Penson Worldwide's Earnings Beat

Penson Worldwide PNSN reported EPS of $0.11, and $0.07 excluding non-operating expenses. The results were better than J.P Morgan modeled, better than it feared and were largely in line with what management said the company would earn when PNSN reported 3Q10 results. JPM is maintaining its Neutral rating as the company is still generating losses, and it expects will continue to generate sub par results until short term rates rise – something it doesn't expect until early 2013. As management forecast last quarter, Penson's revenue rebounded across the board. Clearing, technology, other and NII all rebounded meaningfully in 4Q due to a combination of better market conditions and a rebound in trading from high frequency traders. Management also managed to keep expenses unchanged. Although fundamentals were much improved, Penson still generated a loss and a small decline in book value. Although Penson's business showed meaningful improvement in 4Q, it is still generating losses that are expected to continue for 1H11. J.P Morgan models a return to profitability in 2H11, but don't expect meaningful earnings until short-term rates start to rise. JPM increases its 12/11 price target from $6.00 to $6.50 reflecting better results for 4Q10, a better outlook for 2011. JPM closed Friday at $6.41