Investors are pricing in too much bad news into the share price of embattled AMP Limited (ASX: AMP) and have factored in too much good news into Suncorp Group Ltd (ASX: SUN) ahead of their August profit results, according to JP Morgan.
This prompted the broker to upgrade its recommendation on AMP to "overweight" while cutting its rating on Suncorp to "neutral" this morning.
In essence, this means that wealth manager AMP could rally next month when it hands in its earnings report card while insurer Suncorp could be hit with a bout of profit-taking.
JP Morgan's bullish take on AMP comes after management provided a trading update last Friday with the broker estimating that market is only valuing AMP's wealth division on a price-earnings multiple of around 5 times.
If this is right, this is a very low multiple that is usually reserved for companies that are in a terminal decline.
The wealth division is the main source of pain for shareholders as the Haynes Royal Commission exposed a litany of bad behaviour, which forced the resignation of several top executives including its chief executive and chairperson.
"We think [the valuation] encapsulates all but very adverse business model risks, particularly bearing in mind the scale of the operation (A$135bn+ funds administered)," said JP Morgan.
"We think investors will still need to be patient and hope we don't get worst-case regulatory changes."
Meanwhile, Suncorp could disappoint investors when it reports results next month even though JP Morgan admits there are a number of positive catalyst for the stock.
This includes the potential sale of its life insurance business, improved FY19 growth outlook with the removal of a one-off investment hit in the previous year and a recovery in the commercial cycle – although that will benefit its peer Insurance Australia Group Ltd (ASX: IAG) more.
"We have nevertheless downgraded to Neutral given the current share price is now trading above our through-the-cycle valuation, there are some risks from the Royal Commission [on insurers] and the uplift in margins the company is seeking are very sharp," explained JP Morgan.
The broker has a price target of $3.90 on AMP and $15 on Suncorp.
JP Morgan isn't the only one that thinks the stock has run ahead of its fundamentals. Bell Potter has also downgraded the stock to "hold" from "buy" on valuation grounds.
AMP reports its results on August 8 and Suncorp will unveil its earnings the day after.
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