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Lehman Earnings: Moment of Truth

Monday, 17 Mar 2008 | 4:04 PM ET

LEHMAN BROTHERS (LEH)

Profile: Major brokerage house. One of the top firms for M&A advice, debt and equity underwriting and research and private equity. Caters to clients ranging from governments to institutional- and high-net-worth investors.

Reports Q4 earnings Tuesday Mar. 18 at approx. 8am ET. Conference call at 10am ET.

AP

WHAT WILL MOVE THE STOCK:

MARK-DOWNS - How much? How strong is Lehman'sbalance sheet? Last Tuesday, March 11, JPMorgan wrote it expects another $750 million in writedowns on Lehman's fixed income portfolio, which is mostly Alt-A. However, the world has changed quite a bit since then.

VALUATION - Until today, the brokerages looked very cheap in comparison to their book values. Now, Oppenheimer says investors should look at the price to book multiples during the 1990-91 credit squeeze. In that light, stock prices still have plenty of room to fall.

LIQUIDITY - Lehman CEO Dick Fuld told CNBC's David Faber that the liquidity issue is "off the table" for the entire industry now that the Fed has opened the discount window to primary brokers. Even before that, The Wall Street Journal noted many investors think Lehman's financials are much stronger than Bear Stearns'.

CONFIDENCE - Could Lehman get hit with a crisis of confidence similar to what happened to Bear Stearns? Citigroup says it's unlikely because Lehman (and the other brokerages) have much more diverse businesses. However, UBS says that Lehman is "next on the list" of companies to watch.

STALE ESTIMATES - Only a handful of analysts have updated their estimates and ratings on Lehman over the last week, despite huge changes in the outlook for the brokers. If Lehman earnings come in below estimates, will that hurt the stock price? Probably not, considering Lehman's huge stock plunge on Monday. Investors have bigger fish to fry, including markdowns, investor confidence and...

THE OUTLOOK - What will Lehman say about its ongoing business? This week's Barron's cover article focused on Bear and the financial firms. It quoted one analyst as expecting Q3 and Q4 estimates to get cut soon, if capital markets don't improve soon.

ESTIMATES:

Q1 Estimates: EPS down 63% to $0.72, revenue down 34% to $3.351 billion

Q2 Estimates: EPS down 38% to $1.37, revenue down 21% to $4.336 billion

FY 08 Estimates: EPS down 28% to $5.19, revenue down 28% to $17.094 billion

Source: Thomson Financial

Year-ago actuals: Q1 EPS $1.96, Rev. $5.047 billion

*All estimates are current as of 3/17 and subject to change.*

FACTOIDS:

MOODY'S CUTS LEHMAN OUTLOOK - On Monday, Moody's affirmed Lehman's A1 bond rating BUT cut the rating outlook stable from positive.

UBS EXPECTS MORE PAIN - At the same time, UBS downgraded six financial services firms, including Lehman and Goldman Sachs, to "neutral" from "buy." Analyst Glenn Schoor writes, "The current liquidity squeeze and de-leveraging in the capital markets is intense (it brought down Bear Stearns), and we think the odds are high that it will get worse before it gets better." Lehman could be "next on the list" for the confidence/liquidity crisis. Oddly, UBS did not lower its earnings estimates on LEH, even though its estimate of $1.00 is well above consensus of 72 cents. What's up with that?

DEUTSCHE BANK: LEHMAN IS NOT BEAR STEARNS - Deutsche Bank is sticking by its "buy" rating on Lehman and telling investors the broker will "weather the storm."

OPTIONS PREDICTED A MESS - Early Monday, options trading pointed to a 50+% decline in Lehman shares over the next few months. Lehman shares opened down about 35%, bounced higher then started falling again. During the day, LEH traded as low as $20.25, a 48.4% decline, the lowest price for Lehman since June 2000.

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