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Lehman Upgraded, Uncertainties Settled: Richard Bove

Reuters
Tuesday, 17 Jun 2008 | 7:10 AM ET

Veteran analyst Richard Bove upgraded Lehman Brothers to "neutral" from "sell," saying the Wall Street investment bank has settled the uncertainties related to its balance sheet as it has raised capital and reduced the size of its balance sheet.

Ladenburg Thalmann & Co's Bove, however, said the earnings outlook for Lehman remained uncertain and forecast a loss for 2008. Banc of America analyst Michael Hecht widened his 2008 loss estimate for the company.

On Monday, Lehman posted its first ever quarterly loss, but shares rose as much as 9 percent after Chief Executive Richard Fuld expressed confidence in the company. Fuld said Lehman's franchise and capital position were strong.

Last week, Lehman raised $6 billion in capital in its latest move to shore up its capital base. The company had made a $4 billion convertible preferred share offering in April and a $1.9 billion preferred share offering in February.

"While Lehman has been towards the front of industry as far as balance sheet de-leveraging, questions around appropriateness of marks, size of remaining exposures and recent management changes keep us on the sidelines," Banc of America's Hecht said.

On Thursday, Lehman demoted its Chief Financial Officer Erin Callan and Chief Operating Officer Joseph Gregory, days after Lehman had forecast its first-ever loss as a public company.

The replacement of Callan as CFO, after only six months in the post, and Joseph Gregory as COO, triggered further speculation about whether Lehman can continue to exist as an independent entity given the size of recent writedowns and pressure on investment banks to reduce risk.

Bove said he still saw two risks for the company. "The company's hedging policies appear to still be ineffective. Plus, further writedowns may be possible concerning the company's real estate related financial instruments." Bove cut his price target on the stock to $30 from $35.

He also forecast a fiscal 2008 loss of $3.19 per share for Lehman, compared with his prior estimate of a profit of $2.07 per share.

Banc of America's Hecht widened his 2008 loss estimate to $3.69 a share from his prior view of a loss of $3.28 a share, saying markdowns on troubled assets continued to remain an area of concern for the rest of the year. Hecht rates Lehman "neutral," and has a price target of $23 on the stock.

Shares of the company closed at $27.20 Monday on the New York Stock Exchange. Through Monday, Lehman shares have plunged nearly 60 percent this year, compared with a 20 percent drop in the Amex Securities Broker-Dealer Index.

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