Merrill Lynch Earnings Preview: Rally Fuel or Killjoy?

MERRILL LYNCH (MER)

Major investment firm. Owns 45% of asset manager BlackRock

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[BLK  Loading...      ()   ], just sold 20% stake in Bloomberg for about $4.5 billion.

Reports Q2 earnings Thursday 7/17 at approx. 400p ET. Conference call at 500p ET.

AP

WHAT WILL MOVE THE STOCK:

ANOTHER UPSIDE SURPRISE OR... - Wells Fargo

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[WFC  Loading...      ()   ] started a stampede of unexpectedly good earnings news from the financial sector. Will Merrill Lynch

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[MER  Loading...      ()   ] show that the brokers are on the mend as well? Plenty of investors are betting that Merrill will. Today, Merrill shares traded as high as $32.70 -- a whopping 38% above the intraday low of just two days ago.

HOW BIG ARE THE WRITE-DOWNS? - Again, the fear is Merrill will report a(nother) huge writedown, but the lack of big writedowns at Wells Fargo and other banks is a positive sign. On Monday, Charlie Gasparino said writedowns could top $6 billion. The same day, Wachovia's analyst estimated $5 billion in writedowns.

DID ANALYSTS BLOW IT? - If they did, they're not alone in underestimating the financials. Until Wells Fargo reported, the outlook for financial sector earnings was downright bleak. Fifteen of seventeen analysts following Merrill cut their Q2 earnings estimates in the last month, dropping the consensus from a 16-cent-per-share profit on June 24 to the current forecast of a $1.91 loss. Over the same period, ten of twelve analysts with Q2 revenue estimates slashed their forecasts by an average of 56%. However, there have been no revisions this week. Is this silence unusual? No. Just keep in mind that Merrill shares have surged since estimates were last updated.

BLOOMBERG SALE PROVIDES STABILITY - Merrill's sale of its 20% stake in Bloomberg for about $4.5 billion (first reported by Charlie Gasparino) provides liquidity and stability for MER's balance sheet. Plans to sell Merrill's nearly 50% stake in BlackRock have been shelved. Watch for Merrill's description of capital position. Does it have enough? (See CNBC's Merrill Lynch preview in the accompanying video from Thursday.)

ESTIMATES:

Q2 EPS drops to loss of $1.91 from gain of $2.24, revenues down 66% to $3.266 billion

Q3 EPS rises to gain of $0.61 from loss of $2.85, revenues up 1108% (yes, 1108%) to $6.967 billion

FY 08 EPS improves to loss of $2.35 from loss of $10.73, revenues up 95% to $21.916 billion

Source: Thomson Reuters

Year-ago actuals: Q2 EPS $2.24, Rev. $9.728 billion

FACTOIDS:

TEN-YEAR LOW - Tuesday's close of $24.69 and intraday low of $23.64 were the lowest for Merrill in nearly ten years (since October, 1998).

QUARTERLY DECLINE - Even with Merrill's latest rebound the stock is down roughly 35% since its last earnings report on April 17. MER closed that day at $46.71.