Analyst sees big headwinds for Merrill, Morgan ahead
NEW YORK (MarketWatch) -- Ladenburg Thalmann & Co. cut estimates for Merrill Lynch & Co. Inc. and Morgan Stanley on Monday, joining a chorus of analysts predicting the two besieged banks will face serious headwinds in coming quarters.
For its part, Merrill (MER ![]()
MER) will have to raise equity in the third quarter and could be forced to unload 20% of its stake in financial news provider Bloomberg, analyst Dick Bove predicted.
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Bove estimated Merrill would sell its holdings in Bloomberg for $1 billion, which would solve any current capital issues, and would not issue equity.
"This would bring in cash but also it would allow the company to value the remaining position in Bloomberg at $4 billion and solve the near-term capital issue," Bove wrote in a research note.
Bove lowered his 2008 estimate for Merrill to a loss of $1.64 a share from a previous per-share estimate of a profit of $1.37 and cut his price target to $30 from $39.
"My estimate is that the firm could show a net negative revenue number of $2.5 billion in its principal transaction line or a figure consistent with the first-quarter result," Bove said.
On Friday, Lehman Bros. Holdings analyst Roger Freeman raised his estimate for Merrill's write-downs by $3 billion to $5.4 billion and predicted a second-quarter loss of $2.78 a share, compared to a previously estimated loss of 64 cents a share.
Goldman Sachs Group Inc., too, revised its estimates for Merrill, issuing a note that predicted second-quarter write-downs of $4.2 billion for the bank and lowering its per-share earnings estimate to $2 from a prior estimate of a profit of 25 cents.
As for Morgan (MS ![]()
MS) , Ladenburg cut its 2008 and 2009 profit estimates for the firm on worries that management turmoil and a dip in equity markets will affect the bank's bottom line.
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Bove trimmed his 2008 profit estimate for the bank to $4.34 a share from $4.80 a share, and for 2009 to $5.14 a share from $5.64 a share.
Ladenburg said that continued turmoil in the equity markets has been troubling to Morgan Stanley, which is already struggling to convince investors it has sound risk management procedures in place.
"June, the first month of the third fiscal quarter (ends in August), was not a good one. The equity markets plunged," Bove said. "Plus, the company has been in the midst of management turmoil in the past 12 months as it comes to grip with the issues in its risk management business."
Concerns about the value of many of Morgan's assets have troubled much of Wall Street over recent weeks.
The bank faced renewed scrutiny after Moody's Investors Service placed Morgan Stanley's Aa3 long-term ratings on review for a possible downgrade and indicated that it is likely to cut the investment bank's debt to A1. See related coverage.
Bove added that he believed that if former Morgan chief executive Phil Purcell were still in charge, Morgan Stanley would be in better shape.
"It is quite possible that had Mr. Purcell remained in charge, Morgan Stanley would not have suffered a disastrous loss in the fourth quarter last year; its earnings would be much higher at present; and the firm would be in very strong position relative to its industry and not looking at a possible rating cut by Moody's," Bove wrote in a research note.
Riley McDermid is a MarketWatch reporter based in New York.
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