More headwinds seen facing Merrill Lynch, Morgan Stanley

By Daniel | June 30, 2008

Analyst sees Merrill, Morgan facing big headwinds

By Riley McDermid, MarketWatch

Last Update: 6/30/2008 4:58:00 PM

NEW YORK (MarketWatch) — Wall Street’s bearish drumbeat goes on.

In the latest episode, 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.

The lower estimates and revised earnings projections sent shares of Merrill (MER)
down 3% and Morgan (MS) ended 1.7% lower, as another day of a volatile trading
slammed most financial stocks.

For its part, Merrill (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,
Dick Bove, an analyst at Ladenburg Thalmann, predicted.

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.

Speculation about Merrill’s possible sale of Bloomberg was reignited last week
after other analysts said the bank may need to raise new capital. See related
coverage.
Click for Detail

Bove lowered his 2008 estimate for Merrill to a loss of $1.64 a share from a
estimate of a profit of $1.37 a share, and he 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. 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 a loss of $2 from a prior estimate of
a profit of 25 cents.

As for Morgan (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.

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.

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