April 1, 2008 / 8:02 AM / 11 years ago

UPDATE 2-RESEARCH ALERT-Punk Ziegel cuts Lehman FY '08 EPS view

(Adds analyst’s comments, background)

April 1 (Reuters) - Punk Ziegel financial analyst Richard Bove lowered his fiscal 2008 earnings forecast on Lehman Brothers Holdings Inc LEH.N due to the firm’s new convertible preferred share offering and on expectations of further writedowns at the fourth-largest U.S. investment bank.

“Lehman remains under significant stress as investors question its long-term viability. The short position on the stock is currently 47 million shares or 8.4 percent of the outstanding. The company’s balance sheet continues to raise concerns,” said Bove, who kept his “buy” rating on the stock.

On Monday, Lehman said it was issuing $3 billion of convertible preferred shares. The investment bank, beset by rumors of not having enough funding, also said it can sell up to another $450 million of convertible preferred shares to meet extra demand.

“My assumption is that the coupon on the preferred will be somewhere between 7 percent and 7.5 percent. Without hard information, I am also assuming that the company’s diluted shares will grow by 30 million for dilution of 6 percent,” Bove wrote in a research note to clients.

Lehman has a sizable $37 billion portfolio of residential mortgages and it is believed that it has $5 billion in sub-prime mortgages, Bove said.

In addition to the real estate positions, it is estimated that there may be another $4 billion in assets that are over-priced. The status of these investments remain unknown, Bove noted.

He also said Moody’s may have downgraded a number of Lehman’s securitized offerings and is expected to downgrade more.

“All in all, the picture is one of concern. It is for this reason that Lehman is committed to building its long-term capital base. In so doing, the firm hopes to quell fears of its viability,” he said.


Lehman, however, has a “sizable cash hoard” to meet short-term needs, Bove said, adding that the bank has an estimated $31 billion in cash and another $65 billion in short-term unencumbered assets.

“In theory this means that Lehman can quickly access almost $100 billion in cash to meet market demands,” he said.

Rumors have swirled around Lehman since the demise of Bear Stearns Cos Inc BSC.N but Lehman has said it has over $200 billion of assets it could sell or borrow against, and that its ability to borrow from the U.S. Federal Reserve should dispel questions about its solidity.

However, Bove did cut his target on the stock to $46 from $51, and pared his fiscal 2008 earnings estimate to $3.87 a share from $4.30.

Lehman shares closed at $37.64 Monday on the New York Stock Exchange. Fears about the bank’s stability have helped push down its share price more than 40 percent since February. (Reporting by Tenzin Pema in Bangalore; Editing by Bernard Orr)

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