May 14, 2008 / 3:23 PM / in 11 years

UPDATE 2-Lehman, Morgan Stanley forecasts cut by Goldman

(Adds analyst comments, background; updates share movement)

By Tenzin Pema

BANGALORE, May 14 (Reuters) - Lehman Brothers Holdings Inc LEH.N may suffer a second-quarter loss, as Wall Street investment banks take hits from slower client and investment banking activity and poor results from principal and proprietary trading, a Goldman Sachs & Co analyst said.

William Tanona, the analyst, also slashed his second-quarter and 2008 earnings outlooks for Morgan Stanley (MS.N).

Tanona is the latest in a growing line-up of Wall Street analysts to cut estimates on U.S. investment banks, but is the only one now projecting a second-quarter loss at Lehman, according to Reuters Estimates.

He expects a quarterly loss of 20 cents per share at Lehman, compared with his earlier forecast for a profit of $1.35 per share. Tanona halved his profit forecast for Morgan Stanley to 80 cents per share from $1.60.

The analyst said quarterly results may suffer from hedging activity and losses related to structured credit liabilities will also hurt results. He expects losses from credit spread tightening to total $1 billion at Morgan Stanley and $400 million at Lehman.


In spite of his forecasts, Tanona expects investment banking trends to improve, as many of the U.S. Federal Reserve’s actions should help drive economic growth in late 2008 and early 2009.

The Amex Securities Broker-Dealer Index .XBD, which includes Lehman and Morgan Stanley, has through Tuesday fallen 17 percent this year as the effects of the subprime mortgage crisis, credit crunch and housing slump reverberate.

But Tanona believes the weakness of the stocks is a buying opportunity. He rates Lehman and Morgan Stanley “buy.”

Among 18 analysts covering Lehman, one rated it a “strong buy,” eight others rated it “buy” or the equivalent, while the rest rated it “hold,” according to Thomson Reuters data.

Morgan Stanley is rated “strong buy” by one analyst, “buy” or the equivalent by seven analysts, and “hold” by 12 analysts.

Tanona also cut his second-quarter and 2008 profit forecasts for Bear Stearns Cos BSC.N, the troubled Wall Street bank being acquired by JPMorgan Chase & Co (JPM.N). The closing is expected to take place by the end of June.

Shares of Lehman were little changed at $42.89 in afternoon trade on the New York Stock Exchange.

Morgan Stanley shares were up 63 cents at $47.24, while Bear Stearns’ shares were down 10 cents at $10.06. The following table lists Tanona’s second-quarter, full-year estimates for U.S. brokers: COMPANY Q2 EPS VIEW 2008 EPS VIEW RATING

Current Prior Current Prior Bear Stearns $0.60 $2.35 $2.90 $7.40 Neutral Lehman Brothers -$0.20 $1.35 $3.10 $5.00 Buy Morgan Stanley $0.80 $1.60 $4.80 $6.00 Buy (Editing by Pratish Narayanan)

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