April 18 (Reuters) - At least four brokerages, including Banc of America and Lehman, cut their 2008 earnings estimates on Merrill Lynch & Co MER.N, while a fifth forecast a loss for the company, after it posted its third straight quarterly loss and said it planned to cut 2,900 more jobs.
Banc of America analyst Michael Hecht said incremental markdowns of about $3 billion that he expected for world’s largest brokerage over the course of 2008, along with a lower level of activity across global markets and investment were the main drivers behind the estimate cuts on Merrill.
Oppenheimer’s Meredith Whitney, however, raised her earnings estimates on the company, but said future losses are highly probable at Merrill and that further capital raises would be needed, given that housing fundamentals had yet to improve and that the state of the consumer had shown signs of stress.
Merrill’s Chief Executive John Thain had said that the bank was well capitalized, but in a conference call with reporters said the company may look to issue preferred shares similar to JPMorgan Chase & Co’s (JPM.N) $6 billion sale on Wednesday.
In January and earlier this month, Thain said Merrill Lynch was not looking to raise more capital.
Moody’s Investors Service said it is reviewing whether Merrill Lynch can improve its capital position amid continued difficult market conditions, and may cut the company’s debt ratings.
“While Merrill is making progress on de-leveraging its balance sheet and the worst of the writedowns could be over, we think EPS could remain under pressure as Merrill still has significant exposure to problem assets,” UBS analyst Glenn Schorr said.
Analyst Kenneth Worthington at JP Morgan said he expected valuation declines in the residential and commercial mortgages to continue hurting the company’s marks and revenue. He added that benefits from spread widening on Merrill’s own debt would hurt earnings in a recovery.
Lehman Brothers said there was more intermediate downside to the stock given the economic outlook, along with sizeable gross exposures to illiquid assets on the company’s balance sheet, among other factors, adding that it saw Morgan Stanley (MS.N) relatively more attractive to Merrill.
Merrill Lynch hasn’t turned a profit since the second-quarter of last year. Since then, the company has recorded more than $30 billion of write-downs and credit losses, spurring it to raise over $12 billion of new capital.
“While the current market environment remains tough, it’s not unreasonable to think that some of the reserve build related to the financial guarantors as well as some of the writedowns in the bank portfolio will eventually be written back up several quarters down the road,” analyst Prashant Bhatia at Citigroup said.
Bhatia, who forecast a loss for Merrill to reflect the challenging market environment, said the company may not have to raise more capital and that he expected it to return to profitability starting the next quarter.
Following are the price targets and 2008 and 2009 earnings estimate changes made by the four brokerages: Brokerage Rating Price target 2008 EPS view 2009 EPS view
New Old New Old New Old Banc of America Buy $53 $56 $0.01 $1.00 $4.63 $5.38 Lehman Equal Weight $49 $52 $0.40 $0.89 $4.29 $4.46 Wachovia Market Perform — — $0.15 $0.47 $3.84 $4.20 Oppenheimer Underperform — — $1.15 $0.20 $5.25 $5.10 JP Morgan Neutral — — $0.86 $1.46 $4.85 $4.94 Citigroup Buy $75 — -$1.00 $1.20 $5.10 $5.10 UBS Neutral $49 $52 — — $5.15 $5.30
Shares of the Merrill rose about 2 percent to $47.61 in morning trade on the New York Stock Exchange. (Reporting by Ramya Dilip in Bangalore; Editing by Jarshad Kakkrakandy)