With profit reports from several of the largest U.S. securities firms scheduled for release in mid-June, analysts continue to slash second-quarter estimates for the companies, citing weakness in mergers and acquisitions advisory business and stock trading.
On Monday, Dean Eberling, an analyst at Keefe, Bruyette & Woods Inc., reduced his estimates for Lehman Brothers by 5 cents, to $1.10 a share. The company ended its second quarter at the end of May. Mr. Eberling also reduced his estimate for Morgan Stanley Dean Witter & Co. by a nickel, to 85 cents a share. Investment bank results tend to be watched closely by investors in large U.S. banks that also have capital markets groups. Lehman, Morgan Stanley, Goldman Sachs Group, and Bear Stearns Cos. keep fiscal quarters that end a month before the quarter periods reported by commercial banking rivals such as Citigroup, J.P. Morgan Chase & Co., and Bank of America Corp.
Deal activity slowed considerably at the beginning of January and has stayed lackluster compared with last year. The declines in underwriting, trading, and M&A have hurt profits at virtually every company with a big presence in capital markets, and many have announced stricter cost control measures in recent months to help make up the difference.
Mr. Eberling is not the first to reduce estimates for Lehman and other investment banks. In a research note Monday, he said he had decided on a "more conservative investment banking revenue forecast." He said he expects Lehman's profits to decline 10% from the first quarter, to a range of $425 million to $435 million on weak underwriting and M&A deal flow.
Lehman has persisted with its strategic growth plan, pushing up head count and raising operating costs, Mr. Eberling said, "despite the signature tight cost discipline" it has long exhibited. He cut his fiscal 2001 estimate for the company from $5.24 to $4.94 per share and his 2002 estimate from $5.45 to $5.
Commercial banks such as Citi and Morgan Chase will have the additional four weeks of June to beef up capital markets profits, but there is a downside to reporting later. "Volatility began to fall off at the end of April, beginning of May," said Richard Strauss, an analyst at Goldman Sachs - a trend that may dampen trading profits.
Shares of Lehman fell 0.2% in trading Monday. The American Banker index of 225 bank stocks rose 1.4%.