Wall Street's most famous bull is looking a little gored by market conditions.
Merrill Lynch & Co. on Tuesday warned investors that it will miss second-quarter earnings estimates by as much as 30 cents a share, or 37% below the current Wall Street consensus.
In a morning conference call with investors, David H. Komanksy, Merrill's chairman and chief executive officer, blamed losses in the firm's equity and debt trading unit. Merrill said it expects a 15% decline in profits for the quarter ending June 30, down from the $874 million in the first three months.
Merrill's prediction for losses in its equity trading division echoes the results from investment banks that have already reported earnings. Bear Stearns Cos., Lehman Brothers, Morgan Stanley, Dean Witter & Co., and Goldman Sachs Group Inc. - whose respective quarters end a month earlier than Merrill's - all said second-quarter earnings suffered because of decimalization, which affected trading spreads in the Nasdaq markets, and declining volatility.
Unlike Lehman and Bear Stearns, Merrill will not be able to lean on fixed-income to help buoy earnings this quarter, Mr. Komansky said.
"Some of our competitors, who announced their results last week, reported particular strength in the area of mortgage-backeds, energy, and commodities," he said.
Merrill Lynch "has made a strategic decision to limit participation in certain of these areas," he continued, referring in part to the sale during the first quarter of certain energy-trading assets, which added a nickel to first-quarter earnings of 87 cents a share.
After strong results from its fixed-income businesses in the first quarter, Merrill has experienced a slowdown in its debt derivatives and government bonds areas, Mr. Komansky said.
"While the market environment has been difficult for some time, it has weakened further as the second quarter progressed, with the end of May and the beginning of June being the most difficult," he told investors.
Merrill also told Wall Street to brace for the impact of a slowdown in equity underwriting, which the company described as substantially lower than last year's record levels.
Mr. Komansky said the company would continue to watch costs, including staffing, and that that it has already eliminated 3,300 positions, or 5% of its work force, since the beginning of the year.
"Almost half of those have happened in the second quarter," he told investors. Merrill has also cut about 500 consultant positions. However, Mr. Komanksy said it will also continue to invest "selectively in technology and personnel" to position itself for what he called the "upside leverage."
When the upside will come remains to be seen. Last week most companies put off calling for a recovery as they entered Wall Street's traditionally sluggish summer months.
Analysts described Merrill's announcement as surprising but not entirely unexpected. Merrill's chief financial officer, Thomas Patrick, had warned of tough times ahead when reporting first-quarter earnings. "Today was the feared bomb," Richard Strauss, an analyst with Goldman Sachs, wrote in a research note released after Merrill's news hit the street. "Certain companies will likely have greater-than-expected trading writeoffs. But the bomb was dropped by the least likely of candidates," Mr. Strauss wrote.
As a result, Mr. Strauss said, he has cut a dollar from his outlook for the full year and is now looking for Merrill to earn $3 a share.
Henry McVey an analyst with Morgan Stanley, pointed to the difference in Merrill's financial year, which follows the standard calendar, and the fiscal calendars of the other investment banks.
"We knew that revenues were likely to fall off in June," Mr. McVey said. "And Merrill is not as leveraged in fixed income as they were in the past." Morgan Stanley had already revised estimates Monday, but did so again Tuesday, he said. The company is now looking for 55 cents per diluted share on second-quarter earnings and $3.01 for the full year.
Hit hard by the news, Merrill's stock closed Tuesday at $58.91, down 11.35%.