Technically, Lehman hit a new high last spring between $77 - $78 per share in May '06, and then, with the rest of the market, suffered through the summer months and bottomed at $58 in June, only to trade back toward its old high in the high $70's towards the end of the year.
After breaking out again in January, and trading as high as $85, the stock has since collapsed and is back in the 2006 trading range and is trading around its 200-day moving average near $73 - $74 per share, (and 200-week moving average too) supposedly on subprime mortgage worries.
I'm a big believer that technicals precede fundamentals and are the early warning system that allows a small investor to track the big dogs, and in the case of Lehman, the poor trading is indicative of something besides the subprime brush that is painting most of Wall Street red these days.
To wit, we track "forward 4q earnings estimates" for every company we follow on our proprietary spreadsheets, and for Lehman here is how the last 8 quarters have progressed:
q1 '07 - $7.41 - 20% y/y growth
q4 '06 - $7.20 - 30% y/y growth
q3 '06 - $6.85 - 35% y/y growth
q2 '06 - $6.45 - 49% y/y growth
q1 '06 - $6.16 - 45% y/y growth
q4 '05 - $5.53 - 45% y/y growth
q3 '05 - $5.09 - 41% y/y growth
q2 '05 - $4.33 - 26% y/y growth
Since the peak in late '05, early 2006, well before the subprime problems, LEH has seen analysts factor in lower forward growth estimates, and LEH has been beating earnings by less upside surprise, and the problem is in their investment banking division, particularly their profit margins within investment banking.
Since peaking in August '05 (fiscal third quarter of '05) at 24% of total pre-tax profits, LEH's investment banking pre-tax profit margin has shrunk to just 9% of total pre-tax dollars with this latest quarter ended Feb '07, even though investment banking net revenues have remained fairly constant at between 18% - 20% of total Lehman net revenues and the problem has not been fixed-income or M&A, but in equity underwriting, which has fallen to just 3% of total net revenues from its peak of 6% - 7% in August - November, 2005.
In Lehman's latest 10-K released in January, the company commented that Global Equity Finance revenues declined 1% y/y in fiscal '06 relative to '05 albeit against very tough comp's in '05, but also against a 35% increase in global equity origination market volumes.
The problem appears to be in Asia, and in particular with very tough comp's from very a few very large deals in 2005.
Is Lehman broken ? Hardly, in that with the latest quarter, equity sales and trading made up some of the equity investment banking decline, but at a lower margin. Lehman's total equity business varies from anywhere from 25% - 30% of LEH's total net revenues, so LEH whether they like to identify with it or not, is still 2/3rd's fixed-income related shop.
Actually my biggest worry about LEH looking out a few quarters is that with credit spreads at or near all-time tights, particularly within the high-grade and high-yield corporate bond sectors, their reliance on fixed-income might make the equity investment banking weakness pale in comparison.
To conclude, LEH remains a very well managed firm, with Mr. Fuld almost maniacal about controlling compensation expenses as a percentage of net revenues. For the last five quarter, "compensation / benefits as a percentage of net revenues" has been EXACTLY 49.3%, a fact I find fascinating to say the least.
Technically, LEH isn't broken but as forward eps growth gets lowered, even with a 10(x) p/e ratio, the stock may not make new all-time highs, unless and until the Fed cuts rates again. The attached weekly chart, compliments of our technical software provider, www.worden.com shows the stock testing its 200-week or roughly 4 year moving average this week, on the heaviest downside volume in many years. The 200-week moving average has provided support for the stock for some time, thus the fact that we remain above the trendline is still a positive.
To conclude, the stock is in a precarious position, but it isn't broken, and the earnings and revenue estimates are still getting revised higher, albeit at a slower growth rate. Goldman's earnings this week were a thing of beauty, thus that might be the brokerage stock of choice at this point, but we'll give LEH some time to see what transpires.
Long LEH, GS
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