Lehman Brothers Holdings Inc. was upgraded to ``buy'' at Citigroup Inc., which said concern the securities firm lacks adequate access to cash was misplaced and the stock's 41 percent plunge this year had gone too far.
Lehman's profitable first quarter and backing from the U.S. Federal Reserve provide ``excellent'' protection against a further drop in the share price, Citigroup analyst Prashant Bhatia wrote in a report about the New York-based firm today.
``Reality will trump fear,'' Bhatia wrote. ``Lehman has ample liquidity to run its business.''
Speculation that Wall Street firms can't fund their operations contributed to the collapse of Lehman rival Bear Stearns Cos. earlier this month. A run on Bear Stearns, formerly the fifth-largest U.S. securities firm, forced the New York-based company to sell itself to JPMorgan Chase & Co. at a fraction of its market value with financial support from the Fed.
Lehman, the fourth-biggest U.S. securities firm, fell 8.9 percent yesterday in New York Stock Exchange trading as options traders increased bearish bets and speculation about the bank's liquidity intensified. The stock rose 1.2 percent to $39.16 at 9:46 a.m. today.
Nine analysts surveyed by Bloomberg recommend buying Lehman shares, and nine say investors should ``hold'' the stock. Bigger rival Goldman Sachs Group Inc., the most profitable Wall Street firm, has seven buys versus 14 holds. Morgan Stanley's 12 hold ratings outnumber buys by three. All three firms are rated ``sell'' by Portales Partners LLC analyst Charles Peabody.
Cash Access
Lehman said on March 18 that it had $30 billion of cash and $64 billion in assets that could easily be turned into cash. Lehman's stockpile of cash, money-market instruments, corporate bonds and equities available for sale is the largest among the five biggest brokers, according to Sanford C. Bernstein & Co. analyst Brad Hintz.
The securities firm has access to an additional $200 billion from a Fed credit facility, according to Citigroup's Bhatia, who kept his share-price estimate at $65. He said he sees a 70 percent ``upside'' in Lehman's stock.
``It's tough to have a liquidity-driven meltdown when you're being backed by government entities that have the ability to print money,'' Bhatia wrote. ``The liquidity backstop buys the time necessary to restore confidence and quell fears that are not based on fundamentals.''
Earnings Report
Lehman stock fell as much as 48 percent on March 17 on speculation it would face the same cash shortage that broke Bear Stearns. The shares gained 46 percent the next day, when Lehman announced first-quarter earnings and its cash position.
The firm's net income declined 57 percent in the quarter because of a $1.8 billion writedown on mortgage assets. Merger advisory fees jumped 34 percent, investment-management revenue surged 39 percent and equities rose 6 percent.
The collapse of the subprime mortgage market and subsequent asset writedowns may force Citigroup, Wachovia Corp., Bank of America Corp. and Wells Fargo & Co. to reduce dividends, Oppenheimer & Co. analyst Meredith Whitney said in a separate report on the biggest U.S. banks today.
Citigroup already reduced its dividend once this year. Whitney expects the New York-based company to post a loss of 15 cents a share in 2008 on further asset writedowns.
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