GOLDMAN SACHS LOWERS ESTIMATES FOR BROKERS, BANKS
Goldman Sachs analyst William Tanona says he lowers third quarter and full year estimates for all of our large-cap brokers and universal banks. "Once again, the majority of our negative estimate revisions are being driven by higher than estimated write-downs on mortgage assets," he said in a note. He added that he's "also seeing results being negatively impacted by slower levels of client activity and expenses and fines from auction rate securities."
Tanona expects that Lehman Brothers (LEH) will be very aggressive in reducing its overall mortgage exposure this quarter via asset sales. He anticipates that Lehman will reduce its overall mortgage exposure by 20%, suggesting about a $15 billion reduction. As a result, he assumes Lehman will have one of the more significant net marks this quarter and he estimates it to be in the $2.5-3.5 billion range.
He says firms are clearly being more aggressive with asset sales and reducing their balance sheet exposure to troubled assets. However, he believes a major recovery is still a few quarters away, as he anticipates additional asset sales and write-downs in coming quarters throughout the financial services sector. "With this as a backdrop, a lower level of corporate and institutional activity is likely to ensue until the financial markets stabilize," he says.
Tanona believes that Morgan Stanley (MS) is one of the best positioned brokers from a business mix perspective when the environment turns, while Citigroup (C) remains heavily exposed to mortgages and consumer credit.
NEEDHAM UPGRADES HEWLETT-PACKARD TO STRONG BUY FROM BUY
Needham analyst Richard Kugele says that while the broader tech sector has not uniformly corroborated with the fear of a global recession, nowhere is that more evident than in the consistent, impressive performance of Hewlett-Packard (HPQ). He notes HP's far-reaching product offerings and relentless focus on cost have enabled it to mitigate the macro headwinds and thrive.
Looking ahead, Kugele believes the impending EDS (EDS) deal affords CEO Mark Hurd with an opportunity for an encore, once again able to apply focus and cost discipline to a wayward behemoth.
He raises $3.55 fiscal year 2008 (October) EPS estimate to $3.60 and $3.89 for fiscal year 2009 to $3.91. He reiterates $57 target price.
PIPER JAFFRAY CUTS NOVATEL WIRELESS TO SELL FROM NEUTRAL
Piper Jaffray analyst T. Michael Walkley says Novatel Wireless (NVTL) second quarter view is disappointing and the company guided to a weaker third quarter. He downgrades on intensifying competition in several key markets, continued transition of product portfolio and lack of near-term catalysts.
Walkley notes $89.8 million second quarter revenue is in line with his estimate, but $0.03 pro-forma EPS is below his $0.15 estimate. He believes its weak bottom line is driven by a one-time charge related to ongoing internal accounting review and bad debt expenses. He also notes management indicated unfavorable product mix, execution issues, and delays in higher margin products due to changes in FCC-related regulation as reasons for disappointing margins.
He cuts $0.70 2008 pro-forma EPS estimate to $0.35 and $0.79 for 2009 to $0.58; his $8 price target is lowered to $6.