NEW YORK (Reuters) – Goldman Sachs & Co slashed its earnings outlooks for five major rivals on Tuesday, citing mounting write-downs on mortgages, a slowdown in overall activity, and legal expenses.
Analysts led by William Tanona reduced third-quarter and full-year forecasts for Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), Lehman Brothers Holdings Inc (LEH.N: Quote, Profile, Research, Stock Buzz), Merrill Lynch & Co (MER.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz).
Lehman could lose $9.65 per share for the year, versus a prior forecast for a loss of $2.10 per share, the Goldman analysts said. Lehman may reduce its mortgage exposure in the third quarter by 20 percent, or $15 billion, which could lead to a $2.5 billion to $3.5 billion write-down, the analysts said. Its share-price target was cut to $22 from $40.
“We assume no or negative earnings for the majority of firms in our universe this quarter, and for some of our firms, the third quarter marks the fourth consecutive quarter of reported losses, clearly an unprecedented streak,” Tanona wrote.
“Firms are clearly being more aggressive with asset sales and reducing their balance sheet exposure to troubled assets,” the analyst added. “However, we believe a major recovery is still a few quarters away.”
Tanona said results will also be affected as Citigroup, JPMorgan, Merrill and Morgan Stanley buy back billions of dollars of illiquid auction-rate securities from clients. Citigroup, JPMorgan and Morgan Stanley have also agreed to regulatory fines over the debt, while Merrill has not.
Despite his outlook, Tanona still recommends a trade in which investors buy Morgan Stanley shares and sell Citigroup shares short. He said Morgan Stanley is one of the brokers best positioned for a market turnaround, while Citigroup will remain heavily exposed to mortgages and consumer credit issues.
Tanona lowered his third-quarter earnings-per-share forecasts as follows: Citigroup, to nil from 17 cents; JPMorgan, to 40 cents from 64 cents; Lehman, to a loss of $2.75 from a profit of 68 cents; Merrill, to a loss of $4.75 from a loss of $4.40; and Morgan Stanley, to 85 cents from $1.10.
He lowered his 2008 earnings-per-share forecasts as follows: Citigroup, to a loss of $1.30 from a loss of $1.10; JPMorgan, to $2.30 from $2.60; Lehman, to a loss of $9.65 from a loss of $2.10; Merrill, to a loss of $10.25 from a loss of $10.10; and Morgan Stanley, to $4.45 from $4.80.
Tanona also lowered his 2009 earnings-per-share forecasts for JPMorgan, Lehman, Merrill and Morgan Stanley. He left his forecast for Citigroup unchanged.
In Tuesday trading, Citigroup shares closed down 43 cents, or 2.4 percent, at $17.19; JPMorgan fell $1.16, or 3.2 percent, to $35.58; Lehman slid $1.96, or 13 percent, to $13.07; Merrill fell 92 cents, or 3.7 percent, to $23.82, and Morgan Stanley fell $1.51, or 3.8 percent, to $38.08.
(Reporting by Jonathan Stempel; Editing by Gary Hill)