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Lehman Brothers (LEH)
Lehman Brothers Quiets Critics with First Quarter Results
Financial firms may be down, but Lehman Bros. has made it resoundingly clear that they are not out. Amid rumors and speculation of the company's stability, Lehman Bros. is determined to prove that the fate of Bear Stearns (BSC: Charts, News, Offers) will not be theirs as well. Although the number four U.S. investment bank suffered a massive decline in revenues during the first quarter, they surprised analysts by beating earnings forecasts with better-than-expected results. As the company's liquidity is being called into question by experts quick to compare it to its rivals, will Lehman be the next to fall?
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In a welcomed turn of events from yesterday's Bear Stearns-JPMorgan Chase (JPM: Charts, News, Offers) headlines, Lehman's first quarter earnings report was met with widespread enthusiasm by investors. The company's stock price has soared over 17 percent in early trading even though the net income from the quarter was the lowest the company has reported in five years. The credit crisis has created a tense environment to say the least for investment banks as merger and IPO activity, a primary source of lucrative fees, has dwindled substantially. Revenue from the company's capital markets business alone dropped 52 percent to $1.7 billion because of the unstable credit and mortgage market.
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Overall, earnings fell 57 percent for the quarter ended February 29, to $489 million, or 81 cents per share. During the same period last year, the company posted earnings of $1.15 billion, or $1.96 per share. In the more recent fourth quarter, net income was $886 million, or $1.54 per share with net revenues of $4.4 billion. This quarter's net revenue was 20 percent less at $3.5 billion. Still, Lehman was able to top analyst expectations of 72 cents per share with gains in products such as high-grade corporate debt and foreign exchanges.
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Though Lehman has a reputation more as a bond house, its strategy has shifted, enabling it to become more diversified over the years. CEO Richard Fuld says, "In what remains a challenging operating environment, our results reflect the value of our continued commitment to building a diversified platform and our focus on managing risk and maintaining a strong capital and liquidity position. This strategy has allowed us to support our clients through these difficult and volatile markets, while continuing to build and strengthen our global franchise for our shareholders." This diversification will remain an important factor in upcoming quarters as investors continue to shy away from risky products.
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Lehman still has to defend itself against critics who fear they could be the next to find themselves in a situation like that of Bear Stearns. The company's liquidity has been questioned due to the bank's heavy exposure to the subprime market, nominal write-downs, and fixed-income platform that is similar to Bear's. Lehman was quick to defend itself by showing that is has close to $200 billion in liquid assets and cash, even after suffering sell-offs in trading yesterday. Some analysts agree that Lehman is no Bear Stearns, with firms such as Deutsche Bank Securities maintaining its buy rating on the stock. Investors are confident today, but only time will tell if the financial titan will be able to continue on this optimistic path.
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