Broker-Dealer Grades Fall Despite the Market’s Rise

Broker-dealer companies’ stocks have inched higher in recent weeks amid a brighter outlook for the economy and signs of improvement in the stock market, but analysts remain skeptical about a rebound in the sector’s short-term profits.

Guy Moszkowski of Citigroup Inc.’s Salomon Smith Barney on Friday lowered his investment ratings, earnings estimates, and target prices for the five major investment banks and told investors that share prices are at near-peak. Indeed, several analysts in late February reduced their short-term profit projections for the broker-dealer group. Mr. Moszkowski said in his research report that a further improvement in share prices would not happen without a broader market upswing, one that he says could take longer than some expect.

He downgraded Goldman Sachs Group Inc. and Bear, Stearns & Co. Inc. two notches to “neutral” from “buy,” and Lehman Brothers Holdings Inc., Merrill Lynch & Co. Inc., and Morgan Stanley Dean Witter & Co. to “outperform” from “buy.”

Revenues from merger-and-acquisition activities were “particularly hard hit, with a decline in announcements foreshadowing a bigger fee drought in 2002 than we’d forecast,” Mr. Moszkowski wrote. “This is a major reason for taking Goldman Sachs to neutral. Essentially we would not be surprised if M&A revenue does not revisit last year’s level until 2004.” Such a long wait would hurt Goldman more than others in the group, he wrote.

Goldman Sachs could benefit from increased non-U.S. underwriting, though, Mr. Moszkowski wrote. He added 5 cents to his first-quarter estimates, now at 93 cents, while cutting 54 cents off his full-year outlook, to $4.06. He projects per-share earnings of $1 for Bear Stearns this quarter, down 3 cents; 92 cents for Lehman, down 17 cents; and 72 cents for Morgan Stanley, down 4 cents. His outlook for Merrill Lynch was unchanged at 63 cents.

Many analysts started the year with higher hopes for broker-dealers. It was widely expected that their revenues and share prices would rise in tandem with a recovery in underwriting, M&A, and equity trading.

But the market turnaround hasn’t happened, and many analysts have adjusted their numbers recently. On Feb. 26 Justin J. Hughes of Robertson Stephens Inc., the brokerage unit of FleetBoston Financial Corp., cut first-quarter estimates, and last Tuesday Reilly Tierney of Fox-Pitt, Kelton Inc., a unit of Swiss Re Group, reiterated his “underweight” rating for the sector.

But the group has its supporters, including Merrill analyst Judah S. Kraushaar, who reiterated his bullish stance in a report issued Friday.

Mr. Kraushaar shared most of his colleagues’ view of current market conditions but said he was “upbeat that a solid profit recovery for the brokers may still be near at hand.”

On Friday the group traded higher, along with the broader market. Goldman Sachs rose 0.37%, Merrill Lynch 1.02%, Lehman Brothers 1.62%, Morgan Stanley 2.97%, and Bear Stearns 0.77%. The American Banker index of 225 banks rose 0.97%, and the Standard & Poor’s 500 index rose 0.58%.