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Lehman: Read Between the Lines

March 18, 2008

In the earnings news today, Lehman (LEH) Reports Q1 (Feb) earnings of $0.81 per share, $0.09 better than the First Call consensus of $0.72; revenues fell 30.5% year/year to $3.51 bln vs the $3.35 bln consensus. What is meant by the word certain?

LEH says liquidity pool of $34 bln and unencumbered assets of $64 bln, with an additional $99 bln at regulated entities, at quarter end. Net revenues for the first quarter of fiscal 2008 reflect negative mark to market adjustments of $1.8 bln, net of gains on certain risk mitigation strategies and certain debt liabilities.

Now for the bad news:

The Firm’s pre-tax margin was 18.9% for the first quarter of fiscal 2008, compared to 33.7% for the first quarter of fiscal 2007.

Shareholders are not going to be happy with this:

Return on average common equity was 8.6% for the first quarter of fiscal 2008, compared to 24.4% for the first quarter of fiscal 2007.

Still looking rough:

Return on average tangible common equity was 10.6% for the first quarter of fiscal 2008, compared with 29.9% for the first quarter of fiscal 2007.

That is a relief. So, if we calculate the value based on current accounting principals, the stock should be a buyout candidate close to… $3, $4 or maybe $50?:

Book value per common share was $39.45.

The point is that do we really think that any of this matters right now? I can’t make heads or tails of it, can you?

(from briefing.com)

Disclosure: Clients of Horowitz & Company do not hold positions mentioned as of the date of publish.

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Written by Andrew Horowitz · Filed Under Short Ideas, Stocks 

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One Response to “Lehman: Read Between the Lines”

  1. George on March 18th, 2008 12:10 pm

    Most of this goes back to Soro’s theories on Reflexivity.

    http://thevolatilitysoma.blogspot.com/2008/03/soros.html

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