Lehman Trades Lower on Rising Profits

Top shelf investment banking firms Lehman Brothers (LEH) and Goldman Sachs (GS) are experiencing falling stock prices, as worries over interest rates and the economy grab financial news headlines. Despite reporting a nearly 50% increase in profits for the 2nd quarter, Lehman's stock has been on a steady decline from its 2 for 1 stock split (adjusted) $75 a share opening price on May 1st of this year to close at $59.42 on June 13th. Lehman has proven that while rising interest rates and inflation worries may dampen analyst expectations, the benefits of stock appreciation is reserved for investors who can read between the lines and find value where others harbor doubt.

Lehman's Growth
Lehman spent 2005 climbing to a high of $143 a share, during a year of rising interest rates, natural disasters, rising oil prices and the fear of a real estate bubble. Lehman recorded $3.2 billion in net income on $14.6 billion of net revenues last year. For the 2nd quarter of 2006, Lehman posted $1 billion in net income on $4.4 billion of net revenues. Lehman's capital markets segment, which provides clients with financing operations in fixed income and equity products, was responsible for approximately 70% of 2nd quarter net revenues. Lehman's equity capital markets grew by 85% driven by an increase in trading activities and prime brokerage services to the hedge fund community.

Lehman's Future
Lehman, who is well known for its strength in fixed income, is focused on increasing the performance of its investment banking segment. Lehman's recent advisory role with BellSouth's (BLS) acquisition of AT&T (T) shows that its stature in M&A is growing. Although there are fears of another quarter point increase in interest rates by the Fed, Lehman is expecting interest rates to go as high as 5% before stabilizing. As a saving grace from increasing interest rates and speculation of a decline in equity trading revenues, Lehman forecasts $8.5 trillion in the global fixed income origination market which plays to their sweet spot in debt underwriting. Lehman is also focused on deriving more of its revenue from outside the U.S. In 2005, Lehman generated 12% and 25% of net revenues in Asia Pacific and Europe respectively.


Why I like Lehman?
The negative press creates volatility that can create buying opportunities for investors who can spot value. Determining whether or not Lehman is a good investment requires investors to understand how interest rate changes affect the needs of clients who will ultimately look to investment banking firms to guide them through the waters of risk management and the sunshine of expansion. In both cases, Lehman Brothers is a proven leader in the industry that can benefit clients and shareholders through the peaks and troughs of economic cycles.