Lehman cuts its target on Washington Mutual (WM) from $27 to $10 on the expectation that the thrift will front-end load its loan loss provision. Given the the stock is at $6, this still calls for a Hail Mary recovery. So if Lehman really believed the stock were headed to $10, it would probably upgrade it to Buy.
Lehman expects that WM will break even in 2009, after which point revenues will more than cover credit costs:
If WM were able to space out their embedded credit costs over the next several years, revenues of about $15 billion per year would more than cover the credit charges. We believe that will be the case in 2009 and beyond, but not in 2008, when the company will be front end loading their provisions for loan losses to build loss reserves.
We estimate provisions of $15 billion in 2008, but charge-offs of $7.8 billion, for a reserve increase of $7.2 billion, resulting in a loss for the year of $3.91 per share. For next year, we estimate the provision drops to $8 billion, but charge-offs increase to $10 billion, causing a depletion of the loan loss reserve of $2 billion. However, revenues net of expense almost cover the provision for losses, thus we believe the company should reach breakeven in 2H09 and generate a profit for full year 2010
Lehman maintains its 2-Equal Weight rating and cuts its target from $27 to $10.
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