Lehman (LEH) dropped 11% yesterday to $19.81, marking the first time in eight years that the stock had closed below $20. rumours suggesting that LEH may be forced to sell itself at a steep discount helped fuel the sell-off. (WSJ sources denied both this and any further writedowns). Much of the drop was also likely the result of quarterly window-dressing (fund managers flushing the stock so as to not have to cop to being dumb enough to own it). WSJ:
Lehman Chief Executive Officer Richard S. Fuld Jr. is trying to steady the firm and stay out of the headlines. But it will take a long time for unpleasant memories of the $2.8 billion quarterly loss, $6 billion in fresh capital and the replacements of Lehman’s president and chief financial officer in June to fade.
On Monday, Mr. Fuld and Bart McDade, who succeeded Joseph M. Gregory, Mr. Fuld’s lifelong friend, as his No. 2, were pitching Lehman to institutional investors in Boston. It’s a tough sell. With Bear Stearns Cos.’ sale to J.P. Morgan Chase & Co., Lehman now is the smallest of the major Wall Street firms. And it has more exposure to the still-troubled mortgage market than any of those rivals.
So is LEH now cheap enough to justify a value play? Morgan Stanley thinks so. It initiated coverage on Lehman with a $31 price target and an Overweight rating and suggested that LEH’s discount to book value already prices in significant additional writedowns.
This seems like a reasonable call. Lehman’s trading at 0.5X book. Assume another third of the balance sheet vaporizes, and it’s still below book. $31 seems a stretch (except on a short-term relief spike), but one hopes that the $6 billion Lehman just raised will take care of its capital needs for a while.