Description
There has been tremendous pressure on Lehman in the past
week. It closed at $16.20 on Sep 5, and
is currently trading at $3.65 on Sep 12.
So what happened to the underlying fundamentals of Lehman that cause a
78% drop in one week? The market
consensus is that Lehman cannot survive as an independent firm and will either be bought out completely or
face bankruptcy.
Thesis:
At $3.65, the market has oversold Lehman. I agree that Lehman screwed up and should be
punished. It is a weaken franchise going
forward. And I definitely agree with
David Einhorn short analysis. However, I
believe Lehman can survive independently and even in worst case scenario,
Lehman is worth much more.
Worst case
scenario Balance Sheet
|
Cash & near cash
|
12513
|
|
restricted cash
|
0
|
|
Financial instruments / inventory
|
|
|
MBS
|
55983.4
|
|
Treasuries/agencies
|
26988
|
|
corp debt
|
47204
|
|
equities
|
43485.8
|
|
Real Estate held for sale
|
15651
|
|
Commercial paper
|
4757
|
|
Derivatives
|
46991
|
|
253573.2
|
|
Collateralized agreements
|
|
|
purchased under aggrements to
resell
|
169684
|
|
securities borrowed
|
124842
|
|
294526
|
|
|
|
Receivables
|
|
|
brokers, dealers
|
16701
|
|
customers
|
20784
|
|
others
|
4236
|
|
41721
|
|
Current Assets
|
|
|
|
|
|
|
Net fixed assets
|
4278
|
|
intangibles
|
0
|
|
Oth Asst/Def Chgs&Oth
|
5853
|
|
LT assets
|
10131
|
|
|
|
Total Assets
|
599951.2
|
|
ST borrowings, current LTD
|
35902
|
|
Financial instruments shorted
|
141507
|
|
177409
|
|
Collateralized agreements
|
|
|
purchased under aggrements to
repurchase
|
127846
|
|
securities loaned
|
55420
|
|
Other
|
20656
|
|
203922
|
|
Payables
|
|
|
brokers, dealers and clearing
|
3835
|
|
customers
|
57251
|
|
accrued and other
|
9802
|
|
bank deposits
|
16324
|
|
87212
|
|
Current Liabilities
|
468543
|
|
|
|
Preferred equity
|
6993
|
|
LT borrowings
|
132982
|
|
LTD
|
139975
|
|
|
|
Total liabilities
|
608518
|
|
Total common equity
|
-8566.8
|
|
|
|
Tot liab & equity
|
599951.2
|
Source: 2Q08 – 10Q
Adjustments
·
Include the $ 6 billion raised on June 12.
·
Wrote off intangibles and $23.05B of financial
assets, which represents 53% of their level 3 reported book values.
·
Increased liabilities by $5.4 billion to reverse
the nonsense of fair value because there is no $$$ available for Lehman can buy
back their debt.
Bankruptcy Risk?
|
Liquid Assets
|
ST debt
|
|
394,325
|
|
468,543
|
|
illiquid Assets
|
LT debt
|
|
205,626
|
|
139,975
|
|
|
|
Equity
|
|
|
|
(8,567)
|
|
599,951
|
|
599,951
|
The above table shows the capital structure in a worst case
scenario. Lehman faces a $74.22 billion
deficit if a run on the bank occurs tomorrow.
This is a significant risk because market is irrational in the short
term, and fear can turn this into a self-fulfilling prophecy.
However, I believe Lehman can buy time because the Federal Reserve’s
Primary Dealer Credit (PDCF) and Lehman has not
borrowed from the PDCF as of Friday. I
would suspect if Lehman is indeed in a liquidity crisis like the market and CDS
spreads have predicted, then Lehman would be closed to maxing out on its Uncle
Sam credit line.
Once Lehman have time, their challenge will be the $8.6
billion deficit. Neuberger Berman (NB)
is worth $5 – 7 billion. Let’s say they
can only sell at $5B, I believe Lehman can raise $ 3.6 B at significant cost to
shareholders.
|
Sum of the Parts Valuation
|
|
|
|
|
Neuberger Berman
|
5000
|
|
|
|
10 yr normalized earnings
|
2165.9
|
|
|
|
|
|
|
|
Earnings Multiple
|
|
3x
|
5x
|
|
40% haircut on earnings
|
1299.54
|
3898.62
|
11695.86
|
|
Market Cap
|
|
8898.62
|
16695.86
|
|
diluted #
|
691.2
|
691.2
|
691.2
|
|
|
12.87
|
24.15
|
|
If they were forced to raise $3.6B at $4.00, it will add 900 to
diluted # of shares. This is very
unlikely.
|
|
|
|
|
|
|
worst diluted #
|
1591.2
|
1591.2
|
1591.2
|
|
|
5.59
|
10.49
|
Lehman is a weaker company going forward. I assume they only have 60% of their
pre-crisis earnings power. And even at
massive dilution, it is still worth $5.6, which represents a 53% potential gain
over Friday’s closing price. Personally,
I will sell around $10 – 13 range.
Conclusion: I would like to remind everyone that the current
credit crisis, is not PERPETUAL. I
believe investors are too focused on the “headlines” while ignoring the
underlying fundamentals. Lehman is a
good short at $40, but not at $3.65.
Remember MBIA two months ago? It
was in the headline as Lehman is. Look
at the chart of RDN, PMI, ABK two months
ago vs today.
Risks:
1)
That I am dead wrong on my assumptions about
Lehman assets and that things are, much worse.
2)
A government forced take-under like Bear
Stearns.
Catalyst
Any "positive" headlines.