Over the same period, peers have lost 7% while the S&P 500 is off 1%. GSCO believes the sell off is overdone, and recommends investors build a position in Merrill Lynch to take advantage of the very strong investment banking and capital markets environments. Firm's $107 price target implies 31% upside. They raise 1Q07/2007 EPS estimates to $2.00/$8.20 from $1.84/$8.00.
Catalyst: MER reports 1Q2007 earnings in mid-April, and GSCO anticipates the firm will deliver upside to consensus estimates. Investors have over-estimated the headwinds sub-prime mortgage will have on the firm, in their view, and they believe they are not giving management enough credit for the positive momentum it has built over the last few years to improve its ROE.
Both LEH and BSC have indicated sub-prime mortgage is a small contributor to their fixed income business, so MER's contribution should be equally as small. While the timing of the First Franklin deal was less than optimal, any revenues will be accretive in 2007 as the deal closed on 12/30/06.
MER trades at 2.0x book value, generally in line with its 5-year historical multiple of 1.9x and well below its recent multiple of 2.4x.
Notablecalls: Expect to see buy interest in MER!