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Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

The Rise of the House of Lehman: Chapter II by Steven M. Sears

Summary: Lehman Brothers (LEH) reported Q2 earnings of $2.21, a 27% increase y/y and 18% better than analyst forecasts of $1.88. Analysts continue to fret over its subprime mortgage exposure, which the company says comprise only 3% of its revenues. Its price-to-book multiple (the most relevant metric for banks) of 2.1 trails that of rivals Morgan Stanley (NYSE:MS) [2.6] and Goldman Sachs (NYSE:GS) [2.9]. Previously weak investment-banking revenues were up 55%, and international revenues now account for 48% of all revenues -- more than all but Goldman. Risk-averse CEO Richard Fuld keeps the company's earnings volatility at about 1/2 of most brokerage firms. Lehman has become more aggressive at pursuing deal-making, although Fuld stresses that the company's role is to provide capital, and not to become a bidder itself (I-banks like Goldman have been criticized for competing with their customers). Barron's calls it a "smaller, more risk-averse Goldman Sachs." At $41B market cap, it is the right size for a major U.S. commercial bank, or an I-bank in Europe or Asia. Shares are up just 1% YTD, and 29% over the past year -- vs. 63% for GS and 61% for MS. Even on its own, Lehman investors will be happy customers.

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Conference call transcript: Lehman Brothers F2Q07

Source: Lehman Brothers: A Risk-Averse Goldman Sachs - Barron's