Several firms comment on Merrill Lynch (MER) after the company announced an $8.5 billion equity raise as well as a "substantial sale of U.S. ABS CDOs."
- Oppenheimer's Meredith Whitney notes this would reduce MER's CDO exposure by $11.1 billion. While MER has significantly diluted existing shareholders, they applaud this purging of assets as an attempt to cut its losses and focus on stabilizing its platform and righting the franchise towards growth. While MER's stock still sells at a premium to book value and is expensive in the firm's opinion, they believe the stock is getting closer to fairly valued levels as now the hardest work is behind the company.
- Deutsche Bank notes the move increases shares outstanding by an estimated 38% and reduces estimated run-rate EPS from $4/share to $2.80/share but also eliminates most of the worst vintage CDOs, gets cash up front from the monolines (vs. waiting 20-40 yrs.), and keeps book value around $22/share. DB is lowering their price target from $31 to $28 but keeping their Hold rating given an inexpensive valuation.
The good news is that the actual sales can give confidence that it is finally selling assets vs. merely marking them to market. Merrill is also getting ahead of others in getting money from the monolines.
They apply a target multiple of 1.2x to their 2009E book value of $23.
- Goldman Sachs thinks it was undoubtedly a bitter pill to swallow, but they believe management's decision to finally sell the majority of its ABS CDO portfolio and write off its monoline exposure was the right thing to do in order to move the firm forward. Nonetheless, these actions come at a very high cost to existing investors as outstanding shares increase by 38% under the "if converted" method (assuming no exercise of the over-allotment option). Although painful, the firm believes putting these issues largely behind it will better enable the firm to focus on existing business opportunities in the marketplace.
Merrill Lynch currently trades at 1.1x its pro forma if-converted book value of roughly $22. GSCO's new $28.50 six month price target assumes the stock will trade at 1.3x its pro forma if-converted book value in six months.
- Citigroup says that in their view the Merrill franchise has a tremendous amount of earnings power that can be unleashed over time through execution. While the real promise of the new management team at Merrill is the potential to unlock this earnings power, the legacy assets proved to be a year-long detour, but that is now behind it.
This is the first large-scale CDO transaction that is not a distressed sale. Industry participants will likely mark super-senior CDO assets with 2006 and 2007 vintage collateral down to the $0.22 range. Including the financing, Merrill took assets with a carrying value of $0.36 and wrote them down to $0.22, and transferred the risk of declines down to $0.17 to a 3rd party.
Reiterates Buy and $45 target (down from $65 due to dilution) as they expect the sale of highly illiquid mortgage related assets to be a catalyst to refocus on the earnings power of the Merrill franchise. The overhang that has plagued MER for over a year has finally been removed. Furthermore, the capital raised enhances the quality of Merrill's equity base by significantly reducing the preferred component in exchange for straight common equity. MER is trading at 1.1x book despite the credibility of book value being materially higher post reducing the CDO exposure.
Notablecalls: So that's why MER was schmeissed over the past couple of days. I think the stock will see a bounce on this. Trading around book value and around 10x FY09 estimates is where people will likely come in to buy the common.
It's all about survival these days and it looks like MER has made it.
The only downside to the story can now come from earnings. Let's face it - we don't know what MER's real earnings power is.