Any way you slice it, this was a great year for large investment bank Lehman Brothers
In a year when banks large and small have been challenged to cope with a flat yield curve and many insurers have been battered by scandal and/or storm losses, many of the brokers constituted a relative pocket of prosperity within the financial sector.
For the fourth quarter, Lehman's sales rose 28% as merger advisory fees, underwriting revenues, and trading revenues all increased by double digits. Expenses also stayed under control, and the company managed to post 41% growth in earnings.
With investors having become accustomed to strong outperformance from Lehman, they seemed to react to the company's earnings with a decidedly ho-hum attitude. Even though the company did beat the average estimate and came within $0.04 of beating the high number, investors were seemingly more worried about the fact that earnings were down from the third quarter -- even though that's what every single published estimate suggested would happen.
Nevertheless, I can see some reasons for caution with these shares. The stock has done quite well over the last year and trades at the high end of its normal historical range. What's more, Lehman has generally made a lot of money from its trading operations, and if that business really is slowing down, it would keep a lid on growth next year -- even if companies are flush with cash and on the prowl for more deals.
Maybe I'm just scarred from years of working for these kinds of companies, but I'm not thrilled at the idea of buying in now. Moreover, at current prices and valuations, I'm more inclined to take a chance with Goldman Sachs
The market has thrown a bit of a party for Lehman Brothers shares in 2005, but it looks like the party is winding down. Far be it from me to discourage a long-term investor from hanging on to the shares of a company that has made some definite improvements over the past couple years, but I wouldn't want to overstay my welcome here.
For more Foolishness to bank on:
JPMorgan Chase is a Motley Fool Income Investor recommendation.
Fools, now is the time to open your hearts and wallets to worthy causes! Please support our five Foolish charities at www.foolanthropy.com .
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).