Lehman Quarter Bodes Well

Updated from 10:58 a.m. EDT

Lehman Brothers(LEH) blew past Wall Street expectations in the third quarter, posting a 74% jump in profits that was fueled by strong gains in investment banking and stock trading.

In the quarter, Lehman earned $879 million, or $2.94 a share, compared with $505 million, or $1.71 a share, a year ago. Net revenue in the quarter was $3.85 billion, up 47% from the year-ago quarter.

Analysts were expecting Lehman to earn $2.37 a share in the quarter on revenue of $3.4 billion, according to Thomson Financial.

In morning trading, shares of Lehman were up $1.55, or 1.3%, to $113.83. For the year, shares of the investment firm are up 30%.

In a conference call with analysts, Lehman executives weren't afraid to gloat over their "record'' results and predicted more of the same for the future.

"These are terrific results,'' says David Goldfarb, the firm's chief administrative officer. "We are relatively bullish on the long-term and near-term growth prospects of what we do.''

And what Lehman, and other Wall Street firms, do best when the economy is humming along, is make money -- lots of money -- from investment banking and trading.Net revenue from investment banking rose 55% to $815 million, with strong, across-the-board gains in fees from stock and debt underwriting and merger advisory work

Capital markets, which includes proprietary trading, posted a 49% gain in net revenue to $2.5 billion. Gains in stock-related trading were particularly strong, doubling to $637 million.

Lehman is the first of four big Wall Street investment firms, whose quarters ended Aug. 31, to report earnings. Over the next two weeks, other Wall Street banks set to report are Bear Stearns(BSC), Goldman Sachs(GS) and Morgan Stanley(MWD).

Overall, Wall Street firms are expected to post sharply higher earnings, as the third quarter got a big boost from a flood of new stock offerings. In fact, according to Thomson Financial, August was the strongest month ever for initial public offerings in terms of cash and investment banking fees raised.

Brokerage analysts were quick to applaud Lehman's results. Glenn Schorr, UBS's brokerage analyst, says he found little to quibble with in the firm's numbers.

"Awesome quarter all around,'' says Schorr, in research note. "Likely a good read thru for the group as expectations were high, but not this high." Lehman is an investment banking client of UBS.

Analysts expect profits in the third quarter, traditionally a sleepy one on Wall Street, to be even better than the second quarter.

Looking ahead, Lehman executives expect the good times to keep rolling along. Goldfarb says the firm's backlog of investment deals is running at a record level and sees little signs of a slowdown in corporate capital markets spending.

Lehman executives, giving short-shrift to some concerns about a looming economic slowdown, say they expect the global economy to continue to grow at a modest pace in 2006.

"The trend has been our friend and we continue to believe this will be the case, which is why we remain optimistic,'' says Goldfarb.

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