Report Card: Henry "Chip" Dickson

Henry "Chip" Dickson Lehman Brothers
	Report Card 1* Overall rank 1* Rank by institutions 15* Rank by stock picking Makes money for me Saves me from disaster Makes me think Tells the truth Meaningful service, not overkill Well-connected *Out of 29. Best star rating is 3 stars. Click here for our methodology.
1st Place Banks

Bio

B.S., M.B.A., Babson College. Dickson joined Lehman Brothers in July, though at the time this survey was conducted he covered banks at Salomon Smith Barney. Before joining Salomon in 1993, he followed the industry at Kemper Securities and also at McDonald & Co. Securities. Before moving to Wall Street, Dickson spent 10 years as a commercial lending officer.

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"We're in a more challenging phase of banking," asserts Dickson. Among the reasons: better informed customers ("which means staying competitive is more expensive") and higher credit costs. Noting that "the relatively easy operating leverage that existed for much of the 1990s is gone," the analyst observes that earnings growth in the bank group is now much more dependent on the level of revenue growth.

Dickson has done some independent digging into his companies' numbers to reveal a further worrisome statistic. The analyst, who moved from Salomon Smith Barney to Lehman in July, believes that many banks are overstating their return on equity , or ROE. The ROE reported by most of the companies in his universe averages 18%, but he calculates the median figure at closer to 12%. "An accurate accounting of the capital invested to create the companies gives the real picture," he observes. "It isn't that pretty."

Revised downward to 12%, the companies' ROE barely covers the cost of capital, says Dickson. This return is also lower than that in 1997 and 1998, the years of the industry's great consolidation wave. "The burdens created by paying too much have engendered their own pressures, he points out.

The upshot: As a group, banks face a difficult environment, and investors must be selective. The Lehman analyst has zeroed in on those companies seeking to improve their returns by becoming more focused -- buying businesses that build on their strengths and selling parts that don't fit into their new focus.

Dickson's top pick is Chase Manhattan (CMB), whose stock has fallen 6% since Sept. 13, when it announced plans to buy J.P. Morgan (JPM). (TheStreet.com has covered this and other recent financial services mergers extensively.) He also has buys on Bank of New York (BK) (up 28% year-to-date), Fifth Third(FITB) (up 0.6%), Mellon Bank(MEL) (up 32%) and Wells Fargo(WFC) (up 14.4%).

Says the Lehman analyst of his favorite stock: "I liked Chase before the merger announcement, but I like it even better now. The company is well-positioned in financial services sectors that are secular growth areas -- namely, capital markets, securities processing and asset management. Also, the deal makes the combined company stronger than the individual companies. Their competitive position should be stronger and not as expensive to grow and maintain."

Dickson also puts in a good word for Mellon. He thinks it is emerging as one of the stronger fiduciary companies, and, in his view, it still has room for growth in its asset management and securities processing businesses. The analyst expects Mellon's earnings growth rate to improve after the third quarter. Moreover, the company doesn't need much in the way of new capital, he contends. On Sept. 14 Dickson raised his 12-to-18-month target price for Mellon from $50 to $57. The stock currently trades in the low 40s.

Institutional investors in TheStreet.com's Analyst Rankings -- Equity 2000 poll speak in superlatives about the Lehman analyst's abilities. One contends that Dickson has the "best analytical mind in the industry," adding that "he is my first call when I'm doing my models." Another describes the analyst's research as "thoughtful and unique."

Stock Pick
Favorite stock for next 12 months:
Chase Manhattan; Target price: $73

Comment:
"We think earnings growth will slow next year because of dilution related to its acquisition of J.P. Morgan, but the following year we expect growth to reaccelerate to more than 10% annually. Do I think the new Chase is capable of faster growth than the old Chase? Yes, but I didn't raise my earnings growth target, because I didn't have to justify maintaining a buy on the stock."


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Which stock do you like best? Dickson: Chase Mayo: Mellon

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