Lehman Traders Show Muscle - TheStreet

Updated from 9:19 a.m. EST

Lehman Brothers'


first-quarter earnings blew past estimates, as the bank's fixed-income focus gave it a huge advantage trading mortgages and interest-rate derivatives in this winter's screwy bond markets.

Lehman earned $875 million, or $2.91 a share, in the quarter ended Feb.28, compared with $670 million, or $2.21 a share, a year ago. Net revenuerose 21% from a year ago to $3.81 billion. Analysts had been expectingearnings of $2.19 a share on revenue of $3.11 billion.

Lehman's outperformance occurred on the hard-to-forecast trading desk,where fixed-income revenue rose 29% from a year ago to $2.07 billion. Thestrength of the firm's trading division was evidenced in Lehman's overallreturn on equity, which was 24.5% in the first quarter, up more than 300basis points from a year ago.

Firmwide compensation rose at a slightly lower rate than bond-tradingrevenue, coming in at $1.89 billion in the quarter, up 20% from a year ago.

Investment banking, driven by bond underwriting and merger advice,posted revenue of $683 million in the quarter, up 34% from a year ago.

Lehman executives weren't modest, in calling it s a "terrific quarter."

The stock closed Monday at $93.32. In early trading Tuesday, the shares added $2.14, or, 2.3%, to $95.46.

Lehman pegged its book value at $51.75 a share in its press release. TheThomson analyst consensus for full year earnings ending in November -- aforecast that will undoubtedly rise substantially -- is for earnings of$7.89 a share, implying an earnings multiple of about 12.

Lehman is the first of Wall Street's four big brokerages to reportearnings this week. Other securities firms set to report profits for thequarter that ended in February include

Bear Stearns




(GS) - Get Report


Morgan Stanley



In a conference call with analysts, Lehman executives were generallybullish about the prospects of both the firm and the U.S. economy during therest of the year. In the call, the firm's executives often described Lehmanas a "growth company."

In the first quarter, Lehman said a lot of its fixed-income revenuegrowth came from Europe. The firm said its growing overseas business is asign of its diversification.

From the perspective of stock price, 2005 has been a difficult year formost brokerages, with the majority treading water. Financial stocks havecome under pressure from a combination of rising interest rates, higher oiland gas prices and fear that inflation may once again become an economicproblem.

The major brokerages are reporting earnings just a new scandal isbreaking on Wall Street involving the potential misuse of confidentialinternal communications. Federal prosecutors and the

Securities andExchange Commission

are investigation allegations that daytraders andhedge fund may have illegally paid brokers to listen in on internal "squawkbox" communications in order to gather trading tips.

Lehman and

Merrill Lynch


are two big firms said to be attractingscrutiny from the federal authorities who are conducting the eight-monthinvestigation.

No questions were asked about the investigation during the conferencecall and the firm did not comment on it.