University of Pennsylvania
Harvard Business School
. Guy Moszkowski has covered this sector for
Salomon Smith Barney
since 1998. Before that, he spent a year at
in a similar capacity, and eight years as an analyst at
Sanford C. Bernstein
Industry Outlook and Style
Back in February, Guy Moszkowski upgraded both
to strong buys, mainly because of their operations in Europe, where an investment banking boom has been "in full flower," as he puts it. The Salomon analyst is convinced that Europe will continue to generate substantial investment banking opportunities across the board -- in mergers and acquisitions and in the equities and fixed-income businesses.
Trading at $80 when he upgraded it, Goldman's stock climbed as high as $127 before falling back in the recent market turmoil. On Oct. 16, it closed at $103.63. Lehman's shares traced an even more spectacular ascent before succumbing to a similar retreat: At $80 on March 1, the stock skyrocketed to $153 in early October. Since then the shares closed as of Oct. 16 at $122.56.
Moszkowski is an especially strong proponent of Goldman, which he calls "one of the two best-positioned firms in Europe, not to mention globally, in both M&A and equities." (The other is
Morgan Stanley Dean Witter
.) He believes Goldman will continue to grow its global equities business faster than any of its peers. (Salomon was, like many Wall Street firms, a co-manager in both Goldman's IPO and secondary offering syndicates.) On that basis, the analyst forecasts that Goldman's earnings per share will vault from $5.27 last year to $6.57 this year and $7.30 next year.
Another unfolding story Moszkowski has been watching closely -- and supporting with a buy since early 1999 -- is
, his top pick.
Merrill Lynch: Top Pick
He noticed that its stock was looking quite undervalued after a period of aggressive overinvestment: The firm bought
Mercury Asset Management
just as the U.K. money manager began running into performance problems and client defections, and it ran into further troubles with its money-losing acquisition of the retail branches of Japan's failed
. The 1998 emerging markets bond crisis, too, affected Merrill more severely than its rivals, Moszkowski says.
Stung by those setbacks and the resulting loss of market confidence in its stock, in early 1999 Merrill began to focus on improving its cost management and delivering shareholder value, Moszkowski observes. On June 1, 1999, Merrill announced its much-needed online brokerage strategy. Many observers feared that the firm's online strategy would cannibalize its full-service retail business, but the Salomon analyst disagreed.
Investors took a while to come around, but by early 2000 they were finally convinced that Merrill was "rotating out of its binge mode and that its two-pronged retail strategy was working," says Moszkowski. Merrill's stock inched up only 4 points between Jan. 31 and Dec. 31, 1999, but it climbed 30 points, to a split-adjusted price of $72, from the beginning of this year through the end of August. Moreover, the stock climbed 90% from the Salomon analyst's upgrade price. To Moszkowski's way of thinking, Merrill has the best value of all the major firms.
Moszkowski also favors
. In April he launched coverage of the company with a buy. "Its multiple was less than 10 times earnings, extremely low relative to the rest of the group," he notes.
On July 20, he met with Bear President and Chief Executive James Cayne, who gave Moszkowski the impression that his proudly independent firm might be willing to be acquired -- at four times book value. In a wave of consolidation,
had just been purchased for 3.5 times book by
. And since then,
Donaldson Lufkin & Jenrette
have been acquired for three times book by
Credit Suisse First Boston
, respectively. (
wrote about all three deals in
The next day, the analyst let clients in on Cayne's comment, and Bear's stock moved quickly from $42 to $60, subsequently rocketing as high as $72 in September. Having backtracked to $56 in the recent market slaughter, with an acquisition price which could be as high as $90, the stock remains attractively valued, in Moszkowski's view.
As for his outlook for the securities industry as a whole, Moszkowski is bullish. He predicts Europe will continue to offer substantial investment banking opportunities and that demographics favor the U.S. equities business for several years to come. He adds the caveat, though, that the sector could be damaged if oil prices go higher and the euro falls lower.
Also, he thinks it will be difficult to maintain the growth rate of the U.S. merger business. "The value of mergers as a percentage of the GDP reached 18% this year," he notes. "That high level may not be sustainable given recent antitrust activism in Washington. Domestic M&A business could not only not grow, it could even shrink." But Moszkowski is pinning his hopes for the sector on low- to midteens earnings growth over the next five years. "If there are positive earnings surprises, the stocks, which represent acceptable value now, will do very well from here on out."
Favorite stock for next 12 months:
Merrill Lynch; price target for 12-18 months: $85
"Merrill will reach our target price because, based on my relative-price-to-book-value model, if a company is trading at around the midpoint of its historical range, it is a very good value. Merrill is at 51% relative price to book, and its high has been 65% to 70%, while its low has been 35%. It's closer to midpoint than are its competitors. My earnings estimates for 2001 are conservative -- $4.05 vs. $3.85 for this year -- and I think the probability is that I will need to revise them upward."
"The company's strategy of leveraging its existing cost base will produce significant margin improvement over the next several years. That, along with its attractive valuation and strong franchise, makes Merrill very appealing."
Rate Their Stock Picks:
Which stock do you like best?
McVey: Lehman Brothers
Moszkowski: Merrill Lynch
Eisman: Fannie Mae