In a little over two weeks from now, Lehman Brothers will be reporting their quarterly earnings. The current consensus estimate for LEH is a loss of $1.73 per share, as compared to $1.54 that was earned in Q3 in 2007. This will represent a reversal of -112% from the same quarter from last year.
For this current quarter, there is much expectation that LEH will have to write off a significant amount on the income statement due to their credit exposure that they have. Some estimates have the amount hitting around $4 million this quarter.
As a result, one the key for LEH is for them to build their capital stream by strengthening their balance sheet. From the first quarter to the second quarter, LEH assets on the balance were reduced by 19% (from $786,035M to $639,432M).
As a result, LEH has realized that their goal is to build their liquidity by building their balance sheet. As current news report has LEH actively seeking buyers for their asset management unit, and there are recent reports that LEH is looking for buyers for their mortgage assets.
Another tool that LEH can use is to cease their dividends for the time being. For the past six months, Lehman Brothers has paid out $334M in dividends to their shareholders. LEH can use this proceeds from the dividends to add liquidity to the balance sheet.
In essence, LEH must build their liquidity to continue to fight against the negative headwinds that the company is facing. LEH needs to make some tough decisions e.g. cutting their dividends and selling their assets. Once they recapitalize themselves and build their balance sheet with capital, LEH will come out stronger on the other side of this cycle.
I have no position in LEH
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