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Merrill warns on 2Q profit
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June 26, 2001: 1:39 p.m. ET
Market conditions cutting into revenue, profit from equity and debt trading
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NEW YORK (CNNfn) - Merrill Lynch & Co. warned Tuesday that current market conditions will cut into second-quarter revenue and profit, particularly in equity and debt trading.
The news hit shares of Merrill (MER: down $7.19 to $59.26, Research, Estimates) hard, as they lost more than 10 percent of their value at midday. It also led to broad declines across almost all leading financial stocks, and was credited for helping to lead the broader U.S. markets lower as well.
Merrill, one of the nation's leading brokerage firms, said it expects earnings per share of 52 cents-to-57 cents in the quarter, down from $1.01 a share a year ago and well below the consensus forecast of 82 cents a share of analysts surveyed by earnings tracker First Call.
Merrill warned during the first-quarter conference call that if weakness at the end of that period persisted, it would be difficult to maintain profitability and revenue. It said Tuesday that it has seen a decline from those levels.
"Market conditions have weakened further since March, with the past four weeks being the weakest of the quarter," the company said. "As a result, second-quarter net revenues are expected to be approximately 15 percent lower than the $6.4 billion reported in the first-quarter 2001."
Analysts who follow Merrill already had expected a 6 percent decline in revenue. But the new guidance, which puts second-quarter revenue at about $5.4 billion, is well below the $6.0 billion forecast from First Call.
The news was seen as a sign that the financial sector might still struggle even if the Federal Reserve announces its sixth rate cut of the year as expected on Wednesday.
Other leading brokers who reported results for a fiscal quarter ending in May have posted large declines in earnings as well, but many were able to beat forecasts for their own reporting periods.
"I was surprised by the announcement that they (Merrill) were going to be that weak," said Lauren Smith, an analyst at Keefe Bruyette & Woods, told Reuters. "Clearly, June is extremely weak."
The fact that a company whose own analysts issue earnings forecasts for hundreds of other firms is so far off its own target was an embarrassment that the financial community did not need right now, said Todd Eberhard, stock strategist for Eberhard Investment Associates. He pointed out on CNNfn's Before Hours Tuesday that Congress is now probing the validity and objectivity of analysts' recommendations.
"It's a big miss from the guys who are supposed to be analyzing these markets," he said. "And if you're not hitting your own numbers, it's definitely drawing credence to what the Congress is doing on the Hill with all these analysts."
In its warning Merrill cited reduced trading volume, lower volatility and the impact of decimalization on trading spreads in the Nasdaq market. It said its investment banking business has had increased market share in equity and equity-linked origination, while maintaining a leading position in announced mergers and acquisitions. But is said that segment also has had a downturn.
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CEO David Komansky said that while third-quarter revenue also looks weak, expense cuts should allow the company to meet its full-year financial goals, although he would not give details. First Call's forecast is for 2001 earnings per share of $3.60, down from $4.12. 
-- Reuters contributed to this report.
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