Merrill: Losing the Expectations Game

Dennis Berman looks today at Merrill Lynch's earnings per share. With earnings down and the number of shares up, he concludes, reasonably enough, that, in the words of Sanford Bernstein's Brad Hintz, "it's extremely difficult to get to the earnings-per-share number of 2004 anytime soon".

Er, yes. But then again, Merrill's share price is now less than half what it was back in 2004: surely therefore the bank needs to come up with less than half 2004's earnings per share in order to justify its trading level?

It's true that back in 2004, Merrill's shareholders wanted earnings per share of substantially over $4. Right now, by contrast, they'd probably be happy with anything over $0.

Berman seems to think that Merrill CEO John Thain will have failed if he can't get back to 2004's $4.40 EPS. That's not true: Merrill 2008 is not the same as Merrill 2004, and the goals have changed as the share price has fallen. The only reason to want $4.40 EPS right now would be if you were paying something over $50 a share for the stock, and nobody is doing that.

All the same, it does seem that for all Thain is downplaying his bank's prospects on CNBC, he still hasn't mastered the art of playing the expectations game. If the Wall Street Journal still thinks that Merrill should be earning $4.40 a share, there's clearly far too much optimism out there.