breakingviews: Bear May Beat Lehman as Stock Pick; Both Former Underdogs Are Looking Up Now; Choosing Different Paths
THE PILLARS OF WALL STREET used to look down on Lehman Brothers and Bear Stearns as mere bond houses. Guess who's looking up now. Since 1998, shares of both have blown away their competitors. Yet the two, which report earnings next week, have followed very different strategies. Lehman has done even better. But Bear may be the better stock pick.</br></br>Seven years ago, the two were valued at roughly $5 billion each. Today, Lehman sports a $35 billion market cap, almost three times Bear's. That reflects Lehman's savvy decision to expand aggressively as the bursting of the tech bubble was followed by the inflation of the current credit bubble.</br></br>Both had about 9,000 employees in 1998. Today Lehman has 22,500 compared with Bear's 11,500. Over that period, Lehman's earnings nearly quadrupled, while Bear's results grew about two and a half times. Lehman expanded abroad and derives 40% of earnings outside the U.S. Bear gets a tenth of its profit abroad.</br></br>Yet both are reliant on fixed income and would be hurt by a marked slowdown in credit markets. Though Lehman draws more than half its revenue from fixed income compared with about 45% at Bear, investors seem convinced Lehman's growth prospects make it a better bet.</br></br>Lehman trades at 12.5 times 2006 earnings as forecast by Morgan Stanley -- a 20% premium to Bear. It also fetches 2.3 times book value -- a 40% premium to Bear's book value multiple.