P/E Ratio: 8
Yield: 2.4%Question: What do you call it when an $8 billion asset writedown translates into a $30 billion loss in market cap? Answer: an overreaction.
Even if Merrill writes down another $6 billion in the fourth quarter, stocks are valued on future earnings. There's little reason to believe this will have a big effect on 2008 profits, which analysts estimate at $7.68 a share. That means Merrill is trading at a mere eight times 2008 earnings (with a 2.4% dividend yield).
Why are we so confident that the mortgage debacle won't bleed into 2008? Two reasons. The first is Merrill's new CEO, John Thain. Thain used to run the mortgage desk at Goldman, and it's hard to believe he would have taken the Merrill job if the problems were worse than they appeared to be. The second reason is that financial panics are almost always overblown. When this market bounces back, as surely will happen, Merrill stands to post sizable gains as it writes up the same assets it was forced to write down.
Last updated January 02 2008: 5:32 PM ET