Wall St. lowers Travelers forecast Earnings estimates are trimmed in light of Salomon losses

December 26, 1997|By BLOOMBERG NEWS

NEW YORK -- Travelers Group Inc.'s purchase of Salomon Inc. was hailed as a triumph for Chairman Sanford I. Weill when it was announced in September. Now it's drawing mixed reviews on Wall Street.

Eight of nine analysts polled by IBES International Inc. have pared fourth-quarter earnings estimates for Travelers, which completed the $9.3 billion purchase last month. Analysts cut forecasts more than 13 cents a share on average, or about 20 percent, to 60 cents.

The lower profit forecasts followed Travelers' disclosure last month that Salomon, the biggest trader in the global bond market, had lost $60 million in October's financial tumult.

Travelers, parent of Baltimore-based Commercial Credit Co., has said it will shut down Salomon's equity risk arbitrage. Travelers will likely clamp down on other money-losing activities, said Richard Strauss, an analyst at Goldman Sachs & Co.

"We're going to see a much more risk-averse Salomon," he said.

Travelers' decision to buy Salomon and combine it with its Smith Barney Inc. brokerage unit was a shock to many on Wall Street because the companies are so different.

Salomon, an investment bank that worked mainly with institutions, traditionally made most of its profits using borrowed money to bet in the bond market. The firm paid traders bonuses of as much as $30 million for their winnings, even though its strategies sometimes backfired. The company's Salomon Brothers unit lost $963 million before taxes in 1994.

Smith Barney, by contrast, concentrated on less risky businesses such as providing brokerage services to individual and institutional investors.

Travelers made the announcement that it was shutting down Salomon's New York-based equity risk arbitrage operations last month, after the unit lost about $100 million betting on British Telecommunications PLC's bid for MCI Communications Corp.

"We're going to see them do a lot of restructuring in the fourth quarter," said Strauss, who has Travelers on his "recommend" list.

In October, Travelers said third-quarter earnings climbed 29 percent to a record $740.8 million, or $1.12 a share, from $576.1 million, or 86 cents, a year earlier.

Weill built a following on Wall Street by delivering steady, growing earnings, and investors don't expect him to change. Travelers stock generated returns -- price increases plus dividends -- of more than 44 percent annually since 1993, almost twice the 23 percent return on the Standard & Poor's 500 index during the period.

Even investors who sold Travelers shares recently are optimistic about the company's prospects. Boston Partners Asset Management, for example, pared its stake during the third quarter to 2.37 million shares from 3.39 million.

"We just took a few chips off the table" to lock in gains on earlier investments, said Mark Donovan, a money manager at the firm. "It's still a large holding for us."

Travelers fans note that Salomon isn't the only financial firm stung by losses in recent months, when Asian stocks and currencies swooned. Chase Manhattan Corp. and J. P. Morgan & Co. also said they had trading losses.

What's more, Travelers beat other financial stocks during the past three months, advancing 11.25 percent as the Standard & Poor's index of financial stocks rose 5.4 percent.

Analysts are optimistic that Weill will be able to make the merger work and will use Salomon Smith Barney Inc., the world's second largest stock underwriter, to improve profits next year.

Strauss, who lowered his fourth-quarter profit forecast for the company by a dime, to 57 cents, recently raised estimates for next year, as did the majority of analysts surveyed by IBES. He boosted his 1998 estimate to $3.17 a share from $3.03.

Pub Date: 12/26/97

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