Merrill Lynch (MER)/Bank of America (BAC)

Merrill Lynch’s (MER) announcement that it will sell $30.6 billion in face value mortgage backed securities to Lone Star Funds for a purchase price of $6.7 billion -22 cents on the dollar. Merrill had already marked down these securities significantly, carrying them at $11.1 billion, or 36 cents on the dollar. So this sale will result in another writedown of $4.4 billion - the difference between what they were carrying the securities at and what they are selling them for ($11.1 - $6.7 = $4.4).

They also announced that they will be selling $8.5 billion in stock to further strengthen their balance sheet. Because of reset protection in a previous offering, Merrill will have to compensate Temasek Holdings $2.5 billion. So it looks like this will raise an additional $6 billion in cash.

Positives for MER would be its Wealth Management division. 50% of its revenues are generated from this segment. Its stake in Blackrock also makes it attractive.

The move towards annuitization of revenues through fee-based products instead of commissioned-based services is creating strong profit margins less subject to the market’s volatility.

Merrill Lynch's acquisitions of subprime lender First Franklin and private bank First Republic have triggered talk of overpayment and increased exposure to the ailing subprime mortgage industry. Since the beginning of 2007, Merrill's stock is down 17%, reflecting investors faltering confidence upon reading of these events. What people aren't reading are the cold, hard facts about Merrill's operations. Merrill Lynch is a solid company with strong performance metrics. Its revenue is showing accelerating growth, with five-, three-, and one-year growth rates of 12%, 35%, and 43.5%, respectively. Q2 2007 profits rose 30% from the same quarter in 2006, despite the subprime bust. Merrill's price/earnings ratio is currently at 7.94x earnings, compared to an industry average of 20.66x; of its main competitors, only Morgan Stanley (MS) has a lower PE ratio of 7.8x. This indicates an undervaluation of Merrill's stock, which savvy investors could take advantage of. Most of the talk of subprime exposure is just hype; a 17% drop in Merrill's stock price since the beginning of 2007 is more than enough to discount any exposure to the subprime fallout. Though Merrill's stock price may continue to decline for the meantime, it will eventually rebound as the firm's strong performance calms investors' fears.

Merrill may see substantial value creation from the BlackRock venture.

Merrill's continued emphasis on cost containment through out the last economic boom leaves it well positioned to deal with a cooling economy.

Notwithstanding the recent losses during the sub-prime crisis, Merrill Lynch is based on strong fundamentals.The beating that Merrill's stock price took following the sub-prime crisis makes sure that the stock is available at a bargain.

Merrill Lynch's acquisitions of subprime lender First Franklin and private bank First Republic have triggered talk of overpayment and increased exposure to the ailing subprime mortgage industry. Since the beginning of 2007, Merrill's stock is down 17%, reflecting investors faltering confidence upon reading of these events. What people aren't reading are the cold, hard facts about Merrill's operations. Merrill Lynch is a solid company with strong performance metrics. Its revenue is showing accelerating growth, with five-, three-, and one-year growth rates of 12%, 35%, and 43.5%, respectively. Q2 2007 profits rose 30% from the same quarter in 2006, despite the subprime bust. Merrill's price/earnings ratio is currently at 7.94x earnings, compared to an industry average of 20.66x; of its main competitors, only Morgan Stanley (MS) has a lower PE ratio of 7.8x. This indicates an undervaluation of Merrill's stock, which savvy investors could take advantage of. Most of the talk of subprime exposure is just hype; a 17% drop in Merrill's stock price since the beginning of 2007 is more than enough to discount any exposure to the subprime fallout. Though Merrill's stock price may continue to decline for the meantime, it will eventually rebound as the firm's strong performance calms investors' fears.