Goldman cuts Merrill to "sell," sees new writedowns

NEW YORK (Reuters) - Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research), battered by over $40 billion in write-downs, will incur fresh write-downs, according to a Goldman Sachs research report, and its shares dropped 3.2 percent on Friday.

Goldman analyst William Tanona downgraded the stock to a "sell" and reduced his third-quarter estimate by $1 to a loss of $5.75.

Merrill, the world's largest brokerage, said last month it would need to take additional write-downs of more than $5 billion in the third quarter after it sold about $30 billion in repackaged debt to Lone Star Funds.

Tanona, however, expects Merrill to post even more write-downs, and he added the stock to his Americas conviction sell list.

Tanona said the stock currently trades at the highest price-to-book multiple in his large-cap brokerage universe, despite having some of the most significant exposures to troubled assets like collateralized debt obligations, mortgages and leveraged loans.

_We expect Merrill's multiple to compress over the coming weeks and months, as third-quarter earnings will mark the fifth consecutive quarterly loss for the company, and its prospects for the fourth quarter of 2008 are not promising enough to warrant this level of a premium to book value," he wrote in a Thursday note to clients.

Tanona cited expectations of higher compensation expense alongside his outlook for large gross write-downs as the reason for his downgrade. He also widened his 2008 loss estimate to $11.55 a share from $10.25.

He also cited a fine of $125 million that the brokerage is due to pay to settle a regulatory dispute over sales of the debt instruments known as auction-rate securities, and the cost of buying them back from retail investors.

The analyst cut his six-month price target on the stock to $22 from $28.50.