We are maintaining our Hold on UBS AG (UBS). In line with earnings guidance issued on July 4, UBS posted a net loss from continuing operations of CHF415 million for the second quarter.
This largely reflected US$5.1 billion in losses related to US residential real estate and other credit positions and US$900 million in provisions for auction rate securities, partly offset by a CHF3.8 billion tax credit. We are changing our estimates for 2008 and 2009 by $0.20, partly due to dilution caused by the CHF15.6 billion rights offering in June. Our new estimate for 2008 is a loss per share of $3.10 and for 2009 earnings per share of $2.65.
Positively, UBS continues to reduce its credit market risk positions, including the recent $15 billion sale of mortgage securities to BlackRock (BLK). Further writedowns and losses are likely given continued turmoil in the credit markets.
Currently, UBS is trading at 6.8X the consensus estimate for 2009, a 19 percent discount (versus an 18 percent discount in our last report on June 23, 2008) to its industry peers price/earnings (P/E) ratio of 8.4X, based on 2009 consensus estimates. Given the cloudy outlook for UBS's near-term earnings due to our expectation for continued weakness in the company's US real estate and related investment portfolios, we believe the shares are fully valued. Our $22 target price represents an 8.4X P/E of our 2009 earnings estimate of $2.65 per share, roughly in line with the median for the industry.
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