Earnings Preview: Merrill Lynch & Co. writedowns anticipated

OVERVIEW: Investment bank Merrill Lynch is believed to have been hurt by the deterioration in the mortgage and credit markets during the first quarter, though probably not as badly as it was during the previous quarter.

Merrill Lynch took a $14.6 billion writedown in the fourth quarter as it reduced the value of bonds and securities backed by mortgages and other troubled debt. The New York-based bank took $7.9 billion in writedowns during the third quarter of last year, as well.

Other major investment banks have already posted fiscal first-quarter results. Merrill Lynch's competitors, including Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Morgan Stanley, took a combined $6.1 billion in writedowns during the quarter.

BY THE NUMBERS: Analysts polled by Thomson Financial, on average, forecast a loss of $1.99 per share on revenue of $3.7 billion.

ANALYST TAKE: Banc of America Securities analyst Michael Hecht estimates Merrill Lynch will record a net writedown of $5.8 billion for the quarter.

The writedowns will be tied to the declining value of residential and commercial mortgage holdings, exposure to bond insurers and its leveraged loan portfolio, Hecht wrote in a research note.

Hecht expects Merrill Lynch to report a quarterly loss of $2.25 per share.

Earlier this month, Buckingham Research Group analyst James Mitchell cut his first-quarter projection to a loss of $1.35 per share from income of 80 cents per share. He cited an estimated $6 billion in writedowns and continued weakness in investment banking.

Merrill Lynch continues to see strength in its trading and wealth management operations, however, Mitchell wrote in a research note.

WHAT'S AHEAD: Merrill Lynch is at a competitive disadvantage as it has the least available cash to take advantage of potential buying opportunities during the current weak market, Wachovia Capital markets LLC analyst Douglas Sipkin wrote in a research note. That weakness could hinder earnings going forward.

STOCK PERFORMANCE: Shares of Merrill Lynch fell 24 percent during the first quarter. They closed Monday at $42.88.