Target Upped on Hold-Rated DB

We are continuing our Hold on Deutsche Bank AG (DB - Snapshot Report), but raising our target price to $118. DB posted a first quarter net loss before nonrecurring items of 985 million, compared to net earnings of 1,924 million in the year-ago quarter. This was in line with the April 1 pre-announcement that called for 2.7 billion in writedowns related to leveraged loans, commercial real estate, and residential mortgage-backed securities.

We are cutting our 2008 EPADS estimate to $8.00 from $14.15 and initiating our 2009 estimate at $14.15. Though DB's results should be bolstered by improved efficiencies and acquisitions, headwinds include problems stemming from more dislocations in the US subprime mortgage and other credit markets. DB recently increased its annual dividend by 13%.

Deutsche Bank is trading at 8.5X the consensus 2009 earnings per share estimate, slightly below the 8.8X median P/E ratio for the industry, based on 2009 consensus estimates. While DB's expected growth rate of 8% is below the median for the industry, DB's dividend yield of 5.9% provides an above-industry median return. Despite this, we believe the market penalizes DB for its above-average reliance on more volatile trading results, which are contributing an increasing proportion of revenue and earnings.

We think the shares are appropriately valued at present. Our $118 price target equates to roughly 8 ¼X our $14.15 EPADS estimate for 2008, providing a PEG ratio (P/E divided by estimated future growth rate) of 1.0X, approximately in line with the industry median.

Read the full analyst report on DB.