UBS Slogs Through Credit Market

We are maintaining our Hold on UBS AG (UBS - Snapshot Report). The company posted a first quarter net loss of CHF11.6 billion, due to CHF19.5 billion in writedowns in its US real estate and related structured credit positions. To counter the effects of these writedowns on its capital base, UBS completed a CHF15.97 billion rights offering in June, significantly diluting existing shareholder interests.

Positively, UBS continues to reduce its credit market risk positions, including the recent $15 billion sale of mortgage securities to a newly created distressed asset fund that will be managed by BlackRock (BLK - Snapshot Report). Further writedowns and losses are likely given turmoil in the credit markets. UBS replaced its cash dividend with a 5% stock dividend.

Currently, UBS is trading at 6.7X the consensus estimate for 2009, an 18% discount to its industry peers price/earnings (P/E) ratio of 8.2X, 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 subprime and related investment portfolios, we believe the shares are fully valued. Our $23 target price represents an 8X P/E of our initial 2009 earnings estimate of $2.85.

Read the full analyst report on UBS