Today's 3 Picks: LEH, NYT, MCD

Beleaguered Lehman Brothers Holdings (LEH) went into a tailspin Tuesday after its efforts to sell a stake to the Korean Development Bank fell apart.

Lehman's shares had already careened down 80% year to date as the mortgage-market collapse ground up the venerable Wall Street investment bank. With Sunday's ouster of Washington Mutual (WM) Chief Executive Kerry Killinger, Lehman helmsman Dick Fuld has to be wondering how long he can hang on now that prospects for a reported $5.3 billion infusion from the Korean consortium have evaporated.

The Chosun Ilbo, an influential Korean newspaper, said the state-run KDB had made an offer for 25% of Lehman. It was going to lead a consortium that included Kookmin Bank, Woori Finance Holdings, Shinhan Financial Group and Hana Financial Holdings, but those banks said domestic economic conditions made it unlikely they'd join the group.

Richard Bove, an analyst at Ladenburg Thalmann, wrote Tuesday that Lehman's management doesn't seem to understand how skeptical the marketplace is about the health of the 158-year-old bank. He wrote that failure to make a deal for its Neuberger Berman unit is the most glaring example of the problem.

"Clearly the company does not believe that it has a serious balance sheet problem and it simply refuses to take what it believes are fire sale prices for its key assets," Bove wrote. "Buyers seem to believe that Lehman is overvaluing its assets and refuse to hit the bid."

Merrill Lynch (MER) analyst Guy Moszkowski this week dramatically increased his estimate on Lehman's third-quarter loss to $6.50 a share. That's 40% worse than his earlier estimate, and well past the Street consensus loss estimate of $2.49 a share.

Meredith Whitney, at Oppenheimer & Co., summed up the bank's weakness in her own report lowering her estimate to a loss of $2.70 from an earlier projected gain of 23 cents a share.

"The primary drivers for these revisions are write-downs, customer volumes, overall weak global equity markets, and weak advisory and underwriting revenues," she wrote Monday.

Bove wrote that the struggles in the markets and the boardroom were an unpromising combination.

"The net result is no action. This is depressing shareholders and infuriating insiders. Thus, I continue to believe that the only rational result is a hostile takeover. This board and CEO are committed to a program that is at odds with investors and employee views. Something must give."

The Bottom Line: Hold
You'll recoup at least a piece of your massive losses when Fuld folds and the market rewards his ouster while he spends more time with his family.

The market briefly rewarded the battered stock of the New York Times (NYT) when the newspaper announced it would close a New York-area distribution center and exit the wholesale distribution business.

Shares rose as much as 5% in early trading, though gains -- a rare enough occurrence for the Times' stock, down almost a third in the last year -- leveled off by midday Tuesday. The bump probably wasn't so much a reward for the cost-cutting move, one of many the company's been forced to make (including a wave of buyouts that saw some of its best reporters leave the paper), as a bit of a squeeze on the many short-sellers who expect the stock to keep going down. About 15.3% of the Times' public float was held short as of Aug. 12.

Gabelli & Co. analyst Barry Lucas estimated the City & Suburban operation, which the Times bought in 1992, suffered annual losses of over $10 million, but emphasized the roughness of his projected figure. Looking forward, Edward Antorino, at the Benchmark Company, pegged annual cost savings at $35 million to $40 million. About 550 employees will be laid off.

"The decision reflects the dramatic change in the business environment and as a result, New York Times Co. management believes wholesale distribution is no longer an economical business and is moving to a distribution model similar to that of its national edition, which is delivered by third-party organizations," Antorino wrote Tuesday, while retaining his Hold rating on the stock.

On an episode of "The Simpsons," Nelson, the school bully, heckles a newspaper reporter, singing out, "Ha-ha, your medium is dying!" He's rebuked by his principal, who tells him, "There's being right and there's being nice."

There's also being a brand, and the quality of the Times' journalism allows it to overcome management's many missteps with less impact than a weaker paper might feel. Getting rid of a badly aging business model is an encouraging step.

"We believe the company is one of the best-positioned newspaper publishing companies for renewed growth over the next 1-2 years mainly due to the strength of its national brand newspaper, The New York Times, and a growing position on the web," Antorino wrote.

The Bottom Line: Hold
If you still own newspaper stocks, it's something of an act of faith already, and even this small move toward more efficient operations supplies enough hope to hang on a bit longer.

Shares of McDonald's (MCD) rose on news that its August same-store sales spiked 8.5%, based mainly on global growth and Olympic eating habits in China.

Same-store sales, projected at 5.5% by RBC Capital Markets analyst Larry Miller, were driven by a global fast-food frenzy. The Asia-Pacific, Middle East and Africa region saw 10% growth, fueled by extended hours and Olympic-related marketing, while Europe's weakening economy failed to blunt positive trends in the United Kingdom.

Though the Beijing Olympics was the site of more Golden Arches than gold medals, shares have fallen off a bit since the $67-a-share peak reached just before the Games' opening ceremonies early last month. Earlier in the year, McDonald's saw U.S. same-store sales slip, and high commodities prices have pushed up food costs.

Though the promotional efforts paid off, Miller cautioned investors not to supersize prematurely.

"In our view, an increased level of discounting could further pressure margins already being hit by higher commodity costs, the sales boost from the Olympic sponsorship is not sustainable, and foreign exchange should become a headwind in the fourth quarter of 2008," he wrote Tuesday.

At the same time, Oppenheimer & Co. analyst Matthew DiFrisco suggests the current quarter will see a domestic boost from advertising around the Democratic and Republican political conventions, and catch some more benefits from ongoing hard times, which he calls the "trade-down" dynamic.

The Bottom Line: Sell
The strengthening dollar is only going to eat further into international profits, and there's nothing on the horizon like the Olympics that will warrant another big spike.