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Lehman Brothers (LEH) reported earnings today, and once again demolished Wall Street’s estimates. Fans of Lehman know that this is a quarterly habit for the firm. All told, Lehman raked in $2.76 a share, 14 cents more than estimates and 80 cents more than last year. This has been a terrific year for Wall Street.

As phenomenal as those numbers are, Lehman has done this before. Last quarter, the company beat earnings by 57 cents a share, and in March Lehman beat earnings by 71 cents a share. If there’s a Google of Wall Street, Lehman is it.

I still think of the company as a “little” firm on Wall Street, but its market cap is over $30 billion. And as amazing as Lehman’s performance has been, the stock has slightly underperformed the Amex’s Broker/Dealer Index (^XBD) over the long term. Just about every stock in that sector has been a market beater. Shares of Lehman still trade for less than 12 times this year’s earnings estimate (and we’ve seen how accurate those are), plus there’s a little dividend to boot.

So how come I don’t love the stock? It pains me to say this, but I just don’t see the stock going much higher next year. Lehman is still primarily a bond shop. The company has done a very good job of diversifying over the past few years (Neuberger Berman was a great buy), but bonds are still the heart and soul of the company. With the yield curve so flat, I’m skeptical that the earnings surprises will keep coming.

Half of the firm’s profits come from fixed-income trading which was up 22% over last year, but down 14% from last quarter. That may be a minor blip for Wall Street, but in Lehman’s case it’s too big a risk to ignore. I want to believe in the stock, but for now I’m content with being a spectator not an owner.

Posted by edelfenbein at December 13, 2005 10:48 AM