Lehman up after Morgan Stanley's overweight rating

NEW YORK (Reuters) - Morgan Stanley recommended investors buy Lehman Brothers LEH.N shares, setting a price target of $31, after the beleaguered investment banking firm's stock fell nearly 11 percent on Monday, owing to rumors that it would be bought out well below its current price.

Lehman shares were up 4.1 percent at $20.62 in extended- hours trading after Morgan’s initiation of Lehman shares at an “overweight” stock rating.

“We think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing,” wrote analysts Patrick Pinschmidt and Avi Ghosh. “The firm’s ability to weather near-term market headwinds and return to respectable return on equity generation should help the shares trade closer to book value.”

The Morgan analysts expect ROE to rise from 3 percent in the second half of this year to 12 percent in 2009 and 14 percent in 2010 -- even as debt trading declines 28 percent versus its peak.

“A return to profitability amid a healing credit market should drive valuation close to book value,” they added.

Reporting by Jennifer Ablan in New York; Editing by Jan Paschal