UBS AG (UBS) issued a press release today with results for trading so far in the second quarter.  It appears that even with the majority of equity markets rising, and liquidity seeping back into the economy, the company will still report a net loss for the second quarter.

The majority of this loss will be due to write downs and restructurings which have already been made public.  As far as the operating business is concerned, the company will actually post an improvement compared to the first quarter (not exactly a high hurdle to overcome).

Probably most concerning is the difficulty the company is having in attracting new capital.  Since UBS was one of the hardest hit banks during the liquidity crisis of late 2008 and early 2009, clients have largely lost confidence in the firm.  That confidence is incredibly important for a company built on trust and client loyalty.  Without net new assets brought in by the company’s advisors, there is little hope for a sustainable rebound in long-term profits or in the stock price.

UBS is working hard to get its capital base to a stronger place which should help with confidence and in turn increase marketability and new assets under management.  Along with the second quarter pre-announcement, the company also said it would sell 293.3 million shares to “a small number of institutional investors.”  If the company is able to privately place these shares instead of selling to the broader market that will probably have less of an immediate effect on the stock price.  However, the new shares certainly dilute existing shareholders who have too accept the fact that they own a smaller piece of a (hopefully) stronger bank.

Ironically, while UBS is still in poor shape financially and having a difficult time gaining traction in growing earnings, it may be a great speculative buy at this point.  Now please hear me – this is not a safe investment that you can put a significant portion of your capital into and sock it away.  The UBS trade is fairly risky as the company still has to deal with some very difficult issues.  However, the market may already be pricing these risks into the stock price which means that if any positive surprises occur the stock could jump substantially.

Currently analysts are projecting anemic earnings of $0.36 per share for 2009.  But in the following year if the Swiss bank gets its act together, it could earn $1.50 (or even more if the expectations prove conservative).  Currently, the stock is just below $13 which means the stock is just 8.6 times next year’s earnings.

Up to this point we have seen very clearly that the world governments have a vested interest in keeping the banks in business.  Now there is no guarantee that UBS won’t stumble and fall into receivership.  But if that were going to happen it most likely would have occurred in the past year.  At this point UBS is taking the difficult but necessary steps to repair its balance sheet and build a sustainable business model.  If they are successful, the $1.50 in expected earnings will likely be understated.

It appears the two forces of increasing earnings expectations and a rise in the stock multiple could both come into effect over the next 6 to 12 months.  If expectations were increased to $1.75 and the multiple rose to a still conservative 12 times earnings, the stock would hit $21 which is more than a 60% gain from current levels.  Investors may be able to use the additional supply of stock coming to market as a chance to buy this stock on the cheap and hold as the recovery story becomes common knowledge.

Now I don’t believe the banking industry will return to its former glory and UBS will probably not see the $4.56 in earnings we saw in 2006 for a decade or more.  But at this point with expectations so low, a small fundamental improvement could go a long way towards pushing the stock higher.

FD: Author does not have a position in UBS

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