Morgan Stanley (MS) is scheduled to release fourth-quarter and full year 2014 results on Jan 20, before the opening bell.
In the preceding quarter, Morgan Stanley delivered a positive earnings surprise. Results benefited from a drastic improvement in net interest income and higher fee income. These were, however, partly offset by a slight rise in operating expenses.
Will the company be able to keep the earnings streak alive? Or will it disappoint this time around? Let us see how things have been shaping up for this announcement.
Factors Impacting Q4 Results
Soft trading volumes and lackluster client activities would continue to put pressure on revenue growth. While overall trading volume remained muted during the quarter, a slight uptick in late September through October is expected to marginally support Morgan Stanley’s trading revenue.
Further, with the prolonged low interest rate environment as well as sluggish loan demand, Morgan Stanley’s net interest income growth is expected to remain subdued. Feeble mortgage activity, due to continued uncertainty over interest rate rise, would add to the woes.
Additionally, growth in advisory and underwriting revenues is likely to lose some strength in the quarter. As per Thomson Reuters’ data, companies across the globe raised roughly $200 billion through IPOs and follow-on offerings in Q4, which was down 9% from the prior-quarter level and 24% year over year.
Though this depicts a somewhat dismal scenario, Morgan Stanley topped the chart among global investment banks in terms of the size of deals during the quarter. Hence, we believe that underwriting and advisory fees should support its top line, to some extent.
Moreover, Morgan Stanley’s expense-savings initiatives should lent support to its bottom line. Besides, divestiture of non-core operations, deferral bonus payments and job cuts are expected to further reduce expenses.
However, the company’s deal to divest its Global Oil Merchanting unit to Russia-based Rosneft Oil Company’s wholly owned subsidiary was terminated in Dec 2014, after failing to win all the necessary regulatory approvals.
Also, we expect the company to increase its legal reserve following the disclosure that the U.S. Department of Justice (“DOJ”) has renewed its mortgage-related investigation against Morgan Stanley. The settlement regarding the issue is expected to take place within the first few months of 2015.
Notably, Morgan Stanley’s activities during the third quarter were not sufficient to win analysts’ confidence. The weakness surrounding the industry and the company's financials forced many analysts to lower their earnings estimates. The Zacks Consensus Estimate has declined 3.9% to 49 cents per share over the last 7 days.
Earnings Whispers
Our proven model conclusively shows that Morgan Stanley is likely to miss the Zacks Consensus Estimate in the fourth quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.
Zacks ESP: The Earnings ESP for Morgan Stanley is -4.08%. This is because the Most Accurate estimate of 47 cents per share stands below the Zacks Consensus Estimate of 49 cents.
Zacks Rank: Morgan Stanley’s Zacks Rank #3 increases the predictive power of ESP. But we also need to have a positive ESP to be confident of an earnings surprise call.
Stocks That Warrant a Look
Here are a few finance stocks you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
The Earnings ESP for BancorpSouth, Inc. (BXS) is +3.23% and it has a Zacks Rank #2. It is scheduled to report results on Jan 21.
Associated Banc-Corp. (ASB) has an Earnings ESP of +3.33% and carries a Zacks Rank #3. It is slated to release third-quarter results on Jan 22.
First Horizon National Corp. (FHN) has an Earnings ESP of +5.88% and carries a Zacks Rank #3. It is scheduled to report results on Jan 23.
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