Morgan Stanley Earnings Should Prop the Stock

by Dan Burrows | October 16, 2013 2:59 pm

morgan stanley, morgan stanley stock, morgan stanley earnings[1]Morgan Stanley (MS[2]) won’t have to worry about many of the troubles bedeviling banks this earnings season, but that doesn’t mean the Morgan Stanley earnings report is wholly without landmines.

White-shoe Morgan Stanley isn’t a mortgage lender and it doesn’t refinance homes, so MS earnings won’t be hurt by the huge drop-off in those businesses thanks to higher interest rates — a theme we’ve seen again and again this earnings season[3].

Rather, a serious concern for Morgan Stanley — and anyone holding Morgan Stanley stock — will be trading revenue from fixed income, currencies and commodities after one of the sleepiest summers in memory depressed those markets for all industry players. Indeed, analysts expect Morgan Stanley’s revenue from fixed income to decline 35% year-over-year.

That’s going to hurt profits, but then, it’s not like it’s a secret either, meaning the hit to Morgan Stanley earnings should be largely reflected in Wall Street estimates — and, for that matter, the Morgan Stanley stock price.

And it wasn’t all bad for Morgan Stanley in the third quarter.

After all, there’s nothing like a global bull market to burnish the operating earnings at the investment management business — now known as Morgan Stanley Wealth Management — which in 2012 contributed more than half of the firm’s total revenue.

It also helps that two areas in which Morgan Stanley is traditionally strong — mergers & acquisitions and initial public offerings — have bounced back.

We Can Actually Say ‘Morgan Stanley Earnings‘ … Not Losses!

Throw in some easy year-over-year comparisons, and this Morgan Stanley earnings report could be its best one in a long time. Analysts, on average, expect Morgan Stanley to book Q3 profits of 39 cents a share, according to a survey by Thomson Reuters.

That’s a huge swing from the prior-year period in which MS reported a loss of 55 cents and missed Wall Street’s earnings estimate by a mile. (Analysts were looking for earnings of 24 cents a share at the time.)

And, unlike many banks that are reporting dwindling revenue this earnings season, revenue at Morgan Stanley is forecast to jump more than 45% to $7.7 billion. (The bank missed Wall Street’s revenue estimate by a wide margin last year, too.)

Another potential catalyst for Morgan Stanley stock is what the company says about compensation expense. Buried in JPMorgan Chase’s (JPM[4]) third-quarter earnings report was that it cut its investment bankers’ pay by 15% even as the division’s revenue fell just 2%.

That’s the sort of move that ripples through the ranks industrywide, so there’s reason to think Morgan Stanley will slash what its pricey investment bankers make, as well. That’s bad news for the I-bankers, but good news for earnings — and thus, anyone holding Morgan Stanley stock.

Probably the most important takeaway from the Q3 Morgan Stanley earnings report will be how well the bank is pivoting away from traditional investment banking and toward wealth management.

Buying out Citigroup’s (C[5]) stake in their Smith Barney joint venture so far looks like a smart move for Morgan Stanley.

Indeed, thanks to Goldman Sachs dependence on languishing fixed income revenue and its new focus on wealth management, Morgan Stanley could book higher revenue than Goldman Sachs for the first time in two years.

Emerging from the financial crisis to remake itself as the nation’s largest retail brokerage by adviser count might be the smartest thing MS has ever done. Anyone holding Morgan Stanley stock is sitting on a gain of 50% for the year-to-date.

We’ll need to see a string of positive earnings reports before that call is in the bank, but — at least on Friday — Morgan Stanley should deliver.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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