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Will Earnings Streak be Alive for Morgan Stanley (MS) in Q3?


Morgan Stanley MS is scheduled to announce third-quarter 2016 results on Oct 19, before the opening bell.

Last quarter, Morgan Stanley outpaced the Zacks Consensus Estimate, driven by an increase in net interest income, higher advisory fees and a fall in operating expenses. However, a slump in trading income remained an undermining factor.

The earnings beat translated into improved share price movement. For the three-month period ended Sep 30, Morgan Stanley stock was up over 23%. This indicates that the company’s business activities were cheered by the investors.

Further, Morgan Stanley has a decent surprise history, as evident from the chart below:

MORGAN STANLEY Price and EPS Surprise


Factors at Play

Will Morgan Stanley be able to maintain its earnings streak this quarter driven by improvement in trading scenario? Or will the company succumb to the challenging operating environment?

Let’s dig in to the factors likely to influence Morgan Stanley’s Q3 earnings.

Trading Income Set to Rebound: Given the Brexit-driven volatility and continued investments to technologically upgrade its systems, Morgan Stanley should witness an overall improvement in trading income. Notably, client activity is likely to be higher for fixed income, while equities trading should continue to be dismal.

Debt Underwriting Fees to Improve: Per the data compiled by Thomson Reuters, bond market activities totaled $1.66 trillion during the third quarter, a rise of 41% year over year. Also, the data expects a 37% year-over-year improvement in debt underwriting fees for the entire industry.

Given such an encouraging scenario, Morgan Stanley’s debt underwriting fees are likely to surge 37% from the prior-year quarter to $334.2 million, according to the Thomson Reuters data.

Net Interest Income Growth to Continue: Despite a low interest rate environment, which continues to hamper interest income growth, a pickup in consumer and commercial loan demand will drive Morgan Stanley’s net interest income. Further, it will be supported by efficient deposit deployment.

Efficient Expenses Management: Morgan Stanley has launched a company-wide initiative called Project Streamline. This will enable the company to lower expenses and improve operating efficiency. Hence, the company should benefit from this initiative in the quarter under review.

Dismal Equity Underwriting Fees: Per the data compiled by Thomson Reuters, equity capital markets activity totaled $165.5 billion during the third quarter, up 24% year over year. Also, the data expects a 3% year-over-year rise in equity underwriting fees for the entire industry.

However, Morgan Stanley’s equity underwriting fees are likely to fall 10% from the prior-year quarter to $220.7 million, according to the Thomson Reuters data, despite such an encouraging backdrop.

Slump in Advisory Fee Revenue: According to the Thomson Reuters data, concerns over regulatory and tax risks, along with apprehension about overpaying brought a 26% plunge in global M&As deal value during the third quarter.

Moreover, the data shows that M&A advisory fees totaled $6 billion during the quarter, a fall of 14% year over year. Morgan Stanley is projected to earn roughly $429 million as advisory fees in the quarter, indicating a drop of 22% from the prior-year quarter.

Earnings Whispers

Now, let’s check what our quantitative model predicts. Our quantitative model does not conclusively predict the earnings beat. Here is what it indicates:

Morgan Stanley doesn’t have the right combination of two main factors – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for this to happen.

Zacks ESP: The Earnings ESP for Morgan Stanley is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 64 cents.

Zacks Rank: Morgan Stanley carries a Zacks Rank #3. Though this increases predictive power, we need to have positive earnings ESP to be confident of an earning beat.

Notably, the estimate of 64 cents per share for the upcoming release indicates a year-over-year growth of about 89.1%.

Stocks Worth a Look

Here are a few finance stocks you may want to consider as they have the right combination of elements to post an earnings beat this quarter, according to our model.

BlackRock, Inc. BLK is scheduled to report results on Oct 18. The company has an Earnings ESP of +0.20% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

State Street Corporation STT has an Earnings ESP of +0.80% and a Zacks Rank #2. It is scheduled to announce results on Oct 26.

Raymond James Financial, Inc. RJF has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.

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