Northern Trust Corporation NTRS is scheduled to report third-quarter 2016 results on Oct 19.
The Chicago, IL-based company’s second-quarter 2016 earnings beat the Zacks Consensus Estimate aided by higher revenues. The quarter also witnessed a rise in assets under custody. However, results exhibited escalating operating expenses and decreased assets under management.
Notably, Northern Trust has delivered positive earnings surprises in three of the trailing four quarters, with an average earnings beat of 3.8%. Regarding the stock’s performance, the company has gained about 5% over the last three months.
Will the upcoming earnings release give a boost to Northern Trust’s stock? This depends largely on whether the firm is able to post a beat for the fourth straight quarter. However, our quantitative model doesn’t point to an earnings beat. Here’s why
Northern Trust doesn’t have the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) – for increasing its chances of an earnings beat.
Zacks ESP: The Earnings ESP for Northern Trust is -0.93%. This is because the Most Accurate Estimate of $1.07 is lower than the Zacks Consensus Estimate of $1.08.
Zacks Rank: Northern Trust’s Zacks Rank #2 increases the predictive power of ESP. However, we need a positive ESP to be confident of an earnings surprise. Note that we caution investors against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.
Factors to Influence Q3 Results
Northern Trust, as a player in the custody banking space, derives most of its revenues from non-interest sources of income, particularly trust, investment and other servicing fees. These fees are highly dependent upon the market value of clients’ assets under custody. This, in turn, is directly linked to the performance of equity markets.
The third quarter recorded strong performance of the equity markets. The S&P 500 Index gained 3.3% in the quarter. Also, the index measuring international equity performance – the MSCI EAFE Index – rose 5.8% during the quarter.
However, Northern Trust’s calculation of the corporate custody and investment management fees considers a lag effect, that is, the computations are based on prior quarter-end valuations. Hence, the company is likely to record modest growth in custody, servicing and management fees, as equity markets were relatively weak in second-quarter 2016.
Flatter average yield curve in the third quarter will keep the net interest margin under pressure. However, a spike in LIBOR rates should support spread income as well as securities lending fees.
Given the decreases in foreign exchange (“FX”) trading volatility, as well as volumes in the third quarter, the company’s revenues from FX trading are likely to decline.
Regarding expenses, quarterly results are likely to have increased due to higher FDIC surcharge that went effective in third-quarter 2016. Also, Northern Trust’s continued investments in new business activities and higher regulatory and compliance costs may put pressure on the company’s expense base.
Activities of Northern Trust during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at $1.08 over the last seven days. Notably, the estimated figure represents year-over-year growth of 12.5%.
Stocks that Warrant a Look
Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.
State Street Corporation STT is slated to release results on Oct 26. The company has an Earnings ESP of +0.80% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Raymond James Financial, Inc. RJF has an Earnings ESP of +2.04% and it carries a Zacks Rank #2. The company is slated to release results on Oct 26.
Lazard Ltd. LAZ has an Earnings ESP of +3.90% and a Zacks Rank #2. It is scheduled to report results on Oct 27.
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