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Will Q4 Earnings Support Morgan Stanley (MS) Stock Rally?

Zacks

Morgan Stanley MS is scheduled to report fourth-quarter and 2016 results on Jan 17, before the opening bell.

Last quarter, Morgan Stanley outpaced the Zacks Consensus Estimate, driven by an increase in net interest income and trading revenues. However, weakness in underwriting income and advisory fees as well as a rise in expenses were the undermining factors.

The earnings beat along with optimism surrounding the improving operating backdrop translated into improved share price movement. Over the three months ended Dec 31, 2016, Morgan Stanley stock was up nearly 37%.

Also, the factors that drove the third-quarter earnings beat favored the to-be-reported quarter as well. Hence, it’s not unreasonable to expect impressive earnings in the upcoming release.

This optimism is clearly reflected in the earnings estimate revisions. The Zacks Consensus Estimate for the fourth quarter has been revised upward over the last 30 days, with two estimates moving higher and none moving lower. Further, the estimate reflects a year-over-year improvement of 50.2%.

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 65 cents.

Zacks Rank: Morgan Stanley sports a Zacks Rank #1 (Strong Buy). Though this increases the predictive power, we need to have positive Earnings ESP to be confident of an earning beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Morgan Stanley Price and EPS Surprise

Morgan Stanley Price and EPS Surprise | Morgan Stanley Quote


Factors at Play

Will Morgan Stanley be able to maintain its earnings streak this quarter driven by improvement in trading scenario? Let’s dig in to the factors likely to influence the company’s Q4 earnings.

Trading Income Growth to Remain Impressive: Given the U.S.-Presidential election-related volatility and continued investments to technologically upgrade its systems, Morgan Stanley should witness an overall improvement in trading income. Further, client activity is likely to be higher for fixed income, while equity trading is expected to improve marginally.

Debt Underwriting Fees to Remain Relatively Stable: Per the data compiled by Thomson Reuters, bond market activities totaled $1.24 trillion during the fourth quarter, recording a slight fall. Notably, Morgan Stanley is likely to report more than 2% rise in bond deal value during the quarter. Thus, its debt underwriting fees are expected to remain relatively stable year over year.

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 should continue to drive Morgan Stanley’s net interest income. Further, it will be supported by an efficient deposit deployment.

Advisory Fee Revenue to Rebound: According to the Thomson Reuters data, concerns over regulatory and tax risks, along with apprehension about overpaying brought an 11% decline in global M&As deal value during the quarter. Also, Morgan Stanley witnessed a 29% decline in global M&As deal.

Despite this dismal scenario, the company is projected to earn roughly $558 million as advisory fees in the quarter, indicating a rise of 8% from the prior-year quarter.

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, it should benefit from this initiative in the quarter under review. Nonetheless, improving revenues are expected to lead to a rise in compensation expenses during the quarter.

Dismal Equity Underwriting Fees: Per the Thomson Reuters data, equity capital markets activity totaled roughly $154 billion during the fourth quarter, down 26% year over year. Further, the data expects over 12% year-over-year fall in equity underwriting fees for the entire industry.

Likewise, Morgan Stanley’s equity underwriting fees are likely to decrease 21% from the prior-year quarter to $236.1 million, according to the Thomson Reuters data.

Stocks Worth a Look

Here are a few finance stocks worth considering as they have the right combination of elements to post an earnings beat in their upcoming releases.

The Goldman Sachs Group, Inc. GS is scheduled to report results on Jan 18. It has an Earnings ESP of +2.33% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Citigroup Inc. C is slated to release results on Jan 18. It has an Earnings ESP of +1.79% and carries a Zacks Rank #2 (Buy).

KeyCorp KEY has an Earnings ESP of +6.90% and carries a Zacks Rank #2. The company is slated to release results on Jan 19.

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