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Will Morgan Stanley Earnings Lag on Lower Trading Income?

Zacks Equity Research

Morgan Stanley (MS) is scheduled to release third-quarter 2014 results on Oct 17, before the opening bell.

In the preceding quarter, Morgan Stanley delivered a positive earnings surprise of 5.5% on its restated earnings. Results benefited from a rise in net interest income, a stable fee income and marginally lower operating expenses, partially offset by lower fixed-income, currency and commodities (:FICC) trading income.

Will the company be able to keep the earnings streak alive? Let us see how things have been shaping up for this announcement.

Factors Influencing Q3 Results

Low client activity should continue to pressurize revenues. While overall trading volume remained soft during the quarter, a slight uptick in September should support Morgan Stanley’s trading revenue to some extent. However, it is expected to show a year-over-year decline.

Further, with the prolonged low interest rate environment, Morgan Stanley’s net interest income is expected to remain muted. A lower loan demand will add to the woes.

Nevertheless, investment banking will continue to support the top line, driven by continued strength in M&A and IPO activities during the quarter. Also, Morgan Stanley’s expense-savings initiatives should back its bottom line. Besides, divestiture of non-core operations and job cuts are expected to reduce expenses.

Morgan Stanley’s activities during the third quarter were not sufficient to win analysts’ confidence. As a result, the Zacks Consensus Estimate fell 1.8% to 54 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Morgan Stanley is likely to beat the Zacks Consensus Estimate in the third 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 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 54 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.

Finance Stocks to Consider

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 The Goldman Sachs Group, Inc. (GS) +1.24% and it has a Zacks Rank #3. It is scheduled to report results on Oct 16.

Capital One Financial Corporation (COF) has an Earnings ESP of +2.08% and carries a Zacks Rank #2. It is scheduled to release third-quarter results on Oct 16.

The Earnings ESP for SunTrust Banks, Inc. (STI) is +7.32% and it carries a Zacks Rank #3. The company is slated to release results on Oct 17.

Read the Full Research Report on COF
Read the Full Research Report on STI
Read the Full Research Report on MS
Read the Full Research Report on GS

Zacks Investment Research