Can Morgan Stanley Retain Its Earnings Streak In Q2?

Morgan Stanley MS is scheduled to report second-quarter 2015 results on Monday, July 20, before the opening bell. Last quarter, Morgan Stanley had outpaced the Zacks Consensus Estimate, backed by improvement in fixed-income, currency and commodities (“FICC”) trading income, net interest income and fee income. However, these were partially offset by a rise in operating expenses as well as a fall in equity and debt underwriting revenues.

Will Morgan Stanley manage to keep the earnings streak alive this time? Or will a slump in trading activities during the quarter hurt its bottom line? Let us see how things have been shaping up for this announcement.

What to Expect?

As per Thomson Reuters’ data, deals worth nearly $2.2 trillion were announced across the globe in the first half of 2015, which is up 40% from the prior-year. Morgan Stanley ranked second in terms of worldwide activity, with 176 deals worth $569 billion. As a result, growth in advisory and underwriting revenues is likely to show strength in the quarter.

However, non-interest income might be hit by a slump in FICC revenues, as ambiguity over several global and domestic issues kept investors away from markets. On the whole, fee income should show some improvement driven by strength in investment banking.

Further, despite a low interest rate environment which continues to hamper interest income growth, pickup in consumer and commercial loan demand will aid Morgan Stanley’s net interest income. Hence, we believe that overall revenue growth should remain steady in the quarter.

On the expense front, given the absence of any major legal headwinds in the near term, we predict nil or minimal legal reserve in the quarter. Nevertheless, despite undertaking measures to contain costs, overall operating expenses will likely increase as Morgan Stanley continues to invest in the franchise.

Notably, Morgan Stanley’s activities during the second quarter failed to win analysts’ confidence. The Zacks Consensus Estimate fell by a penny to 73 cents per share over the last 7 days.

Earnings Whispers

Our proven model does not conclusively show that Morgan Stanley will be able to beat the Zacks Consensus Estimate in the second 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 73 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.

Stocks That Warrant a Look

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 Bank of New York Mellon Corporation BK is +3.03% and it has a Zacks Rank #3. It reports results on July 21.

Huntington Bancshares Incorporated HBAN has an Earnings ESP of +5.00% and carries a Zacks Rank #2. It is slated to release results on July 23.

State Street Corporation STT has an Earnings ESP of +0.73% and carries a Zacks Rank #3. It is scheduled to report results on July 24.