Morgan Stanley Seen Earning Somewhat Less Than Year-Ago, Barring Surprises

Morgan Stanley (NYSE: MS), the exalted New York house of finance that is a veritable icon of white-shoe Wall Street firms, is expected to report first-quarter financial results Thursday somewhat weaker than a year ago.

Analysts surveyed by Thomson Reuters expect the firm to report earnings per share of 34 cents, 9.3 percent less than the 50 cents per share seen last year, on marginally lower revenues of $7.33 billion. On an adjusted basis that takes into account several special accounting charges that are expected to weigh down reported earnings at every major U.S. bank this quarter, earnings are seen at 45 cents per share.

"We believe the year has gotten off to a solid (but not rip-roaring) start for Morgan Stanley," Howard Chen, an analyst who covers brokers for Credit Suisse, wrote in a recent note to client.

The reason for constraint in Chen's optimism, which is echoed by many other experts: a view that Morgan Stanley's business portfolio, focused more on sales and trading than mortgage credit products, will not see the same profit pop seen at banks like Wells Fargo & Co and Citigroup Inc. recently.

"While we expect the material YTD credit spread tightening, asset price appreciation and typical seasonal lift will drive a rebound in fundamentals from very weak second half levels," Chen wrote in his note "we are mindful that the current environment is still "glass half full/glass half empty" and somewhat less suited for Morgan Stanley's business mix (more exposure to equities and retail businesses and less leveraged to more improved mortgage and credit businesses)"

What the Experts Are Looking For

Analysts will watch Morgan Stanley's corporate announcement Thursday morning for signs the company has been able to rein in costs. While a priority at other major banks, including Bank of America and Citigroup, it is seen as a trickier issue at Morgan Stanley, where deferred compensation costs -- essentially sunk costs as they reflect prior-year budgeting decisions -- run relatively high.

They will also watch to see if the bank is losing ground in what has been a relatively muted global merger and acquisition environment to start the year off. Morgan Stanley was the top M&A underwriter in the planet in 2010, before dropping to third place in 2011, losing business to competitors Goldman Sachs and JPMorgan Chase and -- to a lesser extent -- Bank of America and Barclays. In the first quarter of 2012, it dropped into fourth place.

Bank analysts will also watch for anything that indicates the bank is accelerating its timeline to attain full control of brokerage Morgan Stanley Smith Barney. The organization -- of which Morgan Stanley already owns a majority stake -- is co-owned by Citigroup. And while a plan had been put in place that allowed Morgan Stanley to buy the remaining stake over time, some experts are suggesting it might be in the firm's interest to close the deal this year.

Surprise, Surprise

While the recent trend has been for analysts to downgrade earnings expectations on Morgan Stanley, there is a strong undercurrent in several comments that suggests analysts are loathe to make definitive predictions for the company, and are almost expecting a positive surprise.

For example, in an early April note to clients that lowered earnings estimates for Morgan Stanley, UBS analyst Brennan Hawken noted that "while we are trimming our 1Q estimate for Morgan Stanley, we believe MS is particularly leveraged to improving equity markets and could be poised to outperform if the environment remains strong."

It might be that analysts are taking into account recent history. Morgan Stanley has beat Wall Street consensus views for five consecutive quarters, and had particularly outsize positive surprises in the last two quarters. In the third quarter of 2011, the company's earnings of $1.15 per share were nearly four times the consensus estimates of 30 cents per share. The company's fourth-quarter loss, at 15 cents per share was just over a quarter of the 57 cent loss analysts had expected.

Shares of Morgan Stanley fell 23 cents to $17.62 in premarket trading on Wednesday.