It's the worst of times for
, but don't count the big brokerage out just yet.
Merrill shares are down 12% on the year, its customers aren't trading much, rising interest rates and oil prices are depressing the stock market, and the firm's lack of proprietary trading muscle has been glaring.
On Tuesday, Merrill Lynch will report a year-over-year decline in third-quarter profits, and the outlook for fourth-quarter earnings isn't much better. The atmosphere of paranoia around the stock has been exacerbated because of Merrill's dependence on retail investors for so much of its revenue.
"This is as bad of an environment as you can design for Merrill Lynch," says Brad Hintz, a brokerage analyst with Bernstein & Co. "Retail investors have just about abandoned the U.S. equity market. Their retail business is facing a challenge."
Throughout it all, however, Merrill continues to hire -- something it refused to do during the crushing brokerage recession of 2002. Investors with a similar faith that the stock market's current doldrums won't last could be rewarded by sticking with Merrill's stock.
The latest analyst estimates, according to Thomson Financial, have Merrill earning 92 cents a share in the quarter, down 11% from the $1.03 cents a share it earned in the same period a year ago. Total revenue is expected to decline 2% to $4.98 billion.
While earnings estimates in the brokerage industry are notoriously inaccurate because of the difficulty in predicting the revenue that firms generate from trading, Merrill's ugly bottom line isn't in doubt.
Of course, Merrill isn't the only Wall Street firm that's suffering along with the stock market.
Last month, two of Merrill's peers,
, posted third-quarter profit declines, with earnings at Morgan plunging 34%. Earnings rose at
, but officials at both firms offered a tepid near-term outlook for the brokerage business.
The dull times on Wall Street are leading to predictions that year-end bonuses won't be as hefty as once expected. While total compensation is expected to rise 10% over last year's level, that's down from earlier predictions of a 20% rise.
But industry experts say the lackluster market is hitting Merrill harder because it's more heavily dependent on retail trading to generate revenue than its main rivals. Merrill's commodities trading desk also lacks the muscle of a firm like Goldman, which has been taking full advantage of the sharp rise in oil prices to harvest huge profits in recent quarters.
Hintz says it's not just customer commissions that are affected by the slowdown on Wall Street. The trading slump also will depress revenue from the firm's institutional stock trading desk. Rising interest rates also will put a crimp into Merrill's mortgage business, a division that has grown in the past few years.
There had been hope that Merrill's third-quarter earnings might not suffer so much since its quarter ended in September, unlike the other big brokers, which conclude their third quarters in August. The optimists on Wall Street were saying the lackluster environment for stocks was nothing more than the typical summer doldrums. The expectation was that the markets and investor interest in stocks would revive after Labor Day.
But except for a few brisk trading days here and there, that hasn't happened.
"September looked like the months before," says David Trone, an analyst with Fox-Pitt Kelton. "Nothing was dramatically different."
It's not only stock trading that's crawling along these days. Corporate deals, which had picked up earlier in the year, have become rare again. Fewer deals were announced in September than in August, historically one of the slower months for mergers-and-acquisition activity.
October isn't looking much better, meaning the fourth quarter may not be much better. Wall Street analysts say they don't expect any revival in stock trading or M&A until after the presidential election on Nov. 2.
But not everything is grinding to a halt on Wall Street or at Merrill.
Stock and bond underwriting both rebounded in September, after a relatively quiet summer. The IPO market has also shown signs of life after a slew of deals were postponed in August.
Merrill, meanwhile, keeps hiring veteran brokers, after cutting its staff to the bone during the recession.
Wall Street recruiter Carrie Degenhardt, president of Degenhardt Consulting, says Merrill is ahead of its target for hiring 1,500 brokers this year. She says the firm has shown no indication of cutting its hiring plans.
Merrill's decision not to derail recruiting is an indication the firm remains bullish on the longer-term health of Wall Street and the economy. But it also reflects a changing dynamic on Wall Street, which is that it's better to recruit veteran brokers than to spend lots of money on training young brokers.
Experienced brokers often bring with them a list of wealthy customers, who are more likely to invest in an array of financial products. Meanwhile, analysts say it has become harder for young brokers to attract customers in the wake of the federal "do not call" legislation, which bars unwanted calls from telemarketers and other salespeople.
So if Merrill executives remain upbeat about hiring during the postearnings conference call, investors will take it as a positive sign for 2005 and look past the poor third-quarter results. As long as the earnings aren't worse than the analysts' estimates, there's a good chance Merrill's shares may rally in the short term.
With shares of Merrill trading at about 11 times current earnings and the stock down 12% on the year, it is by no means a pricey stock. As long as the market malaise isn't the prelude to an economic downturn, Merrill's stock may not have anywhere to go but up in the coming months.