Morgan Stanley: Financial Winner

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) was the winner among the largest U.S. financial companies on Thursday, with shares rising 3% to close at $17.86.

The broad indexes ended mixed after a late-session fade, with Apple ( AAPL) shares declining 2% to close at $628.10, after a federal appeals court overturned an injunction banning Samsung from selling its Galaxy Nexus smartphone, after a Jury in August awarded Apple $1.05 billion in damages, ruling that Samsung had violated several iPhone patents.

Reuters reported that the U.S. Court of Appeals for the Federal Circuit, ruled the lower district court in in California had "abused its discretion in entering an injunction."

For its fiscal fourth-quarter ended Sept. 30, the consensus among analysts polled by Thomson Reuters is for Apple to report earnings of $8.91 a share, declining from $9.32 in the fiscal third quarter, but increasing from $7.05 during the fourth quarter of fiscal 2011.

Financial stocks showed strength after Bloomberg reported that the European Union was considering a delay for the implementation of Basel III capital requirements.

A downgrade of Spain's sovereign debt by Standard & Poor's seemed to be embraced by investors, who hope the country will soon make a formal request for financial assistance.

Citigroup analyst Deane Dray said that "investors should be braced for a choppy 3Q12 earnings season, punctuated with cautious commentary and tepid topline growth due to macro slowing," but that despite the pressure on stocks, the Federal Reserve's QE3 "counterpunch" was "buoying prices to multi-year highs." For the broad market, Dray said "the best news is likely to be centered around encouraging positives in Energy, Commercial Aero OE, and Resi," and that Citi was continuing "to recommend higher-quality, late-cycle names, with better earnings visibility," including General Electric ( GE), Honeywell ( HON) and Danaher Corp. ( DHR).

Guggenheim analyst Marty Mosby painted a rosier picture in his third-quarter earnings preview for large-cap banks, saying on Thursday that "we are forecasting 4% sequential growth in operating earnings per share this quarter, twice the current market expectation. This would represent the 7th positive quarterly earnings surprise since 4Q10."

Mosby advised investors not to "get lost on the headwinds for revenue growth," and said that "as the Large Cap Banks are still in earnings recovery mode, efficiency improvements are just as important." The analyst expects efficiency improvements to be "responsible for ~100% of this quarter's expected sequential increase in operating EPS."

Heading into Friday morning's start to earnings season for the largest U.S. banks, with reports from JPMorgan Chase ( JPM) and Wells Fargo ( WFC), Mosby said his favorite bank stock picks include Regions Financial ( RF) and PNC Financial Services Group ( PNC), for which he expects "operating earnings momentum improvements" to push stocks higher. The analyst's price target for Regions is $9.25, and his target for PNC is $83.00.

Mosby also favors Citigroup ( C), with a price target of $45, as the stock "has a strong return-to-risk ratio and could display further progress in minimizing future exposure to Citi Holdings," which is the runoff subsidiary, part of CEO Vikram Pandit's long-term "good bank/bad bank" strategy for right-size the company's balance sheet and free up capital for an eventual increase in dividends and share buybacks.

The analyst's price target for Citigroup is "based on 9.8x our 2013 EPS" estimate of 98 cents and 0.8 times his estimated year-end tangible book value for the shares. Citigroup's shares rose 1% on Thursday to close at $35.52, trading for 7.7 times Mosby's 2013 EPS estimate of $4.60 and 0.7 times the company's reported June 30 tangible book value of $51.81.

The KBW Bank Index ( I:BKX) rose 1% to close at 51.26, with all but four of the 24 index components showing gains for the session.

Morgan Stanley


Morgan Stanley's shares have returned 19% year-to-date, following a 44% decline during 2011.

The shares trade for 0.6 times their reported June 30 tangible book value of $27.70, and for nine times the consensus 2013 EPS estimate of $1.98, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 86 cents.

The company will announce its third-quarter results on Oct. 18, with a consensus operating earnings estimate of 24 cents, declining from 29 cents in the second quarter. During the third quarter of 2011 Morgan Stanley's results include $3.4 billion in positive revenue from debit valuation adjustments (DVA) and "other credit factors."

KBW analyst David Konrad rates Morgan Stanley "Market Perform," and estimates the company will report third-quarter operating EPS of 20 cents, although the analyst expects "a sizable DVA adjustment in 3Q12 of nearly $2 billion, and as a result, we expect the company to announce a reported loss of $0.47 per share."

Because of the expected bottom-line loss and the increase in goodwill on the company's balance sheet from its purchase of an additional 14% stake in the Morgan Stanley Smith Barney joint venture from Citigroup, Konrad expects the company's tangible book value to decline to $26.15.

KBW expects Morgan Stanley's third-quarter revenue to come in at $6.843 billion, increasing from $6.828 the previous quarter, and $6.616 billion a year earlier.

MS Chart MS data by YCharts

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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