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Earnings Preview: Goldman Sachs and Morgan Stanley Report Tuesday

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October 16, 2017
Exterior of a bank
istockphoto.com/BrianAJackson

The big bank earnings parade continues as we head into another heavy week of results. Both Goldman Sachs (GS) and Morgan Stanley (MS) report third-quarter earnings before the market opens on Tuesday, October 17. Low volatility across many markets has put these firms’ trading segments in focus in recent quarters, and that is likely be one of the main areas that analysts dig into again tomorrow.

The third quarter was another pretty quiet one across most markets, which resulted in several CEOs at the biggest banks reiterating warnings of declines in third-quarter trading revenue. Last week, JPMorgan Chase (JPM), Citigroup (C) and Bank of America (BAC) all reported drops in that division. 

Side by side image showing company profile divisions of Morgan Stanley and Goldman Sachs

FIGURE 1: GOLDMAN SACHS AND MORGAN STANLEY COMPANY DIVISIONS.

Fixed-income, currency and commodity trading, as well as equity trading, are large components of Goldman Sachs (GS) and Morgan Stanley (MS) and they are key revenue drivers for the companies. TD Ameritrade clients can analyze potential revenue drivers of a stock on the Fundamentals tab on the thinkorswim® platform. Trefis information and estimates used in Company Profile are provided by Insight Guru, a separate and unaffiliated firm. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Goldman Sachs Earnings and Options Trading Activity

In the second quarter, GS reported $1.16 billion in fixed income, currency and commodity (FICC) trading revenue, a 40% year-over-year decline. Management noted the division had faced a challenging environment due to “low levels of volatility, low client activity and generally difficult market-making conditions.” At the same time, GS reported $1.89 billion in net revenue in its equities division, an 8% year-over-year increase.

Investment banking was another area of GS’ business that saw declines in the second quarter. The company reported net revenue in that division declined 3% year-over-year to $1.73 billion, with decreases in the financial advisory and equity underwriting segments.

While trading and investment banking revenue was pressured in the last quarter, it was partially offset by growth in some of the company’s other divisions, according to the company. Investing and lending net revenue increased 42% year-over-year to $1.58 billion and investment management grew 13% year-over-year to $1.53 billion. Over the long term, CFRA analysts think GS will continue to take steps to diversify its concentrated position in the capital markets, possibly by growing its investing and lending division.  

For the third quarter, GS is expected to report earnings of $4.31 per share, down from $4.88 in the prior-year period, on revenue of $7.64 billion, according to third-party consensus analyst estimates. Revenue is projected to decline 6.5% year-over-year from $8.17 billion.

GS stock is close to flat on the year, lagging the S&P 500’s (SPX) 12.5% year-to-date performance. Up until the start of September, shares had been bouncing up and down since mid-March, but have moved up from $215 to a little bit above $240 ahead of earnings.  

Options traders have priced in about a 2.6% potential share price move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the October 20 monthly expiration, calls have been active at the 240 and 245 strike prices, while puts have been active at the 235 and 240 strikes. As of this morning, the implied volatility sits at the 32nd percentile. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Stock performance of Goldman Sachs and Morgan Stanley compared to the S&P 500 over the past three months

FIGURE 2: THREE MONTH BANK PERFORMANCE.

The chart above shows the three month performance for Goldman Sachs (GS), charted as the yellow line, Morgan Stanley (MS), charted as the purple line, and the S&P 500 Index (SPX), charted as the teal line. MS has outperformed the SPX over the past three months by a couple of percentage points, while GS is just beating the SPX. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Morgan Stanley Earning and Options Trading Activity

In the second quarter, MS also saw declines in its trading division. Sales and trading net revenue decreased to $3.2 billion, from $3.3 billion in the prior-year period, with the greatest weakness in its fixed-income trading.

While MS faced weakness in trading, growth in its investment banking and wealth management segments helped offset it. The company reported its wealth management division generated $4.2 billion in net revenue, up from $3.8 billion a year ago. Investment banking net revenue increased to $1.4 billion from $1.1 billion in the prior-year quarter.

When it reports third-quarter results, MS is expected to post earnings of $0.81 per share, flat to last year, on revenue of $8.95 billion, according to third-party consensus analyst estimates. Revenue is projected to come in just slightly above the $8.91 billion generated in the third quarter of 2016.

Options traders have priced in about a 2.8% potential share price move in either direction around its upcoming earnings release, according to the Market Maker Move indicator. In short-term trading at the October 20 monthly expiration, calls have seen heavy trading at the 47 strike price and a decent amount of activity at the 48 and 49 strikes. On the put side, trading has been the heaviest at the 46.5 and 48 strikes. As of this morning, the implied volatility is at the 38th percentile.

Looking Ahead

Earnings season is kicking into full gear these next few weeks, with a particularly packed stretch next week. Microsoft (MSFT), Alphabet (GOOG, GOOGL) and Amazon (AMZN) all report after market close on Thursday, October 26. Oil giants Chevron (CVX) and ExxonMobil (XOM) will take the stage before market open on Friday, October 27. If you have time, make sure to check out today’s market update to see what else is happening.

Good Trading,
JJ
@TDAJJKinahan

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