Brokerages Report Strong Profits
Morgan Stanley Dean Witter and Lehman Brothers kicked off the fourth-quarter reporting season on Thursday for the financial-services sector by handily besting profits estimates.
Morgan Stanley (MWD) posted earnings of $1.49 a share for the period, up from $1.30 a year ago and way ahead of the 96-cent-per-share First Call consensus estimate. Lehman Brothers (LEH) came in at 51 cents a share, ahead of the 21-cent estimate but down from $1.30 a year ago.
The sector has notched solid gains since mid-December as investors anticipate stronger profits in 1999 from the brokerage and financial-services companies, which tumbled in the third quarter as the global financial turmoil ate into key underwriting and trading businesses.Analysts had lowered estimates significantly heading into 1999. In a sense, the two firms "beat expectations that were pessimistic to begin with," said Hal Schroeder, analyst at Keefe, Bruyette & Woods, Inc.
Improving stock and debt market conditions, combined with the outlook for a low rate environment, are boosting the securities brokerage stocks, strategists said.
Before Morgan Stanley and Lehman reported Thursday, analysts had expected the financial sector to post average earnings growth of 1 percent for the quarter. In the third quarter, the sector's earnings declined 9 percent from the year-ago period, according to First Call.
Morgan Stanley rose 3 11/16 to84 3/8; Lehman rose 1 5/8 to 55 1/4. Both had rallied strongly Wednesday ahead of the results. Securities brokerage stocks were up 1 percent, led by Morgan Stanley's gains.
Morgan Stanley also said its board authorized a $1 billion share buyback.
Including a $345 million net gain from the sale of its global custody business, Morgan Stanley's net income rose to $1.224 billion, or $2.07 a share in the quarter. Net revenue totaled $4 billion, up 6 percent from a year before.
For the year, Morgan Stanley earned $3.276 billion, or $5.33 per share, including extraordinary gains. The financial-services giant said it gained market share in its securities businss and that its Discover Card business "continues to be a strong, highly profitable franchise."
Its investment-banking business, moreover, saw higher revenue from mergers-and-acquisitions activities, offsetting an industrywide decrease in the business, the firm said.
Some analysts are looking at the credit-card business to boost 1999 results. "The recently improved market conditions combined with the improved outlook for the credit-card business have given us a greater level of comfort in our 1999 estimates," said J.P. Morgan analyst Michael Freudenstein in a note to clients.
Lehman reported net income for the quarter of $74 million and a record $736 million for fiscal 1998. Net revenue for the fourth quarter totaled $665 million, down from $1.023 billion a year earlier. For the year, revenue was $4.113 billion, up 6 percent.
The investment bank said market volatility in October and September "resulted in weaker prices on a broad range of fixed-income products, decreased levels of customer trading activity and significantly lower syndicate volume."
Written By Emily Church