Zacks Industry Rank Analysis Highlights: Bear Stearns, Goldman Sachs, Lehman Brothers, Morgan Stanley and Mosaic
Monday , March 24, 2008 14:13ET
CHICAGO, Mar 24, 2008 (BUSINESS WIRE) -- Zacks.com releases the latest Zacks Industry Rank. Stocks featured in last week's analysis include Bear Stearns (NYSE: BSC), Goldman Sachs (NYSE: GS), Lehman Brothers (NYSE: LEH), Morgan Stanley (NYSE: MS) and Mosaic (NYSE: MOS). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
It was first-quarter earnings week for the major brokerage firms. Both Goldman Sachs (NYSE: GS) and Lehman Brothers (NYSE: LEH) beat earnings expectations. Morgan Stanley (NYSE: MS) also surpassed estimates.
Revenues for all three firms declined because of losses in the credit markets. Goldman Sachs recorded $2 billion of losses due to mortgage-related and other fixed-income securities. (Britain's Telegraph had predicted $3 billion in write downs, based on an unnamed source.) Lehman Brothers wrote down $1.8 billion because of losses in the debt markets. Morgan Stanley incurred $2.3 billion in writedowns.
Investment banking revenues were mixed. GS said revenues declined, while LEH generated a 2% increase and MS enjoyed a 19% increase. (Half of Morgan Stanley's investment banking revenues came from advisory fees.) The tough market conditions and ongoing credit crunch has significantly reduced the number of deals being closed this year. Fewer deals mean lower revenues for investment banking firms.
Notably, investment management was a source of growth for GS and LEH. The firms were able to pass through higher fees, resulting in higher revenues despite basically no change in assets under management (AUM). MS also realized higher fees, but the company incurred a loss because of its real estate investments.
Overall, the numbers cleared substantially lowered hurdles. The numbers were not very good, but they were not as bad as many feared, which is a positive. There has been an erosion of trust and many had feared a very bad scenario for Lehman, in particular. The mere fact that the numbers were not horrible led to restoration of trust (at least temporarily), which is significant.
The reason why trust is so important is that these firms are engaged in the business of making deals and trading securities. Often these firms use margin to buy leveraged securities. In other words, they are borrowing money to buy securities that are comprised of other loans. These companies also float money to get deals closed and engage in various transactions where the other party needs to have reasonable expectation of being paid. Fears that a financial firm may not be able to fulfill its obligations can be fatal. It is such fear that led to the collapse of Bear Stearns (NYSE: BSC).
Lehman has been aggressive in responding to rumors about its fiscal health. The company also provided detailed information about its liquidity at the top of its earnings release, an unusual step. I do not follow LEH closely enough to directly comment on the firm's fiscal stability, but LEH is clearly trying to preempt a fire while there is just a little smoke. This is important, because in the financial industry, perception can be reality.
It is too early to tell what the change in the consensus earnings estimates will be for all three firms. I would not be surprised to see some temporary upward revisions in the coming days, but I also think this could be more an adjustment than an actual change in sentiment. The financial sector as a whole continues to account for a disproportionate share of negative revisions and I don't see this changing over the short-term...
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