Expecting Upside From Morgan Stanley

The earnings season for securities firms kicked off in style on Tuesday with Wall Street powerhouse Goldman Sachs Group Inc. (GS) reporting its Street-beating fourth-quarter earnings nearly doubled. Over the next two weeks, its rivals will take their turn unveiling results. As the season gears up, where are the opportunities in the sector?

The Reuters Select stock screens pointed to Morgan Stanley (MS), whose strong revenues and earnings growth helped land the top-tier investment house on the Relative Growth screen.

We started by focusing on the nine companies from the investment services industry that recently registered on at least one Reuters Select stock screen. [Click here for an Excel sheet comparing these Wall Street firms.]

Even before its latest results, Goldman beat earnings in each of the previous four quarters. We used this fact in our efforts, and we filtered for companies that posted upside surprises in each of the last four quarters. This shortened our list to six firms.

Bank of New York Co. Inc. (BK) plans to acquire Mellon Financial Corp. (MEL), taking Mellon off the list.

Next, we looked at measures of management effectiveness, focusing on return on equity [ROE]. We filtered for the firm where ROE was superior to the industry average in both the trailing 12-month [TTM] period and over the last five years. This left us with only Morgan Stanley.

In order to appear on the Relative Growth stock screen, a company must have posted industry-beating revenue advances in the TTM time frame. The screen also requires that the growth rate of a company's earnings per share [EPS] must be faster than its revenue growth in the TTM span. As indicated below, Morgan easily clears these hurdles.

Also note above that Morgan's TTM EPS growth eclipses the industry norm, as does its EPS performance in the most recent quarter [MRQ]. Morgan's performance here helps the Wall Street firm meet the final requirement of the Relative Growth screen: that a company's MRQ EPS growth must beat the industry average and the company's own TTM EPS growth rate.

Morgan is scheduled to release its earnings for the fiscal-year ended in November on Dec. 19. According to a recent Reuters survey, analysts following Morgan expect the firm to post EPS of $6.77, up from the consensus of $6.68 two months ago.

Disclosure: At the time of publication, Erik Dellith owned shares of GS and MER. He may be an owner of other companies mentioned, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.