Broker Earnings To Dominate Earnings Calendar (LEH, GS, MS)

This coming week is going to be a rather important week for brokerage and investment banking firms.  We have three key firms in the sector reporting earnings: Lehman Brothers Holdings Inc. (NYSE: LEH), Goldman Sachs Group Inc. (NYSE: GS), and Morgan Stanley (NYSE: MS).  As a reminder, brokers almost never give financial guidance because so much is based upon trading and market results.   The other big commonality for the brokers this quarter is that the results aren’t expected to have any huge underwriting fees and won’t have the old massive advisory or investment banking fees because mergers are down in size and scope.  So most brokers are going to get their earnings from investment management fees, trading the markets, and from their brokerage operations.

Below we have created a full earnings preview with summaries and conjecture for each of the three major firms:

Lehman Brothers Holdings Inc. (NYSE: LEH) gets to kick off the earningsweek on Monday, June 16, and frankly this earnings report ispotentially going to have the least correlation to what is going in thebrokerage firm sector.  It is already known to have huge losses and theabrupt canning of the CFO and COO just eliminated yet one more bit ofnegative spin from the report regardless of the numbers.  No one islooking for anything better than a "double-bagger ugly."  Lehman isexpected to post roughly -$5.15 EPS, but we would caution that this was-$4.18 EPS literally a few days ago and was barely a loss more than aweek ago before the "crisis mode" panic set in.  Regardless of what issaid, there is a severe credibility and trust factor that the firm hasto overcome as it has almost been cut in half since mid-April.

Goldman Sachs Group Inc. (NYSE: GS) reports on Tuesday morning, June17, and this is supposed to be the "cleanest" or "best" of thebrokerage firm sector.  That is the case enough that if things come infar worse here then the negative cloud on the sector is likely toremain in place.  The Rolls-Royce of brokers is expected to post $3.42EPS on just over $8.7 Billion in revenues.  For whatever it is worth,despite this having the highest opinion and grade from Wall Street, itsearnings estimates have also been coming down over the last 90-days.This has still held up better than most as it is only down about 11%since early in May and is "only" down 20% from its 52-week highs of$250+.

Morgan Stanley (NYSE: MS) posts its numbers on Wednesday June 18, andit at least has a shot of being able to be judged on its own meritsthis time around.  First Call has estimates at $0.92 EPS on $7.05Billion in revenues.  What is interesting here is that the firm islargely thought to be either "cleaned up" or "mostly through" itscleaning house process.  But the current woes have taken more than 25%off its stock price since early in May, and the stock is down about 55%from its 52-week highs..

The old way to trade the brokerage firm earnings was to fade theinitial move.  As far as if that will be the case this time around itseems that each company is going to likely be judged entirely on themerits of each rather than as a group.  Also keep in mind that some ofthese estimates may change right before the actual report.

Jon C. Ogg
June 14, 2008