Morgan Stanley reported a higher-than-expected profit yesterday, bolstered by strength in bond trading and M&A advisory, but executives were careful not to sound too optimistic about the rest of the year.
Like other big banks, Morgan Stanley had to navigate falling interest rates, volatile markets and recession signals during the third quarter, and fared relatively well.
Its overall profit rose 3%, topping Wall Street expectations by a healthy margin.
However, the factors that created such a difficult operating environment during the quarter have not gone away, chief executive James Gorman and chief financial officer Jonathan Pruzan said on a call to discuss earnings.
They suggested the trade dispute between the United States and China, further central bank easing, an unknown Brexit outcome and other geopolitical tensions could pressure results further.
Although Gorman said the fourth quarter was “off to a good start,” that could change.
“We remain cautious today as trade talks swirl and interest rates continue to be debated,” Gorman said.
Although Pruzan said CEO confidence has remained high, it is unclear whether companies that are planning initial public offerings will proceed.
Morgan Stanley led some of this year’s biggest IPOs, but signs of a possible downturn have slowed activity.
“Conversion from pipeline to realised remains highly dependent on market conditions,” he said.
During the quarter, Morgan Stanley swallowed heavy losses from stakes in companies that went public.
Investment revenue plummeted to $33mn from $340mn.
The bank beat KBW’s revenue forecasts in each business line, analyst Brian Kleinhanzl wrote in a note to clients.
Overall, Morgan Stanley’s profit rose to $2.2bn, or $1.27 per share, from $2.1bn, or $1.17 per share in the year-ago quarter.
Net revenue inched up to $10bn from $9.9bn.
Analysts were expecting a profit of $1.11 per share on revenue of $9.6bn, according to IBES data from Refinitiv.
The sixth-largest US bank capped three days of results from Wall Street heavyweights.
JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc also topped expectations, while Goldman Sachs Group Inc and Wells Fargo & Co disappointed.
Sales and trading revenue rose 10% to $3.5bn.
Gains came from a 21% jump in bond trading as equities trading fell slightly compared to a year ago.
Morgan Stanley typically ranks No.1 in equities trading, but after years of market-share gains it has been facing tougher competition lately.
Its investment banking business, which includes advising on deals and helping corporations raise money, posted a 5% rise in revenue to $1.5bn.
Wealth management’s $4.4bn in revenue was down 1% from a year ago.
That business has been a stabilising force for Morgan Stanley during volatile times.
The business is trying to add new clients in Asia and lend to them more, Gorman said.
Morgan Stanley’s loan book grew 8% rise in the third quarter, but net interest income stayed flat due to declining rates.
In investment management, its smallest business, Morgan Stanley reported a 17% rise in revenue, to $764mn.
Gorman complimented Morgan Stanley’s trading and investment banking businesses for being resilient in a shaky quarter, and said management is focused on keeping the bank stable and prosperous over the long term.
“There remains tremendous upside here,” he said.
Food group Nestle plans to return up to 20bn Swiss francs ($20.13bn) to shareholders over the next three years and reorganise its struggling waters business after organic sales growth slowed in the third quarter.
Packaged food makers are branching out into new areas such as plant-based meat alternatives or products made from all natural ingredients to boost growth in an otherwise sluggish market.
Nestle has followed this trend with its vegan Awesome and Incredible burgers and has also, under CEO Mark Schneider, sold its US confectionery and skin health businesses while polishing up big brands including Nescafe.
Its organic growth, which strips out currency swings and acquisitions, dipped to 3.7% in the third quarter from 3.9% in the second as prices for its products fell slightly, the maker of KitKat chocolate bars, Maggi noodles and vegan burgers said in a statement yesterday.
The figure was in line with analyst forecasts in a poll compiled by the company given that the second quarter marked its fastest growth rate in three years.
Nestle confirmed its outlook for organic sales growth of around 3.5% and an operating margin of 17.5% or above for the full year, pointing to strong momentum in the United States and its petcare business.
China reported flat growth as infant nutrition slowed and sales at its Yinlu brand fell.
It decided to distribute up to 20bn francs to shareholders over the period 2020 to 2022, primarily in the form of share buybacks, but special dividends were also possible.
“Should any sizeable acquisitions take place during this period, the amount of cash to be distributed to shareholders will be adjusted accordingly,” Nestle said.
In a separate statement, Nestle announced it would no longer manage its waters business, which posted weak organic growth of 0.5% for the nine-month period, as a global business.
It will instead integrate it into its three geographical zones.
Nestle’s bottled water brands include Perrier and San Pellegrino.
“This move, subject to employee consultation where required, will help utilise Nestle’s strong local expertise, better respond to rapidly changing consumer preferences, accelerate profitable growth and create synergies,” it said.
Maurizio Patarnello, head of the waters business, will leave the executive board at the end of this year.
British retailer WH Smith Plc made its second major foray into US airports yesterday with a $400mn purchase of Marshall Retail Group, expanding in a fast-growing segment and sending its shares up 5%. Founded more than 200 years ago as a news vendor in London, WH Smith has been rapidly opening shops at major airports across the world to take advantage of an increase in passengers and boost profits soured by turmoil on British shopping streets.
The company, which now sells everything from books and sandwiches to Bluetooth headphones, has 433 shops at over 100 airports outside Britain and outgoing CEO Stephen Clarke told Reuters the retailer plans to open “hundreds and hundreds” more.
Carl Cowling, who takes over from Clarke in November, said the addition of Marshall will roughly double the size of WH Smith’s international travel business.
The company took its first step into the US market last year when it bought digital accessories retailer InMotion.
Founded over 60 years ago in the gambling hub of Las Vegas, Marshall made a name for itself with souvenir shops in casinos and speciality retail outlets created for brands such as Lego and Harley Davidson.
But WH Smith is more interested in Marshall’s 59 airport stores — located in the United States and Vancouver — with 33 more expected to open by the end of 2024.
Peel Hunt analyst Jonathan Pritchard said the deal “completely galvanises the travel side of WH Smith, making it a major player in the States and now one of the serious names in global travel retail.”
WH Smith said it would fund the all-cash deal for Marshall through a combination of £200mn ($255.42mn) in new debt and a £155mn equity raise.
The company will suspend its share buyback programme while it pays off debt.
Profit from WH Smith’s travel business, which includes shops at airports, railway stations and hospitals, jumped 14% to £114mn ($145.70mn) in the fiscal year ended August 31, highlighting how important high-spending travellers have become to the company.
Overall, headline profit before tax rose to 7% to £155mn, marginally beating analyst estimates of £154.2mn, according to IBES data from Refinitiv.
Profits from its high street business stagnated as the uncertainty around what terms Britain leaves the European Union, if does so at all, crimps British shopping sentiment.
WH Smith said it was prepared for Brexit and has put in place contingency plans, including increasing the stock of convenience products.
Apple Inc supplier TSMC raised its 2019 capital spending plan by up to $5bn yesterday and forecast a nearly 10% rise in fourth-quarter revenue on strong demand for faster mobile chips and new high-end smartphones.
The bullish forecast by the world’s top contract chipmaker should ease investor fears of a global tech slowdown, as the world economic growth outlook has dimmed largely due to a 15-month trade war between the United States and China.
“5G smartphone growth momentum is stronger than we expected. We have good reasons to increase our capex this year and next year,” TSMC CEO C C Wei told an earnings briefing after reporting the Taiwanese company’s strongest quarterly profit growth in more than two years.
Wei said TSMC almost doubled its forecast for fifth-generation (5G) smartphone penetration for 2020 to mid-teen% from a forecast of single digit made just six months ago.
Smartphone makers including Samsung Electronics Co Ltd and Huawei Technologies Co Ltd are racing to develop phones enabled with the 5G technology, which could be up to 100 times faster than current 4G networks.
TSMC, formally Taiwan Semiconductor Manufacturing Co Ltd, whose clients also include Qualcomm Inc and Huawei, raised its 2019 capex to a record $14 billion-$15bn yesterday from an earlier forecast of $10 billion-$11bn.
It expected fourth-quarter revenue of between $10.2bn and $10.3bn, up from $9.4bn a year ago, and gross margin at 48%-50% versus 47.7% in the same period a year ago.
TSMC reported a 13.5% rise in third quarter net profit to T$101.07bn ($3.30bn), its strongest growth since the first quarter of 2017, thanks to strong sales to smartphone makers.
The profit figure compared with a T$96.33bn average forecast drawn from 20 analysts, according to Refinitiv data.
Revenue rose 10.7% to $9.4bn, compared with the company’s own estimate of $9.1bn to $9.2bn.
Sales earned from smartphone makers accounted for 49% of its total revenue, up from 45% from a year ago, while China sales amounted to 20%, up from 15%, making up for modest slowdown in every other major region including North America.
New smartphone launches ahead of the year-end shopping season, as well as rising demand for new technologies such as 5G and artificial intelligence will continue to drive sales for TSMC’s high-performance chips, known as 7nm, analysts said.
Central European Media
Broadcaster Central European Media Enterprises (CME) raised its operating profit guidance yesterday for the third time this year, after third-quarter earnings just beat analysts’ expectations.
The market is waiting for news about the possible sale of CME by majority owner AT&T.
PPF, the investment group of the Czech Republic’s richest man Petr Kellner, is reported to be the last remaining bidder.
CME’s adjusted operating profit (OIBDA) came in at $41.4mn in the third quarter, topping analysts’ average forecast of $39.2mn.
The company said it had also increased its OIBDA guidance for the third time this year, but did not give a figure in a statement.
The broadcaster, which operates TV stations in five central and eastern European countries, has seen profits rise in recent years and has cut into a debt pile that once topped $1bn.
Overall, net revenues rose to $138.9mn in the third quarter, supported by growth in the Czech Republic, Slovakia and Slovenia, outweighing a decline in Bulgaria and Romania.
Operating income for the whole group jumped to $30.8mn from $22.2mn in the same quarter last year.
Building materials firm Grafton Group Plc warned yesterday that its annual profit would miss expectations, as the UK construction sector grappled with uncertainties linked to Britain’s looming exit from the European Union.
The news follows a similar warning last week from smaller peer SIG Plc, which is battling weak demand and a dim economic outlook in the UK and Germany.
The Ireland-based company, in an unscheduled update, said that trading towards the end of the September quarter had been more difficult despite a good performance in its home market.
With Britain facing a multitude of uncertainties surrounding Brexit and slower global growth, the company said volumes had been hurt by weak underlying demand as Britons deferred spending on home refurbishment.
Britain’s construction slump deepened in September, with the commercial and civil engineering sectors contracting at the fastest in around 10 years ahead of the country’s exit from the bloc, according to a survey.
Grafton also said demand for its materials has been hit by a court ruling on nitrogen emissions in the Netherlands, which has delayed the granting of permits for new construction projects.
Around 18,000 building projects in the Netherlands, worth billions of euros, risked being shelved after its highest court ruled in May that the way Dutch builders and farmers dealt with nitrogen emissions breached European law.
Last month, a slew of weak manufacturing and service sector data across the globe shook markets, denting the outlook for the world economy already battered by ongoing Sino-US trade tensions and Brexit uncertainties.
Grafton, which operates across the merchanting, retailing and manufacturing sectors, said it expects full-year operating profit for continuing operations to be 4% to 8% below current consensus of about 193.5mn pounds ($246.81mn).
The company, which also makes dry mortar in the UK, said like-for-like revenue for the three months ended September 30 grew less than 1% due to weaker sales in its merchanting and manufacturing markets.
Telecoms equipment maker Ericsson beat quarterly earnings expectations yesterday and lifted its market forecast for this year and its sales target for 2020, saying demand for superfast 5G networks was taking off more quickly than expected.
Sweden’s Ericsson, which together with Finland’s Nokia and Huawei sells the bulk of radio access network equipment that is key for 5G mobile services, said it was now targeting sales of 230-240bn Swedish crowns ($23.5-24.5bn) in 2020, up from 210-220bn previously.
“We see a much faster pace of introduction of 5G than expected,” Ericsson CEO Borje Ekholm told a conference call, citing particular strength in the United States and South Korea.
“Should we have expected this? To some extent we should have, but the reality is it’s happening even faster than we expected just a few months ago”.
The Swedish company’s adjusted third-quarter operating earnings rose to 6.5bn crowns from 3.8bn a year earlier, corresponding to an 11.4% margin and beating the 5.2bn mean forecast seen in a Refinitiv poll of analysts.
Still, Ericsson kept its target for an operating margin of more than 10% for 2020, citing short-term pressure from some contracts and higher initial costs for new 5G products.
The company said it expected 5G deployments in China, where it has invested to gain market share, to start “near term”, adding they were likely to have “challenging margins” initially.
It changed its 2022 margin target to 12-14% from more than 12% previously.
Activist investor Cevian Capital, Ericsson’s largest owner by shares and third largest by votes, said the targets were conservative and the company could deliver more.
“Borje (Ekholm) continues to set targets at a level where it’s basically impossible not to exceed them”, Cevian managing partner Christer Gardell told Reuters.
Ericsson said it now expected the Radio Access Network (RAN) equipment market to grow by 5% in 2019, up from July’s forecast for 3% growth.
But they are still down 1% since the firm’s second-quarter results in July, when it warned costs related to winning new contracts for its network business would likely hit profit margins in the second half of the year.
Credit Suisse said in a research note that Ericsson’s third-quarter results were “better on all metrics”, while Carnegie said the update was “very strong”. While some analysts are expecting Ericsson to benefit from Huawei’s problems, Ekholm said the firm had still not seen any impact on sales from the turmoil surrounding its rival, which had instead made some customers more cautious about investing.
“What it has created is uncertainty in the market and perhaps a certain worry amongst equipment suppliers,” he told Reuters. “So if we see anything, it’s some short-term headwind rather than something positive”.
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