Morgan Stanley: Financial Winner

NEW YORK (TheStreet) -- Morgan Stanley was the winner among the largest U.S. financial names on a mixed Monday for the sector, with shares rising over 1% to close at $14.25.

The broad indexes all saw slight declines, after the U.S. Census Bureau reported that its advance estimates for U.S. retail and food services sales showed a seasonally adjusted decline of 0.5% during June from the previous month, although sales were up 3.8% from a year earlier. Total sales for the second quarter were up 4.7% the second quarter of 2011.

The KBW Bank Index was down slightly to close at 45.85, with 11 of the 24 index components rising for the session.

Citigroup reported second-quarter earnings of $3.1 billion, or a dollar a share -- excluding one-time positive debit valuation adjustments (DVA) and credit valuation adjustments (CVA), and the company's $274 million after-tax loss on the sale of its stake in Akbank -- beating the consensus estimate of an 89-cent profit, among analysts polled by Thomson Reuters.

In comparison, Citi's adjusted operating earnings were $3.4 billion in the first quarter, and $3.1 billion in the second quarter of 2011.

During the second quarter, the bottom line was boosted by a $984 million, compared to reserve releases of $1.2 billion the previous quarter, and $2.0 billion a year earlier.

Citigroup's second-quarter revenue totaled $18.6 billion, missing analysts' consensus $18.8 billion estimate, but on adjusted basis to exclude the DVA, CVA and the Akbank loss, total second-quarter revenue came in at $18.8 billion, declining from adjusted total revenue of $20.2 billion the previous quarter, and $20.3 billion a year earlier. The year-over-year revenue decline mainly reflected lower revenue from Citi Holdings, which holds Citigroup's run-off assets, as part of Citigroup CEO Vikram Pandit's "good bank/bad bank" strategy to right-size the company's balance sheet. The sequential revenue decline mainly reflected lower securities and banking revenue outside North America.

The company also reported that its estimate Basel III Tier 1 capital ratio increased to 7.9% as of June 30, from 7.2% at the end of March.

Citigroup's shares rose 1% to close at $26.81. The shares have now returned 2% year-to-date, following a 44% decline during 2011. C data by YCharts

The shares trade for just over half their reported June 30 tangible book value of $51.81, and for less than six times the consensus 2013 earnings estimate of $4.54. The consensus 2012 EPS estimate is $3.91.

Nomura analyst Glenn Schorr rates Citigroup a "Buy," with a $41 price target, and said after the earnings announcement that the results were "not bad considering the environment," as core revenues at main subsidiary Citicorp "hung in," while "expenses were in check," Capital Markets were "OK," and "core loans and deposits grew (Citicorp loans +10% y/y)."

Interested in more on Citigroup? See TheStreet Ratings' report card for this stock.

Morgan Stanley's shares have now declined 5% year-to-date, following last year's 44% decline. MS data by YCharts

The shares for just over half of their reported March 31 tangible book value of $27.37, and for less than seven times the consensus 2013 earnings estimate of $2.11 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is $1.22.

Morgan Stanley will report its second-quarter results on Thursday, with analysts expecting a 44-cent profit, compared to a six-cent loss during the first quarter, and a 38-cent loss during the second quarter of 2011. The first-quarter results included a negative impact of $2 billion from debit valuation adjustments as the company's credit spreads tightened. The company reported first-quarter operating earnings -- excluding DVA -- of $1.4 billion, or 71 cents a share. The second-quarter 2011 results included a "negative adjustment of $1.7 billion, or $1.02 a share, related to the conversion of Morgan Stanley's preferred stock in Mitsubishi UFJ Financial Group."

Oppenheimer analyst Chris Kotowski rates Morgan Stanley "Outperform," with a $28 price target. The analyst on June 24 lowered his second-quarter earnings estimate for Morgan Stanley to 23 cents from 60 cents, saying his firm had "taken our investment banking fee revenue assumption down from $1.3B to $1.0B," while also cutting "our principal transactions revenue from $3.4B to $2.6B."

Kotowski added that "our comp ratio assumption is raised given that the total dollars of compensation seems to hit a floor around $3.7B."

The analyst estimates that Morgan Stanley will earn $1.23 a share for all of 2012, followed by 2013 EPS of $2.51.

Interested in more on Morgan Stanley? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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