Goldman, Morgan Stanley estimates cut

ByStander

SAN FRANCISCO (MarketWatch) — First-quarter results from Goldman Sachs Group and Morgan Stanley may dent expectations for full-year earnings from Wall Street’s top firms, Barclays Capital analyst Roger Freeman said Monday.

“We continue to believe the Street is too high on 2011 for both firms and that 1Q results are likely to be the catalyst for full-year expectations to be reset,” Freeman wrote in a note to investors.

Goldman shares fell 1% to close at $156.47 on Monday, while Morgan Stanley climbed 5 cents to close at $27.18.

Goldman (GS 156.14, -0.33, -0.21%)  and Morgan Stanley (MS 27.18, +0.05, +0.18%)  are typically among the first investment banks to report results each quarter.

Freeman cut his first-quarter profit estimate for Goldman to 25 cents a share from $3.76 a share. His forecast for Morgan Stanley dropped to 20 cents a share from 69 cents a share.

The results will likely include several one-time items, such as the cost of Goldman’s repurchase of preferred shares it sold to Berkshire Hathaway (BRK.A 127,372, -497.00, -0.39%)   (BRK.B 84.19, -0.18, -0.21%)  in the midst of the financial crisis. Read about the end of this deal here.

Excluding such items, Freeman expects Goldman to report core earnings of $3.15 a share. That’s down from his previous forecast of $3.76 a share.

First-quarter core earnings at Morgan Stanley may be 59 cents a share, down from a previous estimate of 69 cents a share, Freeman noted.

The largest Wall Street firms generated bumper results in the wake of the financial crisis as institutional investors traded a lot more in surging equity and credit markets. But such lucrative client activity started ebbing in recent months.

Barclays Capital’s Freeman warned clients as 2011 started that a more “normal” level of revenue was likely in coming years. The first quarter should highlight this trend, he said Monday.

Institutional investors have been more active this quarter, versus the final three months of 2010. That should bolster revenue generated by Goldman’s and Morgan Stanley’s fixed-income, commodities and currencies businesses. However, this is likely to be a lot lower than in the first quarter of 2010, Freeman said.

Revenue from equities trading may rise “modestly,” driven by stronger activity levels and a rising stock market. But that may be partially offset by a decline in the volume of equity underwriting, the analyst added.

Equity underwriting volume dropped nearly 50% in the first quarter, compared to the final quarter of 2010. Completed mergers and acquisitions fell 10% in the same period, while debt underwriting rose 25%, Freeman noted.

Revenue from investment banking activities like this probably fell 20% in the first quarter, versus the fourth quarter of 2010, Freeman estimated.