Marshall & Ilsley Corporation (MI) reported its second-quarter 2010 results on July 20. The loss for the reported quarter came in higher than the Zacks Consensus Estimate. However, the loss significantly narrowed from the prior-year quarter’s loss. Results for the reported quarter primarily benefited from a lower provision for loan and lease losses, decreased non-interest expenses and slightly improved interest income.
Investors were somewhat impressed by this year-over-year improvement in results. The share price increased slightly following the earnings release.
However, analysts covering the stock now have responded negatively, as they have had sufficient time to absorb and weigh the fundamentals.
Let’s now cover the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock.
Earnings Report Review
Missing the estimates considerably is a definite negative for the stock price. Also, there are several negatives including a decrease in non-interest revenues and lower average loans and leases that kept the company unprofitable.
Assets under Management and Assets under Administration were $31.7 billion and $121.4 billion, respectively, at quarter-end, compared to the year-ago quarter’s $31.7 billion and $109.3 billion.
Earnings Estimate Revisions – Overview
Following the earnings release, estimates have radically moved down. The estimate revision trends and the magnitude of such revisions justify the weakness in the stock. We will now go through the details of the earnings estimate revision to substantiate why an investor may not be interested in this stock.
Agreement of Analysts
Looking at the estimates revision trends, it becomes clear that a majority of the analysts have agreed on the negative FY2010 outlook for Marshall & Ilsley earnings. Of the total 20 analysts covering the stock, 13 have lowered the estimates for FY2010 and only 1 has moved in the opposite direction over the last 30 days.
Also, for FY2011, 11 analysts have decreased their estimates, while no upward revision was witnessed. The higher number of downward estimate revisions for FY2010 and FY2011 indicate a likelihood of downward pressure on the performance of the stock in the near term.
Magnitude of Estimate Revisions
Estimates for FY2010 deteriorated from a loss of $0.80 per share to a loss of $1.00 since the earnings announcement. Also, the estimates for FY2011 significantly moved down from earnings of 20 cents per share to earnings of 4 cents. The significant magnitude of the downward estimate revisions indicates why Marshall & Ilsley is not worth adding to an investor’s portfolio.
The stock has not been very steady over the last four quarters with respect to earnings surprises. The average remained negative at 2.3%. This implies that Marshall & Ilsley has missed the Zacks Consensus Estimate by the same magnitude over that period.
Though credit costs continue to weigh on earnings, we are encouraged to see the sustained turnaround in credit quality in the recent quarters with decline in net charge-offs and nonperforming assets ratios. Management has been adopting an aggressive approach for the last several quarters to proactively identify and deal with credit issues, which should lead to an improved outlook for credit losses over the coming quarters. This will indirectly help the company to experience a faster-than-peers earnings recovery with the gradual improvement of the economy and the recovery of the housing market.
However, contraction of the loan book remains a drag. Though management has been able to meet most of the challenges with the help of low cost funding, disciplined deposit pricing and the preservation of its strong capital base, pressure on core revenues and higher credit costs will weigh on upcoming results.
The estimate revision trends, magnitude of revising the estimates and lower number of upward estimate revisions clearly indicate the potential for downward pressure on the stock over the near term.
However, Marshall & Ilsley shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.
Considering the company’s business model and fundamentals, we have a long-term Neutral recommendation on the stock.