european equity strategy: earnings season monitor€¦ · market performance post results has seen...

M O R G A N S T A N L E Y R E S E A R C H

European Strategy

Equity Research

European Morgan Stanley & Co. International plc+

Equity Main Author: Matthew Garman, CFA

Strategy [email protected]

+44 207 425 3595

European Equity Strategy Team:Graham Secker

Matthew Garman, CFA

Krupa Patel

Hanyi Lim

European Equity Strategy: Earnings Season Monitor

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

12 May 2014


European Strategy

Earnings Season Summary - 1Q 2014

Summary Data

3 Key Charts

4 Earnings Results

5 Revenue Results

6 Aggregated Income Statement

7 Price Impact Of Results

Sectors

8 Earnings Results

9 Revenue Results

Countries

10 Earnings and Revenue Results Charts

11 Earnings Results

12 Revenue Results

Size Group

13 Earnings and Revenue Results Charts

14 Earnings Results and Revenue Results

Earnings Revisions

15 MSCI Europe

16 MSCI Europe Sectors

Reporting Calendar

17 Reporting Calendar

2

We have published the first readings of the 1Q 2014 earnings season. So far, we have tracked 344 companies or 47% of European market cap. Only 55%-60% of market cap report quarterly earnings data.

Earnings estimates have kept deteriorating YTD...European earnings revisions have been negative every week in the last three years, and the pace of downgrades is at their most negative level since the depths of the Eurozone sovereign crisis. The 12M forward earnings revisions ratio (on a 3M smoothed basis) has fallen from -10.5% at the start of the year to -12.9% today. Consensus expectations for 2014 earnings have fallen by 4.2% in the last 3M, and 1.2% in the last month alone. IT, Telcos and Materials have seen the largest downgrades in the last month, and every sector has seen downgrades to 2014 EPS estimates in this time.

... but there have been tentative signs of some sta bilisation through earnings season...Although there has been no doubting that earnings revisions have remained weak, the higher frequency data has stabilised a bit in the last few weeks. Also, when we look at the latest earnings revisions in the last month (on an unsmoothed basis) and compare the pace of downgrades to the equivalent point in time in prior quarters, the earnings downgrades are at the least negative pace since 1Q13.

... while earnings season has been modestly disappo inting despite the prior downgrades...With earnings season now in full-swing, results to date have seen more misses than beats, with 31% of companies beating expectations, and 35% missing, meaning a net 4% of companies have missed expectations. The past couple of earnings seasons in Europe have seen a modest tilt towards earnings beats, so the results to date mark somewhat of a renewed deterioration in results. This is despite the lowered expectations with the further downgrades ahead of earnings season.

... but some large beats, especially in the Energy sector have meant 1Q EPS is almost flat on a weight ed basisWe consider the breadth of earnings beats (rather than the magnitude) to be the key metric to monitor in judging results season, but having said that, we do note that the weighted total earnings have come in very close to expectations with a weighted miss of around 0.3%, supported in particular by the large beat in Royal Dutch Shell's earnings. On a weighted basis, European earnings are down 4.7% YoY, or 3.9% excluding Financials.

FX has continued to be a headwindThe strength in the EUR YTD has continued to provide a headwind to earnings. Revenues have been more negative than earnings (as they have been in the last couple of quarters), which is consistent with the effects of EUR strength. FX has been mentioned as a drag by a number of companies in results, and European stocks that are exposed to EUR strength continue to see more downgrades than the wider metric. While the drag from FX may abate later on in the year, even if just from base effects, the strength in EUR has remained a key headwind for European companies in 1Q.

Market performance post results has seen a slightly negative skewPage 7 shows the performance of stocks around results. Companies that have seen earnings beat by between 0% to 5% have actually underperformed in the 3D post results. While stocks that have been beating have on average outperformed, and those missing underperformed, broadly the skew of performance is towards stocks missing expectations underperforming by more than those beating estimates have outperformed.


European Strategy

Earnings Season Summary

Net proportion of companies reporting positive earn ings surprise (%) Magnitude of earnings surprise (%)

Key earnings statistics Key revenue statistics

Above Below Net +ve Above Below Net +ve

Consumer Disc 35 35 0 1.7 0.0 24.5 Consumer Disc 27 31 -4 0.5 -0.1 4.7

Consumer Stap 17 44 -28 -11.0 -5.0 -12.0 Consumer Stap 41 32 9 -1.0 -0.3 1.3

Energy 43 39 4 15.1 -1.7 -10.6 Energy 33 58 -25 -0.4 -1.8 -6.9

Financials 36 34 2 -8.3 0.0 -6.1 Health Care 18 54 -36 -1.2 -1.2 -2.4

Health Care 33 19 14 0.6 0.0 -5.7 Industrials 25 48 -24 -0.7 -0.9 -2.3

Industrials 17 39 -22 -6.9 -0.9 13.5 IT 39 31 8 -2.9 0.5 -9.7

IT 32 38 -6 0.8 0.0 74.8 Materials 36 44 -8 0.5 -0.3 -2.7

Materials 40 34 6 -4.2 0.5 11.6 Telcos 13 47 -33 1.9 -0.5 -10.7

Telcos 33 25 8 1.2 0.4 -41.3 Utilities 0 80 -80 -6.4 -3.0 -3.3

Utilities 50 0 50 8.6 12.4 -23.0 Europe ex Fins 28 44 -16 -0.3 -0.5 -3.2

Europe 31 35 -4 -0.3 0.0 -4.7

Europe ex Fins 29 35 -5 3.2 0.0 -3.9

Note: Earnings considered to be a surprise if +/- 5 % from consensus estimates. Sales considered to be a surprise if +/- 1% from consensus estimates. Sour ce: MSCI, Factset Estimates, Morgan Stanley Researc h

3

% Of Companies Growth YoY (%)

Weighted Surprise (%)

Median Surprise (%)

% Of Companies Growth YoY (%)

Median Surprise (%)

Weighted Surprise (%)

-30

-20

-10

0

10

20

30

40

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Eur Eur ex Fins

-20

-10

0

10

20

30

40

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Eur Eur ex Fins


European Strategy

European Earnings Results Summary - 1Q 2014

Magnitude of earnings surprise (%) Median size of earnings surprise %

Net % of companies reporting positive earnings surp rise Net % of companies reporting positive earnings surprise

Note: Earnings considered to be a surprise if +/- 5 % from consensus estimates. Source: MSCI, Factset E stimates, Morgan Stanley Research

4

-6

-4

-2

0

2

4

6

8

10

12

14

Util

ities

Mat

eria

ls

Tel

cos

Con

s D

isc

Fin

anci

als

Hea

lth C

are IT

Eur

ope

Eur

x F

ins

Indu

stria

ls

Ene

rgy

Con

s S

tap

-40

-30

-20

-10

0

10

20

30

40

50

60

Util

ities

Hea

lth C

are

Tel

cos

Mat

eria

ls

Ene

rgy

Fin

anci

als

Con

s D

isc

Eur

ope

Eur

x F

ins IT

Indu

stria

ls

Con

s S

tap

-20

-10

0

10

20

30

40

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Eur Eur ex Fins

-30

-20

-10

0

10

20

30

40

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Eur Eur ex Fins


European Strategy

European Revenue Results Summary - 1Q 2014

Magnitude of revenue surprise % Median size of revenue surprise %

Net % of companies reporting positive revenue surpr ise Net % of companies reporting positive revenue su rprise

Note: Revenues considered to be a surprise if +/- 1 % from consensus estimates. Source: MSCI, Factset E stimates, Morgan Stanley Research

5

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

IT

Con

s D

isc

Con

s S

tap

Mat

eria

ls

Tel

cos

Eur

x F

ins

Indu

stria

ls

Hea

lth C

are

Ene

rgy

Util

ities

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

Con

s S

tap IT

Con

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Mat

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x F

ins

Indu

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are

Util

ities

-4

-3

-2

-1

0

1

2

3

4

5

6

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

-30

-20

-10

0

10

20

30

40

50

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14


European Strategy

1Q 2014 Aggregated Income Statement

Aggregated data for MSCI Europe ex Financials Proportion of companies that have exceeded expectat ions

1Q 2014 1Q 2014 % % of co's exceeding Median

Aggregates in €mn Expected Actual Surprise expectations Surprise % # of companies

Sales 720,036 715,732 -0.6 Sales 43.0 -0.5 321

Operating Expense 649,153 643,228 -0.9 EBITDA 52.0 0.0 277

EBIT 70,883 72,504 2.3 EBIT 52.8 0.0 309

Interest Expense 6,140 6,577 7.1 Pre-Tax Income 54.3 0.0 276

Pre-Tax Income 64,742 65,927 1.8 Net Income Before Goodwill 53.8 0.0 344

Taxes 20,631 20,304 -1.6 Net Income 49.4 -1.0 344

Net Income Before Goodwill 44,112 45,623 3.4 EBITDA Margin 52.4 3bp 346

Goodwill 355 1,634 359.7 EBIT Margin 53.3 4bp 346

Net Income 43,756 43,989 0.5 Pre-Tax Income Margin 50.2 1bp 273

Net Income Before Goodwill Margin 46.8 -3bp 306

Margins % bp Net Income Margin 45.4 -7bp 275

EBIT Margin 9.8 10.1 29

Pre-Tax Income Margin 9.0 9.2 22

Net Income Before Goodwill Margin 6.1 6.4 25

Net Income Margin 6.1 6.1 7

Data Coverage

Number of Companies 260

% Of Companies 25

% Of Market Cap 44

Note: Aggregated data based on only those companies who report each of Sales, EBIT, Pre-Tax Income and Net Income.

Source for both exhibits: MSCI, Factset Estimates, Morgan Stanley Research

6


European Strategy

Price Impact Of Results

Median relative performance in 3 days post results based on whether company beat or missed estimates %

Median relative performance in 3 days post results based on size of earnings / revenue surprise %

Note: Data only included in these charts if there a re a minimum of 5 observations in each category. So urce: MSCI, Factset Estimates, Morgan Stanley Resea rch

7

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Sales EBITDA EBIT Pre-Tax Inc Net Inc EBITDA Margin EBIT Margin Pre-Tax Inc Margin Net Inc Margin

Beat

Miss

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

>15% 10% to 15% 5% to 10% 0% to 5% 0% to -5% -5% to -10% -10% to -15%

<-15%

Size of earnings surprise

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

>5% 3% to 5% 1% to 3% 0% to 1% 0% to -1% -1% to -3% -3% t o -5% <-5%

Size of revenue surprise


European Strategy

1Q 2014 Earnings Results By Sector

# Cos % Mcap % of Companies Weighted Median QoQ Growth % YoY Growth %

Rptd Rptd Above In-Line Below Net +ve Surprise % Surprise % Estimated Actual (**) Estimated Actual (**)

MSCI Europe 344 47 31 35 35 -4 -0.3 0.0 40.8 36.5 -4.4 -4.7

Consumer Discretionary 43 37 35 30 35 0 1.7 0.0 -5.1 -11.0 22.6 24.5

Automobiles & Components 9 76 44 56 0 44 2.8 1.7 0.2 -6.7 30.3 33.9

Consumer Durables & Apparel 11 19 27 18 55 -27 0.5 -1.5 44.4 41.7 -2.2 -1.8

Consumer Services 4 3 50 25 25 25 11.0 -0.4 N/M N/M N/M N/M

Media 9 23 22 44 33 -11 -5.3 0.0 -7.4 -14.9 -9.9 -14.7

Retailing 10 26 40 10 50 -10 -8.8 -0.9 -48.4 -50.1 7.2 3.5

Consumer Staples 18 21 17 39 44 -28 -11.0 -5.0 -29.0 -35.1 -3.7 -12.0

Food & Staples Retailing 6 18 17 50 33 -17 0.7 -4.4 -63.9 -63.8 -18.3 -18.0

Food Beverage & Tobacco 9 18 11 33 56 -44 -19.6 -11.3 -22.3 -33.4 -3.2 -17.0

Household & Personal Products 3 36 33 33 33 0 1.1 -3.7 0.7 1.8 4.8 5.9

Energy 23 88 43 17 39 4 15.1 -1.7 18.4 21.2 -21.9 -10.6

Financials 59 48 36 31 34 2 -8.3 0.0 507.1 471.4 -0.3 -6.1

Banks 26 67 27 31 42 -15 -9.5 -0.2 N/M N/M 6.7 -0.6

Diversified Financials 11 53 18 45 36 -18 -12.3 0.0 229.4 188.2 -8.0 -18.9

Insurance 8 19 50 25 25 25 4.0 2.6 -1.8 1.1 -13.9 -12.5

Real Estate 14 12 57 21 21 36 2.5 6.0 89.0 80.4 37.0 39.0

Health Care 36 71 33 47 19 14 0.6 0.0 -6.2 -7.1 -6.3 -5.7

Health Care Equipment & Services 10 53 10 40 50 -40 -4.4 -5.1 -24.7 -36.0 3.8 0.0

Pharmaceuticals Biotechnology & Life Sciences 26 74 42 50 8 35 1.0 0.6 -4.1 -3.7 -7.1 -6.2

Industrials 82 39 17 44 39 -22 -6.9 -0.9 -5.2 -6.1 19.7 13.5

Capital Goods 60 46 20 40 40 -20 -6.0 -0.6 -5.5 -12.6 15.6 9.3

Commercial & Professional Services 12 20 0 42 58 -58 -17.2 -8.1 -26.9 22.7 42.1 23.0

Transportation 10 26 20 70 10 10 -9.6 0.0 8.2 9.7 31.2 30.3

Information Technology 34 66 32 29 38 -6 0.8 0.0 -49.4 -49.4 73.4 74.8

Semiconductors & Semiconductor Equipment 10 62 40 30 30 10 2.1 2.5 -36.1 -34.9 291.1 299.6

Software & Services 16 62 31 38 31 0 -1.1 0.6 -42.7 -44.2 7.8 6.6

Technology Hardware & Equipment 8 56 25 13 63 -38 4.0 -15.0 -66.1 -64.5 N/M N/M

Materials 35 43 40 26 34 6 -4.2 0.5 257.1 230.4 15.9 11.6

Telecommunication Services 12 44 33 42 25 8 1.2 0.4 -23.5 -23.1 -41.9 -41.3

Utilities 2 6 50 50 0 50 8.6 12.4 21.5 23.9 -24.5 -23.0

MSCI Europe ex Financials 285 46 29 36 35 -5 3.2 0.0 -1.3 -2.8 -6.6 -3.9

(**) Actual growth rate based on a mixture of actua l results for those companies that have reported, a nd the latest consensus estimate for those that are yet to report.


8


European Strategy

1Q 2014 Revenue Results By Sector



MSCI Europe ex Financials 321 47 28 28 44 -16 -0.3 -0.5 -6.4 -6.7 -3.0 -3.2

Consumer Discretionary 52 38 27 42 31 -4 0.5 -0.1 -7.9 -7.5 4.3 4.7

Automobiles & Components 10 76 30 50 20 10 0.6 -0.3 -7.7 -7.1 4.9 5.5

Consumer Durables & Apparel 13 20 38 23 38 0 -0.1 0.5 -2.4 -2.5 0.0 -0.1

Consumer Services 6 7 17 67 17 0 0.0 0.3 -3.0 -3.0 -5.7 -5.7

Media 12 26 8 42 50 -42 -0.8 -0.7 -10.5 -11.1 4.2 3.5

Retailing 11 27 36 45 18 18 0.3 0.0 -16.9 -16.8 7.8 7.9

Consumer Staples 22 22 41 27 32 9 -1.0 -0.3 -6.8 -7.3 1.8 1.3

Food & Staples Retailing 6 18 0 67 33 -33 -3.1 -0.6 -7.8 -8.8 1.1 -0.1

Food Beverage & Tobacco 12 19 58 0 42 17 1.2 1.8 -9.3 -8.6 3.8 4.7

Household & Personal Products 4 36 50 50 0 50 -0.3 0.3 4.8 4.5 1.3 1.0

Energy 24 88 33 8 58 -25 -0.4 -1.8 -1.2 -1.6 -6.6 -6.9

Health Care 39 72 18 28 54 -36 -1.2 -1.2 -4.7 -5.9 -1.3 -2.4

Health Care Equipment & Services 13 56 8 31 62 -54 -1.0 -1.4 -5.7 -7.0 2.8 1.9

Pharmaceuticals Biotechnology & Life Sciences 26 74 23 27 50 -27 -1.3 -0.9 -4.5 -5.7 -2.3 -3.5

Industrials 89 42 25 27 48 -24 -0.7 -0.9 -13.8 -14.2 -1.8 -2.3

Capital Goods 63 48 24 25 51 -27 -0.6 -1.0 -17.6 -18.0 -1.6 -2.0

Commercial & Professional Services 13 23 31 38 31 0 -0.9 -0.7 -1.0 -1.7 1.6 1.0

Transportation 13 28 23 23 54 -31 -1.6 -0.9 -4.5 -5.1 -3.6 -4.3

Information Technology 36 67 39 31 31 8 -2.9 0.5 -17.1 -19.1 -7.6 -9.7

Semiconductors & Semiconductor Equipment 11 62 45 27 27 18 0.2 0.4 -11.9 -11.7 5.9 6.1

Software & Services 16 62 38 38 25 13 -0.8 0.7 -16.0 -16.5 6.2 5.5

Technology Hardware & Equipment 9 57 33 22 44 -11 -6.0 0.0 -19.5 -23.0 -18.4 -21.9

Materials 39 44 36 21 44 -8 0.5 -0.3 0.4 0.7 -3.0 -2.7

Telecommunication Services 15 47 13 40 47 -33 1.9 -0.5 -12.7 -11.7 -11.7 -10.7

Utilities 5 12 0 20 80 -80 -6.4 -3.0 2.5 1.7 -2.6 -3.3



9


European Strategy

1Q 2014 Earnings and Revenue Results By Country

Median size of earnings surprise % Net % of companies reporting positive earnings surp rise

Median size of revenue surprise % Net % of companies reporting positive revenue surpr ise

Note: Earnings considered to be a surprise if +/- 5% from consensus estimates. Revenues considered to be a surprise if +/- 1% from consensus estimates. Source: MSCI, Factset Estimates, Morgan Stanley Res earch

10

-25

-20

-15

-10

-5

0

5

10

Nor

way

Nth

lnds

Aus

tria

Den

mar

k

Fra

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Ger

man

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Italy

Spa

in

Eur

ope

Sw

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UK

Bel

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Sw

eden

Irel

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Por

tuga

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Fin

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-90

-70

-50

-30

-10

10

30

Nor

way

Italy

Fra

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UK

Sw

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Aus

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Bel

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Irel

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Nth

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Spa

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Sw

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Eur

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Ger

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Den

mar

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Fin

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Por

tuga

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-7

-6

-5

-4

-3

-2

-1

0

1

2

3

Nor

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Nth

lnds

Sw

eden

Spa

in

Fra

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Por

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Eur

x F

ins

Ger

man

y

Italy

Den

mar

k

Aus

tria

Sw

iss

UK

Bel

gium

Fin

land

Irel

and

-120

-100

-80

-60

-40

-20

0

20

40

60

Nor

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Por

tuga

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Sw

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Nth

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Spa

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Ger

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Fra

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x F

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UK

Italy

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Irel

and


European Strategy

1Q 2014 Earnings Results By Country



MSCI Europe 344 47 31 35 35 -4 -0.3 0.0 40.8 36.5 -4.4 -4.7

Austria 3 23 0 100 0 0 2.7 0.0 75.0 68.5 1.6 2.2

Belgium 9 62 33 33 33 0 -14.8 -0.6 -13.7 -24.3 -8.4 -20.0

Denmark 18 69 33 22 44 -11 1.9 0.0 -12.2 -13.9 18.0 19.4

Finland 39 99 18 23 59 -41 -11.1 -19.1 -25.0 -35.6 4.9 -6.5

France 17 30 29 53 18 12 -8.7 0.0 4.7 -5.4 1.0 -7.4

Germany 76 78 24 42 34 -11 -1.9 0.0 12.3 7.2 1.8 0.3

Ireland 1 7 0 100 0 0 -4.7 -4.7 -59.3 -66.4 1225.1 993.6

Italy 13 33 31 62 8 23 4.1 0.0 N/M N/M -10.9 -9.2

Netherlands 10 39 30 40 30 0 -7.4 2.7 24.5 16.8 -11.0 -15.6

Norway 23 81 52 22 26 26 18.7 5.8 10.3 26.9 7.3 23.6

Portugal 4 47 0 25 75 -75 -134.5 -8.9 187.4 -194.4 320.7 -210.1

Spain 21 54 33 33 33 0 2.7 0.0 7.9 36.5 -30.6 -29.0

Sweden 74 87 35 34 31 4 -0.7 -0.7 -17.3 -19.0 9.6 8.9

Switzerland 18 39 39 22 39 0 -5.6 0.0 17.0 10.7 -2.3 -7.1

United Kingdom 18 31 39 28 33 6 8.2 -0.5 177.6 161.8 -12.7 -7.0



11


European Strategy

1Q 2014 Revenue Results By Country




Austria 4 27 25 25 50 -25 -1.5 -1.4 -1.1 -1.4 -1.1 -1.4

Belgium 10 77 20 20 60 -40 0.2 -2.1 -6.0 -5.9 -3.0 -2.8

Denmark 14 65 29 14 57 -29 -1.2 -1.3 -9.6 -10.1 -6.3 -6.8

Finland 35 99 14 14 71 -57 -4.2 -3.0 -11.1 -14.7 -15.3 -18.8

France 15 25 27 33 40 -13 7.9 0.2 -19.4 -15.5 -12.8 -8.6

Germany 68 81 28 35 37 -9 0.3 -0.5 -5.4 -5.2 0.9 1.2

Ireland 1 8 0 0 100 -100 -5.7 -5.7 -4.8 -8.6 5.8 1.5

Italy 23 56 4 35 61 -57 1.2 -1.2 -4.9 -4.2 -4.0 -3.3

Netherlands 13 38 46 8 46 0 2.7 1.1 -0.1 1.4 -2.9 -1.4

Norway 21 83 62 24 14 48 3.9 2.6 1.6 5.1 3.0 6.5

Portugal 5 55 40 40 20 20 -9.6 -0.2 -4.2 -11.6 6.2 -2.0

Spain 21 39 24 52 24 0 -0.2 0.2 -10.9 -11.0 -4.4 -4.5

Sweden 63 91 37 33 30 6 -0.9 0.3 -11.1 -11.8 8.0 7.1

Switzerland 15 35 27 0 73 -47 -1.5 -1.5 -8.2 -9.6 -2.1 -3.5

United Kingdom 13 33 8 31 62 -54 -4.0 -1.5 1.6 -2.4 -4.8 -8.5



12


European Strategy

1Q 2014 Earnings and Revenue Results By Size Group

Median size of earnings surprise % Net % of companies reporting positive earnings surp rise

Median size of revenue surprise % Net % of companies reporting positive revenue surpr ise

Note: Earnings considered to be a surprise if +/- 5% from consensus estimates. Revenues considered to be a surprise if +/- 1% from consensus estimates. Source: MSCI, Factset Estimates, Morgan Stanley Res earch

13

-1.0

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

Mid Caps Small Caps Europe Large Caps-20

-15

-10

-5

0

5

10

15

Mid Caps Europe Small Caps Large Caps

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

Small Caps Eur x Fins Mid Caps Large Caps-35

-30

-25

-20

-15

-10

-5

0

Small Caps Eur x Fins Mid Caps Large Caps


European Strategy

1Q 2014 Earnings and Revenue Results By Size Group

Earnings



MSCI Europe 344 47 31 35 35 -4 -0.3 0.0 40.8 36.5 -4.4 -4.7

Large 86 53 21 44 35 -14 -0.3 -0.9 43.4 38.4 -6.0 -6.2

Mid 75 34 33 43 24 9 4.4 0.0 19.2 19.7 -2.3 1.0

Small 183 24 34 27 39 -5 -9.1 0.0 33.5 33.6 31.8 23.9

Revenues




Large 60 52 18 32 50 -32 -0.2 -1.0 -5.7 -5.9 -4.2 -4.4

Mid 76 44 21 37 42 -21 0.0 -0.6 -8.3 -8.3 0.2 0.2

Small 185 29 34 24 42 -8 -1.2 -0.3 -8.2 -8.9 0.9 0.1


Note: Size groups based on MSCI Large, Mid and Smal l Cap indices. Earnings considered to be a surprise if +/- 5% from consensus estimates. Revenues consi dered to be a surprise if +/- 1% from consensus est imates.

Source: MSCI, Factset Estimates, Morgan Stanley Res earch

14


European Strategy

MSCI Europe - Earnings Revisions

FY1 Earnings Revisions Ratio % FY2 Earnings Revision s Ratio % N12M Earnings Revisions Ratio %

Consensus EPS Growth Estimates Over Time % Consensus EPS Estimates Over Time

Note: EPS estimates measured in local currency term s. Earnings revisions ratio calculated as ( # of up grades - # of downgrades ) / # of estimates, based on an aggregate of changes over a four-week period.

Source for all exhibits: MSCI, IBES, DataStream, Mo rgan Stanley Research

15

-20

-15

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-5

0

5

10

Jan-11 Jan-12 Jan-13 Jan-14

ERR

3MA

-10

-5

0

5

10

15

20

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-142011 2012 2013 2014 2015 2016

80

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100

110

120

130

140

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-142011 2012 2013 2014 2015 2016

-20

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European Strategy

MSCI Europe Sectors - Revisions To Estimates

14 15 16 14 15 16 14 15 16 FY1 FY2 N12M FY1 FY2 N12M FY1 FY2 N12M

MSCI Europe 8.3 12.4 9.3 -1.2 -0.9 -1.0 -4.2 -3.8 - -12.3 -11.0 -11.7 -3.1 -2.7 -2.8 -2.4 3.9 3.2

Consumer Discretionary 8.4 13.6 10.0 -0.6 -0.8 -0.5 -3.2 -3.0 - -11.2 -9.4 -10.3 4.2 2.8 3.5 -0.1 7.3 6.3

Automobiles & Components 10.7 15.0 8.7 -0.4 -0.9 -0.8 -1.4 -1.4 - -0.7 -6.3 -4.0 0.4 -9.1 -4.8 9.2 3.9 6.2

Consumer Durables & Apparel 6.6 14.1 12.3 -0.8 -1.2 -0.3 -4.4 -4.1 - -24.5 -19.9 -22.5 -0.2 0.5 1.3 8.9 20.9 18.3

Consumer Services 4.2 11.5 11.2 -0.7 -0.5 -0.2 -1.2 -0.7 - -9.8 -3.7 -7.1 -0.7 8.1 -0.1 -29.8 3.5 0.2

Media 4.5 11.4 9.6 -0.4 -0.3 0.2 -3.9 -3.4 - -12.1 -8.9 -9.5 -1.5 -3.3 -0.2 -4.3 7.1 5.9

Retailing 11.7 11.6 10.7 0.1 -0.1 0.4 -6.0 -5.9 - -6.7 -4.7 -6.0 38.0 36.5 35.5 -5.1 -6.9 -8.2

Consumer Staples 2.6 8.4 8.1 -1.3 -1.2 -1.5 -4.3 -4.6 - -21.3 -19.7 -20.4 -4.8 -2.6 -3.6 1.8 13.7 13.0

Food & Staples Retailing -4.3 7.7 6.9 -3.1 -3.4 -5.5 -9.0 -9.2 - -9.2 -10.0 -9.0 13.3 15.1 14.2 22.7 26.8 26.8

Food, Beverage & Tobacco 3.9 8.6 8.4 -1.0 -0.9 -0.8 -3.8 -4.1 - -29.6 -25.1 -27.4 -15.2 -10.8 -12.9 -5.0 7.9 6.1

Household & Personal Products 3.9 8.2 7.9 -0.5 -0.6 -0.3 -1.2 -1.2 - -15.5 -18.3 -17.0 -2.8 -5.7 -4.3 -11.3 9.6 10.9

Energy 9.1 7.2 6.9 -0.8 -0.6 -1.2 -6.3 -6.3 - -13.8 -17.5 -15.4 -1.7 -5.1 -3.3 8.0 6.1 8.2

Financials 15.3 17.2 10.2 -1.3 -0.7 -0.1 -4.6 -2.9 - -7.4 -4.8 -6.4 -2.7 -0.6 -2.1 -1.4 1.9 0.2

Banks 33.1 21.0 12.7 -2.0 -1.4 -0.7 -6.6 -4.9 - -10.6 -5.5 -8.7 -4.1 -1.1 -3.2 -2.4 1.3 -2.0

Diversified Financials -3.1 26.1 14.2 -2.5 -0.4 -0.4 -6.9 -2.0 - -14.8 -12.1 -13.4 -9.9 -4.8 -7.9 -5.0 1.8 0.5

Insurance 3.4 7.3 4.1 0.6 0.5 1.3 -0.3 0.1 - -0.3 -1.7 -0.7 1.6 1.6 1.3 5.0 1.4 2.5

Real Estate 8.4 5.9 3.9 -0.1 0.3 1.0 0.2 0.3 - -5.1 0.6 -4.0 1.1 1.8 1.1 -10.7 6.2 1.6

Health Care 3.1 8.3 7.5 -1.0 -1.4 -1.3 -4.2 -4.6 - -13.0 -12.5 -13.4 -3.7 -5.0 -4.0 -6.1 -7.1 -7.9

Health Care Equipment & Services 7.4 13.3 10.4 -0.8 -0.1 -0.2 -5.1 -4.5 - -1.4 2.5 -1.0 17.6 20.0 17.8 3.3 3.5 0.0

Pharmaceuticals, Biotechnology & Life Sciences 2.8 7.9 7.2 -1.1 -1.6 -1.3 -4.2 -4.6 - -20.3 -21.6 -21.1 -17.1 -20.1 -17.6 -12.1 -13.4 -12.9

Industrials 14.2 14.6 10.4 -1.1 -1.0 -0.9 -3.3 -3.1 - -12.5 -11.0 -12.1 -5.2 -6.8 -5.6 -3.2 2.7 1.7

Capital Goods 13.9 14.1 10.1 -1.3 -1.2 -1.1 -4.1 -3.9 - -15.5 -15.4 -15.7 -6.1 -8.3 -7.3 -4.9 2.7 2.6

Commercial & Professional Services 5.9 11.9 10.7 -1.2 -0.9 -0.2 -4.2 -4.2 - -16.3 -11.6 -15.7 -6.3 -3.5 -6.0 -3.3 5.2 1.1

Transportation 23.6 19.5 11.8 0.8 0.2 -0.5 3.5 3.2 - -0.8 2.0 1.1 -2.3 -5.5 -0.6 0.8 -1.4 -2.6

Information Technology 35.6 21.3 15.8 -2.8 -2.2 -2.6 -2.9 -2.6 - -27.2 -21.6 -25.2 -26.4 -21.6 -23.9 -23.5 5.8 2.0

Semiconductors & Semiconductor Equipment 44.4 36.3 28.0 -5.0 -2.7 -4.0 -5.9 -4.9 - -5.7 -13.2 -8.5 -4.7 -13.2 -6.6 -11.3 28.1 32.0

Software & Services 2.8 10.8 10.6 -1.6 -1.8 -1.8 -1.9 -1.8 - -37.0 -29.4 -33.6 -38.1 -30.5 -34.2 -31.5 -4.5 -8.6

Technology Hardware & Equipment 205.7 31.0 15.6 -3.6 -2.4 -2.6 -2.6 -2.0 - -31.9 -16.4 -27.3 -27.7 -14.3 -23.1 -24.8 0.3 -10.6

Materials 14.5 15.9 12.6 -1.6 -0.7 -0.7 -4.2 -4.4 - -12.9 -9.3 -11.1 0.3 3.7 1.8 -6.1 4.1 2.5

Telecommunication Services -11.8 6.0 7.9 -2.1 -1.6 -4.7 -6.5 -6.1 - -12.6 -14.9 -13.2 -5.0 -7.1 -5.6 -9.4 -3.9 -2.2

Utilities -12.3 4.4 2.7 -0.1 -0.1 -0.2 -1.5 -2.1 - 0.2 -3.3 -0.2 1.5 2.8 2.8 5.7 3.0 6.1

Source for all exhibits: MSCI, IBES, DataStream, Mo rgan Stanley Research

Note: EPS estimates measured in local currency term s. Earnings revisions ratio calculated as ( # of up grades - # of downgrades ) / # of estimates.

16

1M Change In ERR % 3M Change In ERR %EPS Growth % 1M ∆ In EPS Est % 3M ∆ In EPS Est % ERR %


European Strategy

1Q 2014 Reporting Calendar

Number of companies reporting each day Cumulative number of companies reported

Market cap of companies reporting each day €bn Cumul ative market cap of companies reported €mn

Source: MSCI, Factset Estimates, Morgan Stanley Res earch

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European Strategy

Disclosures

18

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Coverage Universe Investment Banking Clients (IBC)Stock Rating % of % of % of Category Count Total Count Total IBC Rating Category Overweight/Buy 1045 35% 355 38% 34%Equal-weight/Hold 1301 43% 455 48% 35%Not-Rated/Hold 110 4% 22 2% 20%Underweight/Sell 543 18% 109 12% 20%Total 2,999 941

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European Strategy

Disclosures

19

Analyst Stock Ratings

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European Strategy

Disclosures

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