The year 2012 has not been kind to Morgan Stanley (MS, Financial). In fact, by mid-summer, stock prices slid by 22% and left corporate bigwigs throwing around words like ”layoffs” and ”cost cutting.“ A significant contributor to this fallout was the poorly mishandled IPO of Facebook (FB, Financial). As the lead underwriter for the widely publicized social media stock blunder, the once pristine image of Morgan Stanley was left bruised and tarnished. Reductions in future investment banking revenue are likely to occur as a direct result. Morgan Stanley, like many other investment banks, has built its business around the ability to offer wealth management strategies, asset management and many other forms of investment advice. In light of recent struggles in business and stock price, they must now confront the realities of the potential for widespread corporate slowdown. Not only does the news hinder the attractiveness of Morgan Stanley stock options, it also presents an enticing challenge for a ”value-driven” investor, the ability to purchase stocks in the lucrative investment firm at budget prices.
The Dismay of the Majority Shareholders
Many investors holding large shares in the firm find themselves left with a sour taste in their mouths in light of the recent downfalls of Morgan Stanley stocks. For example, wealthy shareholder Eton Park Capital, who at the end of the spring quarter owned 15 million shares in Morgan Stanley, sees the plummeting stocks as anything but attractive for its client base. After a few risky decisions, these managers and more entered into Morgan Stanley stock at very inopportune times -- not surprisingly so, given that Morgan Stanley stocks were actually on the rise, with rates exceeding the previous year’s at the end of the first quarter.
It was this strong first quarter that would eventually serve as a vehicle for the rapid decline in stock prices. Converse to analyst expectations that earnings would reach an attractive rate of $0.44 per share, Morgan Stanley instead reported a loss of $0.06 per share.
The anticipated revenues from channels like principal transactions, commissions and even the company’s lucrative investment banking portfolios dropped by more than 10%, whereas expenses rose drastically. This financial declaration would indicate that the cost-cutting strategies and the stream of layoffs at Morgan Stanley are long since overdue in light of evidence that the firm’s annual compensation was ineffective in keeping company revenue at stable rates. The second fiscal quarter was no better; in fact, Morgan Stanley missed the mark by over 30%. This would indicate that troubles for the investment giant are far from over.
Operating as one of the world’s most notable investment banks, Morgan Stanley's main competitor is Goldman Sachs (GS, Financial). Even in light of its unique public relations traumas in recent years, Goldman Sachs presents excellent brand power and uses this advantage to boost profits and smash through the earnings expectations forecasted by analysts. Not surprisingly, Goldman Sachs now trades at slightly higher multiples of both book value and earnings than Morgan Stanley and has realistic expectations of a stronger and more stable asset book.
While there are significant indicators of a solid value investment case for Morgan Stanley, there is cause for concern amongst the financial world given the clear signs of failing business and the inability of analysts to accurately forecast earnings estimates several quarters in a row. Wise investors should be cautioned to pay close attention to Morgan Stanley’s announcements regarding future cost cutting strategies and monitor its public business performance announcements with great diligence.
The Recommendation
With more uncertainties on the horizon, now is not the time to arm wrestle the value investment beast. Instead, hold onto current investments and wait for clearer indicators of company and stock outcomes.
The Dismay of the Majority Shareholders
Many investors holding large shares in the firm find themselves left with a sour taste in their mouths in light of the recent downfalls of Morgan Stanley stocks. For example, wealthy shareholder Eton Park Capital, who at the end of the spring quarter owned 15 million shares in Morgan Stanley, sees the plummeting stocks as anything but attractive for its client base. After a few risky decisions, these managers and more entered into Morgan Stanley stock at very inopportune times -- not surprisingly so, given that Morgan Stanley stocks were actually on the rise, with rates exceeding the previous year’s at the end of the first quarter.
It was this strong first quarter that would eventually serve as a vehicle for the rapid decline in stock prices. Converse to analyst expectations that earnings would reach an attractive rate of $0.44 per share, Morgan Stanley instead reported a loss of $0.06 per share.
The anticipated revenues from channels like principal transactions, commissions and even the company’s lucrative investment banking portfolios dropped by more than 10%, whereas expenses rose drastically. This financial declaration would indicate that the cost-cutting strategies and the stream of layoffs at Morgan Stanley are long since overdue in light of evidence that the firm’s annual compensation was ineffective in keeping company revenue at stable rates. The second fiscal quarter was no better; in fact, Morgan Stanley missed the mark by over 30%. This would indicate that troubles for the investment giant are far from over.
Operating as one of the world’s most notable investment banks, Morgan Stanley's main competitor is Goldman Sachs (GS, Financial). Even in light of its unique public relations traumas in recent years, Goldman Sachs presents excellent brand power and uses this advantage to boost profits and smash through the earnings expectations forecasted by analysts. Not surprisingly, Goldman Sachs now trades at slightly higher multiples of both book value and earnings than Morgan Stanley and has realistic expectations of a stronger and more stable asset book.
While there are significant indicators of a solid value investment case for Morgan Stanley, there is cause for concern amongst the financial world given the clear signs of failing business and the inability of analysts to accurately forecast earnings estimates several quarters in a row. Wise investors should be cautioned to pay close attention to Morgan Stanley’s announcements regarding future cost cutting strategies and monitor its public business performance announcements with great diligence.
The Recommendation
With more uncertainties on the horizon, now is not the time to arm wrestle the value investment beast. Instead, hold onto current investments and wait for clearer indicators of company and stock outcomes.
