Balanced View on Morgan Stanley - Analyst Blog

On Mar 7, 2014, we issued an updated research report on Morgan Stanley MS. This leading financial services holding company recently reported better-than-expected fourth-quarter 2013 results.

Results were aided by top-line growth and improved asset position, which were partially offset by higher operating expenses and decline in Fixed Income & Commodities sales and trading results. Though the company exhibits strong fundamentals, we remain cautious due to the macroeconomic headwinds across the industry.

Morgan Stanley reported fourth-quarter 2013 adjusted earnings of 50 cents per share, beating the Zacks Consensus Estimate by 13.6%. Notably, earnings from continuing operations fell 79% year over year to 7 cents per share owing to mounting legal reserves of $1.2 billion.

Morgan Stanley's performance in 2013 seemed impressive as evident from its earnings history. The company delivered positive earnings surprises in all 4 quarters of 2013.

Amid the challenging macroeconomic environment, Morgan Stanley enjoys a competitive edge over its peers due to consistent growth in its core Institutional Securities' franchise. Moreover, in the last few quarters, the company undertook restructuring activities to reduce balance sheet risks and maintain stable earnings.

Further, Morgan Stanley's recent announcement to vend its Global Oil Merchanting Unit enhances its strategy of shedding non-core operations and driving earnings from more profitable core operations.

However, despite adequate positives, Morgan Stanley's top-line growth is expected to be sluggish in the next few quarters owing to its increased cost structure. Moreover, significant exposure in structured investment vehicles, commercial mortgage-backed securities and commercial real estate sector might limit earnings growth, given the current economic uncertainty.

Further, over the last 60 days, the Zacks Consensus Estimate for 2014 declined nearly 2% to $2.46 per share while it was down 1.3% to $3.00 per share for 2015.

Morgan Stanley now carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Stocks that are worth considering in the Investment Brokerage space include E*TRADE Financial Corp. ETFC, Investment Technology Group Inc. ITG and Piper Jaffray Companies PJC. All these have a Zacks Rank #1 (Strong Buy).