KBW Slashes Estimates On Morgan Stanley Following Q3 Results

• Morgan Stanley MS shares have been declining steadily in the last three months and are down 20 percent since July 21.
• Keefe Bruyette & Wood’s Brian Kleinhanzl maintained a Market Perform rating on the company, with a price target of $37.
• Further multiple expansion in Morgan Stanley’s shares relative to peers is unlikely in the near future, Kleinhanzl mentioned.

Morgan Stanley reported its 3Q results short of expectations, due to elevated litigation expenses and lower-than-anticipated trading revenues. Recent volatility in the markets impacted nearly all the business at Morgan Stanley and, that too, negatively, analyst Brian Kleinhanzl said.

The 42 percent y/y decline in Morgan Stanley’s FICC trading was worse than peers and its Investment management segment saw a large accrual reversal of carried interest. Kleinhanzl expressed concern over the impact of continued volatility in global markets on Morgan Stanley’s future performance.

The EPS estimates for 2015, 2016 and 2017 have been reduced from $2.75 to $2.49, from $3.25 to $3.15 and from $3.60 to $3.50, respectively.

Kleinhanzl believes that the company’s shares are trading below the fair value, since the shares have pulled back along with other asset-sensitive stocks, reacting to the Fed's inaction in September.

“Our forecast largely reflects MS's achieving the longer-term goals, but given the long timeline before Wealth Management's contribution is greater, we do not believe the company will see further multiple expansion relative to peers. Over time, MS may command a greater premium vs. peers but that is still years away, in our view,” the Keefe Bruyette & Woods report noted.