Morgan Stanley plays ball like a girl!
Posted
Jun 19 2008, 02:19 AM
by
Matt Koppenheffer
With the exception of that crafty Goldman Sachs, I've come to expect lousy results from the investment banks. Leveraged loans along with housing related debt and structured products on the books are getting slapped around while investment banking results have been hurting due to a huge drop-off in capital raising.
Even with the expectation of a lackluster report from Morgan Stanley, though, the results were still startlingly bad. Revenue was down around 40% and net income dropped 57% -- despite $1.4 billion in pretax gains from the sale of its Spanish money management business and a secondary offering for MSCI.
But it's when you dig into the numbers that it really gets ugly. Across all the investment banking advisory products -- debt and equity issuance and M&A advisory -- Morgan struggled during the quarter. Collectively, revenue was off 50% from the prior year and market share was down in nearly every area. Of particular note was the drop-off in M&A advisory, which is an area that has held up well for other firms and is typically a strength for Morgan.
Trading also suffered due not only to the expected poor results in credit and mortgage related products, but also "unfavorable positioning" in commodities -- an area that should be one of the few bright spots. Meanwhile, proprietary trading activities -- where traders within the firm risk the firm's capital -- sounded like they were a complete mess and dragged down overall sales and trading results.
There was even an instance reported of a trader mismarking his trading books. That cost the firm a cool $120 million.
Asset management, another area that has stayed strong for competitors, was on the ropes as well. Though total wealth management revenue was up 4% (excluding the sale of the Spanish business), asset management reported a $227 million pre-tax loss thanks to losses on real estate and private equity investments as well as lower performance fees due to the poor investing performance. The firm can claim victory on the strong fund flows during the quarter, but they can thank the great Morgan Stanley brand for that. Keep up lackluster investment results and they can be sure to see those fund flows dry up too.
The bright side to Morgan Stanley is that the vultures aren't circling the way they are with Lehman Brothers. Though it still sports similar risks, it appears to have its head well above water, and it focused on bringing down leverage during the quarter.
Now if Morgan had posted poor results, but was simply struggling with the same market issues that have been hitting all the investment banks, I might find the stock interesting at today's price. From the looks of this report, though, the company is tripping up on a lot of fronts and execution has been falling short. So for investors looking for a good brokerage buy, JPMorgan or Goldman Sachs, though not quite as beaten down as Morgan, are probably better bets.
Investors on The Motley Fool's CAPS community aren't too hot on any of the investment banks, but favor Goldman Sachs over the rest of the group. Goldman has been rated three stars out of a possible five, while both Morgan Stanley and JPMorgan fetch two. One CAPS player, psychohistorian, sounded a bearish note earlier this year and said that Morgan's "seemingly low valuation is a mirage" because the firm's earnings will continue to lag. He concluded that the shares are "cruising for a further bruising short term" and could fall under $30.
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