Morgan Stanley, perhaps in an effort to quell investor fears that it was on similarly shaky ground as Lehman Brothers, pre-announced its third-quarter earnings yesterday, surprising analysts with census beating results. That hasn’t stopped the stock from continuing its descent, however, and speculation has begun that CEO John Mack may have to find a buyer to avoid a Lehman-like fate.
The institutional securities division—which includes investment banking and fixed income as well as equity sales and trading—drove the better-than-expected $1.32 per share earnings result. Analysts predicted $0.77 per share. Net revenues in institutional securities were $5.91 billion in the quarter, up 19.9 percent from the same time last year, although $745 million of the revenue came from a one-time event: the sale of a stake of MSCI, the famed index maker.
On the retail side, global wealth management posted unavoidably bad numbers—but not terrible, given the market; net revenue of $1.62 billion was down 8 percent from last year, and retail suffered a pre-tax loss of $34 million, due largely to a $277 charge related to auction-rate securities. However, despite the market environment and settlement charges, global wealth management posted an eye-popping $13.7 billion in net new client assets, the unit’s tenth straight quarter of inflows—and the second highest quarterly haul ever.
The asset flows reflect the 280 new FAs that came aboard in the quarter, a 3.4-percent increase from the year before, most of them recruits from other firms. Morgan Stanley’s recruiting success suggests the firm continues to fair the best amid the market turmoil of the last 18 months. (Click here to read Registered Rep.’s July feature story, "Morgan’s Magic.") Indeed, in the earnings call yesterday, management commented that Merrill’s merger announcement with Bank of America was an excellent opportunity, and that they have been “getting a lot of phone calls.” Judging from FA sentiment at Merrill—positive thus far—whether they leave depends somewhat on the size of retention package they’re offered by Bank of America. In the end, Merrill Lynch, UBS, Citi/Smith Barney and Wachovia have all made larger write-downs on assets, posted bigger losses and have endured a greater number of embarrassing newspaper headlines in the past year-and-a-half versus Morgan Stanley. (Click here to view a New York Times interactive chart of write-downs and losses.)
Now, with the stock down 33 percent as of noon today, whether Mack & Company will continue this success as one of two remaining independent investment banks (along with Goldman Sachs) or under the umbrella of a larger institution is the question. Ignoring that noise, Bernstein analyst Brad Hintz likes what he sees: In a report issued today, Hintz says with Morgan’s investment bank second only to Goldman Sachs with higher margin businesses than all its peers (except Goldman Sachs), and the stock trading at 0.85 times Q3 2008 book value, he believes “The stock is attractively priced,” and rates it a market “outperform” with a target price of $60.