Morgan Stanley Downgraded – Analyst Blog

Given the current critical sustainability factor, recently we downgraded our recommendation for Morgan Stanley (MS) to Underperform from Neutral. The company’s fourth quarter earnings were substantially behind the Zacks Consensus Estimate due to losses experienced in fixed income sales and debt-related credit spreads. Moreover, low level of activity witnessed in sales and trading revenues and the financial impact of the company’s joint venture with MUFG that is scheduled to commence in May 2010, casts a cautious outlook in the near term.

 

Additionally, Morgan Stanley has experienced an intense pricing competition in some of its businesses in the recent years. In particular, the ability to execute securities trading electronically on exchanges and through other automated trading markets has increased the pressure on trading commissions. The trend toward direct access to automated electronic markets will likely continue.

 

Moreover, as of March 2010, Morgan Stanley has reportedly slipped to the third position in globally announced and completed mergers and acquisitions, taking a beating from prime rivals Goldman Sachs Group Inc. (GS) (#1) and Credit Suisse Group (CS) (#2). Thus, competitive pressures are likely to affect future revenue growth prospects as its peers may seek to obtain market share by reducing prices.

 

As the global economic environment continues to be more challenging and earnings visibility remains low, cyclical pressures in the weak commercial real estate sector increases concern over the near term and prospects for future returns. This has also resulted in declining assets under management that were $283 billion at December 31, 2009 as compared with $300 billion a year ago. The decline reflects net customer outflows in Morgan Stanley’s money market and long-term fixed income fund.

 

Even macro-economic factors such as low demand, growth in unemployment levels and deteriorating credit quality in the markets have adversely affected the pricing, volumes and interest income in this sector. This has contracted the bottom-line results, thereby substantially shrinking dividend to shareholders, book value per share and return on equity as compared to the last couple of years.

 

Overall, Morgan Stanley’s growth has been negatively impacted by the after-effects of the financial crisis. As a result, the company is facing major headwinds in order to keep pace with its peers and its industry leading position. The company’s exposure to the commercial real estate sector, which is still weak, will remain a cause for concern in the upcoming quarters. Moreover, the recent downgrade in Morgan Stanley s industry position, the critical sustainability of the joint venture with MUFG and absorbing the expenses of the discontinued operations poses a near term cautious outlook on the stock.

 

On Thursday, the shares of Morgan Stanley closed at $30.88, up 2.9%, on the New York Stock Exchange.