Foolish Forecast: Morgan Stanley Gets Ready to Deliver

On Wednesday, Morgan Stanley (NYSE: MS  ) will take the stage to give the details of its most recent quarter.

What analysts say:

  • Buy, sell, or waffle? Twenty analysts currently follow Morgan Stanley. Eleven say the stock is a buy, nine say to stay put, and none suggest getting rid of your Morgan Stanley shares.
  • Revenue. The average analyst estimate calls for $9.4 billion in revenue this quarter, which would be 11% better than the same quarter last year.
  • Earnings. Earnings on average are expected to clock in at $1.88 per share, up from $1.51 last year.

What management says:
Backed by a still-strong economy and a good credit market environment, Morgan Stanley delivered strong results in 2006. Business kicked it up a notch across the board, including in the Discover Card segment, which improved pretax income by 72% and had its best year ever. Discover did so well, in fact, that management decided a long-awaited spin-off was finally in the cards.

CEO John Mack was brought back to Morgan to try to nurse the company back to health after he took a hiatus that included some time running competitor Credit Suisse (NYSE: CS  ) . So far, results seem to be positive, though Mack has had a pretty stiff market tailwind at his back. What will be telling is how the new captain manages steering S.S. Morgan in choppy waters.

What management does:
The results under Mack have been good so far, and the company has shown strong top-line growth and an improved return on equity. Spinning off Discover is expected to "unlock shareholder value," but it's also going to take a bite out of profitability, since it's Morgan's second most profitable business line. Ideally, once rid of the distraction of Discover, management will be able to turn its focus to making the rest of the firm's business lines as efficient and profitable as possible.

Margin

8/2005

11/2005

2/2006

5/2006

8/2006

11/2006

Compensation

45.6%

38.4%

49.3%

41.6%

39.4%

38.9%

Operating

25.1%

30.6%

28.9%

35.5%

33.4%

33.3%

Net Income

2.1%

25.7%

18.4%

21.9%

23.2%

25.6%

Return on Equity

2.0%

22.9%

20.7%

24.3%

21.7%

21.9%

Quarterly data from SEC filings.

What CAPS says:
Morgan Stanley is a lowly two-star stock in the Motley Fool CAPS investing service. The stock has 229 supporters, but there are 27, including nine CAPS All-Stars, who see the stock underperforming. Players who were positive on Morgan also had a soft spot for Apple and Google.

One Fool says:
As with Goldman Sachs (NYSE: GS  ) , Lehman Brothers (NYSE: LEH  ) , and Bear Stearns (NYSE: BSC  ) , all of which reported last week, the subprime loan industry is likely to be a topic of conversation during Morgan's conference call. The firm has exposure to the residential real estate market, but analysts may also be eager to probe the firm on the wider credit market. Now that it's out in the open that subprime is a bona fide mess, the new concern is whether the problems could spread to the broader credit market, which would be a significant problem not only for the investment banks but for the economy as a whole.

I don't see any compelling reason at this point to expect anything different out of Morgan than what we heard from the banks last week. Management will likely soothe investors by assuring them that residential real estate exposure is limited and contained, and that at this point they do not see the subprime problems spreading into other areas of the credit market.

As for results: Morgan will likely put up decent- to nice-looking results, with strong performances coming across the board and maybe a little something extra out of its institutional securities segment. But nobody's really going to care all that much, because they're too concerned about what's happening now and how it will affect the next three quarters.

Fool on:

Think you can pitch your favorite stock -- or ditch your least favorite one -- in 27 seconds or less? That's exactly what we're doing over at Motley Fool CAPS!

Fool contributor Matt Koppenheffer owns shares of Goldman Sachs, but does not own shares of any of the other companies mentioned. You can visit Matt on CAPS here, or check out his CAPS blog here. The Fool's disclosure policy is bold as love -- and if you won't take my word, just ask the axis.


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