Morgan Stanley’s (NYSE:MS) stock price and business have struggled so far this year. The stock is down 22% and the company is planning significant numbers of layoffs to cut costs. The fallout from the mismanaged IPO of Facebook (NASDAQ:FB), for which Morgan Stanley served as lead underwriter, has also tarnished the company’s brand and may reduce future investment banking revenue. The bank, which like others also participates in wealth management, asset management, and market making, also must confront the possibility of a global slowdown. This news makes the stock look unattractive, but given the fall in its price a value investor may consider it a buy at the $12.50 level.
Morgan Stanley’s travails have been bad news for Eton Park Capital, managed by Eric Mindich (who became a partner at Goldman Sachs at the age of 27 due to his production at the firm). At the end of March Eton Park owned 15 million shares of the company, and this was an increase since the beginning of the year (though the fund owned as many as 23 million shares last summer). Billionaire Ken Fisher’s Fisher Asset Management initiated a position of over 12.4 million shares in the first quarter (find out what other stocks Fisher likes). These managers doubled down on and got into the stock with very poor timing, as MS was actually up on the year at the end of the first quarter and has since fallen about 35%.
The company’s first quarter likely served as a catalyst for the decline in share price. MS reported a loss of six cents per share, compared to analyst expectations that earnings would be 44 cents per share. Revenues from investment banking, principal transactions, and commissions all dropped by over 10% while expenses, including compensation, rose. This suggests that Morgan Stanley’s cost-cutting layoffs are overdue if growth in compensation has not resulted in even keeping company revenue stable. The bank also missed earnings in the second quarter by over 30%, suggesting that Morgan Stanley’s problems are systemic.
As an investment bank rather than a financial supermarket that balances investment and retail activities, MS’s principal peer is Goldman Sachs (NYSE:GS). Even given its own public relations difficulties over the past few years and its exposure to the same macro factors faced by Morgan Stanley and other investment banks, GS boasts a superior brand and this advantage carries through to its being profitable and beating earnings expectations in the first two quarters of the year. GS thus trades at a somewhat higher multiple of both its earnings and book value than MS does (14 and 0.7 vs. 10 and 0.4) as the market expects some combination of better business performance and a more reliable asset book.
Last week, Jamie Dimon bought back a large number of shares of J.P. Morgan Chase (NYSE:JPM) (read more about the JPM CEO’s move). While it is possible that he did so because of factors particular to JPM, and while JPM does have a sizable retail banking presence in Chase, it is also possible that Dimon believes the headwinds facing the banking industry are not as severe as the financial markets have judged with respect to financial stocks. We see the beginnings of a value case for MS but worry about a business that fails to at least come close to analyst estimates for two quarters in a row, as well as the financial sector generally. We therefore advise value investors to keep a close eye on Morgan Stanley’s business performance and cost-cutting plans.