On Friday, Morgan Stanley (MS) announced the redemption of zero maturity coupon notes with a maturity value of 1.5 million pounds.
These notes, having their maturity date on May 12, 2015, command a redemption price of 109% of the total amount. Morgan Stanley will start the redemption effective May 9, 2011.
Earlier in April, Morgan Stanley redeemed step-coupon notes due in 2016 with a redemption amount of $5 million. Similarly, in March, the company redeemed step-coupon notes due in 2028 with the redemption value of $13.25 million.
Earnings Recap
On April 21, 2011, Morgan Stanley released its first quarter 2011 earnings, which outpaced the Zacks Consensus Estimate. The company’s better-than-expected results were primarily aided by a strong investment banking performance. The increase in revenues from Global Wealth Management Group was also impressive.
Additionally, the quarter witnessed strong client franchise and improved performance in many of its businesses. However, reduced top line and higher non-interest expenses were headwinds to the company.
Estimate Revision Trends
Over the last 30 days, 9 out of the 18 analysts covering Morgan Stanley have lowered their estimates for the second quarter, while 3 have moved north. Furthermore, for fiscal 2011, 6 of the 12 analysts have decreased their estimates, while 2 analysts have increased their estimates over the last 30 days.
Currently, the Zacks Consensus Estimate forecasts operating earnings of 62 cents per share for second quarter 2011, which is a 28.67% drop from the year-ago quarter. Also, over the last 7 days, earnings estimates for the second quarter and fiscal 2011 have remained stable.
Our Take
The redemption of notes will provide the company some financial flexibility at this point. We anticipate that these restructuring initiatives to reduce balance sheet risk will improve its valuation over time. Moreover, its inorganic growth initiatives continue to be significant growth drivers.
Nevertheless, Morgan Stanley is facing major challenges with respect to competition and regaining its industry-leading position. Also, there are concerns over its financials being marred by new regulatory restrictions and its inability to enhance shareholder value as the company was not granted the green signal to raise dividend, following the Federal Reserve’s second round of stress tests.
Morgan Stanley currently retains a Zacks # 4 Rank, which translates into a short-term Sell rating. Also, considering the fundamentals, we maintain a long-term “Underperform” recommendation on the stock. However, the company’s close competitor, Citigroup Inc. (C), retains a Zacks # 3 Rank (a short-term Hold rating).
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