According to an e-mailed statement from National Australia Bank Ltd. (NAB), Morgan Stanley (MS) plans to sell Australian dollar-denominated bonds due in May 2015. NAB is acting as a manager in the transaction.
These bonds, with an estimated value of A$500 million, are expected to yield 180-185 basis points more than swap rates.
Earlier in February 2011, Morgan Stanley sold Australian denominated notes worth A$850 million yielding 7.625% with maturity date scheduled in March 2016. The notes were priced to yield 207 basis points more than quarterly swaps or 237.25 basis points more than similar- maturity government bonds.
In May 2011, Morgan Stanley 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.
Moreover, in April 2011, 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 of 46 cents per share, outpacing the Zacks Consensus Estimate of 34 cents. The better-than-expected results were primarily aided by a strong investment banking performance. The increase in revenues from Global Wealth Management Group was quite 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 the headwinds.
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 4 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 stands at operating earnings of 62 cents per share for second-quarter 2011, which is a 28.99% drop from the year-ago quarter.
Our Take
The sale of bonds will provide the company some financial flexibility at this point. In the recent quarters, Morgan Stanley is taking initiatives to restructure its financials to take less balance sheet risk. The performance of its GWM segment as a result of its joint venture with Smith Barney is also improving. We anticipate its restructuring initiatives to reduce balance sheet risk and improve its valuation over time. We expect these factors will be able to reduce its earnings volatility to a great extent. 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. Besides, 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 competitor, Citigroup Inc. (C), retains a Zacks #3 Rank (a short-term Hold rating).
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