We are downgrading our recommendation on Morgan Stanley (MS) to Underperform on its weak second quarter results, lower possibility of capital deployment and the expected adverse impact of regulatory restrictions. The MUFG preferred stock conversion resulted in a substantial loss during the quarter, though it enhanced the company's capital cushion.
Moreover, higher interest and non-interest expenses were among the negatives in the earnings report. There are also concerns related to the company's financials being marred by new regulatory restrictions and intense pricing competition.
Our six-month target price of $20.00 equates to about 17.7x our earnings estimate for 2011. Combined with the $0.20 per share annual dividend, this price target implies an expected negative total return of 10.8% over that period, which is consistent with our Underperform recommendation.
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