STOCK WATCH


Morgan Stanley: Revival?

A new CEO could be injecting new life in this investment bank.



In June 2005, John Mack took the helm of Wall Street investment bank Morgan Stanley and vowed to revive its operations, including an underperforming brokerage unit and flagging asset-management business. Mack took the chief executive post after a shareholder revolt, motivated by years of disappointing performance, pushed Philip Purcell out of the job.

A year later, it appears that Mack's magic may be working. The firm stunned Wall Street on Wednesday with its second-quarter results: Earnings more than doubled, to $1.86 per share -- up from 86 cents in 2005's second quarter. Those results blew past analysts' expectations of $1.45 per share. Meanwhile, revenues soared 48%, to $8.9 billion, driven by gains in nearly every business.

The earnings release sent Morgan Stanley's stock (symbol MS) up 4.3% on Wednesday. The stock added another 53 cents on Thursday, closing at $60.01. Some analysts took the news as a sign that Mack's turnaround efforts are starting to pay off. Prudential analyst Mike Mayo upgraded the stock from neutral to "overweight," with a 12- to 18-month price target of $65. "Overall, we had a positive meeting with [Mack] a couple of months ago and now we see better results to back up his optimism," Mayo wrote.

Morgan Stanley's shares trade at just 11 times the $5.47 a share that analysts expect the firm to earn during the fiscal 2007 year, which ends next November, according to Thomson First Call.

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The lion's share of Morgan Stanley's revenue increase came from its primary business, institutional securities, a unit that has "seemingly good momentum," Mayo wrote. Revenue in that business rose 71%, to $5.7 billion, fueled by more stock sales and trading, as well as increased bond and commodity trading. Morgan Stanley's other businesses -- asset management, credit cards, and retail brokerage -- all saw modest gains. Mayo says he thinks these units are "at worst, stabilizing, if not getting somewhat better." The firm's asset management group posted a 13% revenue increase, while sales in its retail brokerage unit grew 14%. Revenue from the Discover credit card unit rose 34%.

Prashant Bhatia, a Citigroup analyst, wrote in a letter to clients Thursday that the second-quarter results "continue to demonstrate that Morgan Stanley management is successfully executing its growth plan." Bhatia reiterated his buy rating on the stock and 12-month price target of $75.

Morgan Stanley isn't the only major Wall Street investment bank to post eye-popping second-quarter results. Rivals Goldman Sachs, Bear Sterns, and Lehman Brothers all reported sharply higher earnings verses the year-earlier period.




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