Morgan Stanley (NYSE:MS) stands in a very interesting place, as they performed relatively well in the economic conditions it operated in in the last quarter, yet their failure to meet expectations could put pressure on their to increase their risk, yet in a way that could harm the company over the long term. The question is how they will respond to the pressure.
For the last quarter earnings grew to $413 million on revenues of $6.8 billion. Analysts had been looking for $7.8 billion, although the company made significant inroads as last year during the same quarter the company had lost $10.53 billion. On a per share basis the earnings stood at 29 cents a share, while expectations had been for 36 cents a share.
Much of the dissatisfaction comes from the investment banking side of Morgan Stanley’s business, which most feel underperformed in contrast to their competitors, who generated major profits to offset many of their losses in other sectors and divisions of the company.
To me they should take on more the attitude of Warren Buffett and Berkshire Hathaway (NYSE:BRK-A) who have little or no interest in those investing for quick profits by moving in and out of the markets in attempts to time it correctly. That’s why Buffett has resisted splitting the stock for so many years in order to keep that element out of company ownership.
It seems Morgan Stanley isn’t going to go that route though, as they’re already talking of increasing risk sometime soon. Of course there’s nothing wrong with increasing risk as long as its the right type of risk. But to increase risk for the sake of competing with those who are gambling isn’t necessarily a wise move, and could come back to haunt them. What’s wrong with getting steady and solid returns year after year which helps to build wealth on a more predictable level for shareholders?
Now they could lose some short-term players who put a lot of money into the company, but who really cares about that? They could develop the strategy of long-term growth and let those looking for excitement rather than building wealth go to their competitors. They almost assuredly won’t do it, but it is a good strategy if they had the guts to employ it.
Either way, taking into account the fact that most people feel equities pose more risk in 2010 than in 2009, the timing would be more difficult if they respond to the challenge rather than create a plan and stick with it.
Unfortunately possibly for Morgan Stanley, co-president of institutional securities Colm Kelleher said in an interview with Dow Jones that he may move more into larger trades in 2010. That could be a big mistake.
When you consider that Morgan Stanley’s share price has almost doubled since last year to almost $31, you have to wonder why the company may respond to pressure to place high-risk bets in order to placate those who just want short term gains.
I think, as the earnings reports for the week from banks show, is we’re not even close to being out of the water with the deep recession we’ve been in, and to get into large bets during this economic climate is to bet the family farm at a time when they need to focus on keeping it.
It doesn’t matter what investors or shareholders think about what should have been done last year, as that was last year, and the conditions have changed. Equities have skyrocketed over the last year, and whether Morgan Stanley participated in that as they should have is no longer relevant, what is relevant is how they perform under the existing conditions. And contrary to what a lot of media are saying, we are still in a recession, and after a strong year of stock prices going up for little reason, investors of all sorts, including Morgan Stanley, need to be even more cautious as this year promises to be one that will pull back much more in equities, and won’t reach near the levels they did then.
Morgan Stanley would be foolish in my estimation to respond to criticism over last year when those opportunities and conditions are no longer there. They’ve had a good last 12 months and could have another solid twelve months. Morgan Stanley needs to focus on its own strengths and strategy and not worry about what their competitors are doing. As long as they can deliver what they promise the rest doesn’t matter.
