MCSI: Quarterly Report Leads to Selling

MCSI INc. (MXB) is a recent spinoff from Morgan Stanley (MS).  The company has been trading since November as its own unit but is still under the shadow of Morgan which holds 100 million shares of the company.  As MXB released its quarterly report, there was a simultaneous announcement by Morgan Stanley that it will sell roughly half of its remaining shares.  The news was met with frustration as current shareholders sold in front of the glut of supply that will hit the market in the form of Morgan Stanley’s shares.

The earnings report by itself was not a significantly negative piece.   Revenue continues to grow albeit relatively slower due to a challenging equity environment.  The majority of the company’s revenue is tied to MCSI’s indices which are licensed to ETFs as well as individual mutual funds.  At this point assets within those ETFs continue to grow but the growth comes primarily from new capital being allocated to these ETFs and not to a large degree from actual capital gains within those funds.  A global recession and an environment that is not at this point rewarding those who diversify will likely continue to be a headwind that will make growing capital under management quite a challenge.

Currently the stock is trading at a healthy multiple of a bit over 30 times this year's expected earnings.  The bull camp points to strong historical earnings growth and expects the trends to remain intact.  The bear camp will likely look to the separation from Morgan Stanley as a weakness as the company will need to stand on its own legs without the benefit of the talented experienced management team at MS, not to mention the resources the company had at its disposal.  Debt levels continue to weigh on the company as evidenced by its interest expense line item, and the fact that the parent company is selling such a large piece of its holdings is certainly not a ringing endorsement.

This site has mentioned many times how a declining economic environment will lead investors to take less risk and assign lower multiples even to growth stocks so I will spare readers the repetition.  Suffice it to say that there is danger of lower earnings expectations combined with contraction in the overall multiple which could have a significant effect on the stock price.  With its relatively short trading history and the huge amount of supply hitting the market, I would use caution in owning this stock.

Disclosure: Author has a short position in MXB.