Is Morgan Stanley Stock A Good Addition To Your Portfolio?

| About: Morgan Stanley (MS)
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Morgan Stanley's (NYSE: MS) first quarter earnings proved disappointing to shareholders, causing share prices of its stock to fall. Does this mean that MS stock is no longer a good buy? Should investors still consider adding Morgan Stanley shares to their portfolios?

First Quarter Performance

For the first quarter of the year, Morgan Stanley reported consolidated net revenues of $8.2 billion, up 18% from the $6.9 billion from the same quarter last year and 17% from the $7 billion reported in the fourth quarter of 2012. This brought profit for the quarter to $981 million from the $79 billion loss reported in the same quarter last year, and earnings per basic share to $0.49 for the period.

However, the investment bank reported that income from fixed income, commodities and currencies trading for the period fell to $1.5 billion, a 40% decline from the $2.6 billion reported in the same quarter last year. The decline was attributed to weaker trading activity in March due to concerns by traders over the European monetary crisis as well as the Federal budget deadlock.

In contrast, the bank's major rivals reported smaller declines in their fixed trading operations, with Goldman Sachs (NYSE: GS) reporting a 7% decline, the Bank of America (NYSE: BAC), 12% and JP Morgan, five percent. The report of the weaker trading revenue caused Morgan Stanley's share price to fall by nearly six percent from $21.47 to $20.31, the lowest closing level it has reached since January. The share price has since recovered, however, and is up nearly 30% to $26.32 (closing price as of June18).

One piece of good news for the investment bank is its growing wealth management business. For the quarter, Morgan Stanley reported that its global wealth management division earned $597 million in pretax income from its continuing operations, up by 48% from the $403 million reported in the same quarter last year. Analysts see this as an encouraging sign for the future financial health of the bank, since if an increasing amount of its revenue comes from wealth management, it is not only less risky but also generates more revenues that the bank can use to return value to its shareholders in the form of increased dividend payouts and share buybacks. It should also help the bank bridge the valuation discount gap between it and its competitors. At present, Morgan Stanley trades at some 8.1 times estimated 2015 earnings while its rivals are trading at an average of 9.1 times their earnings estimates.

Growth in Wealth Management Business

The problem with Morgan Stanley is not so much that there is anything wrong with its fundamentals, which are solid, but that there is nothing about the bank that particularly excites investors and wants to make them invest in its shares. But there are many things about the bank that investors should consider that indicate that Morgan Stanley is a solid investment. For one, the bank is actually larger than most investors realize. In the Fed's rankings of the top fifty U.S. holding companies, Morgan Stanley ranks sixth, with total assets of $801 billion as of March 31, up nearly three percent from the $781 billion recorded as of year-end 2012.

For another, the bank actually recorded a higher rate of revenue growth compared with its rival-banks. Wells Fargo (NYSE: WFC), for example, revenues fell by some 1.4% during the first quarter while JP Morgan's revenues fell by 4.9 percent. What this indicates is that although these banks may have recorded higher levels of revenue compared with Morgan Stanley, this growth may not be sustainable in the long run if it is not based on increases in revenue. For example, Wells Fargo reported that its income from mortgage banking fell by 3% and its mortgage originations by sixteen percent. If it turns out that the current housing recovery is actually a housing bubble, this could spell trouble for the bank since it is dependent on mortgages for a large share of its revenue. Wells Fargo currently originates some one-third of all the mortgages created in the U.S.

On the other hand, wealth management could be a growing market in the wake of increasing wealth creation in developing economies in the Asia-Pacific region, Eastern Europe and Latin America, although wealth generation continues to be strong in developed regions such as North America, Japan and Western Europe. The total number of millionaire households also grew to 13.8 million last year, the largest number of which were found in the U.S., Japan and China. This creates a great opportunity for Morgan Stanley to expand its business in this area, particularly in developing countries where new millionaires will need wealth managers to help them manage their new riches. China, for example, is expected to have more millionaire households than Japan by 2015; it currently has 1.3 million of these households vs. Japan's 1.5 million.

The Bottom Line

Not every company has to be an attention-grabber in order to be a wise investment choice. There are many companies that actually work under the radar, quietly generating revenues for its shareholders without the need to constantly hog the headlines. Morgan Stanley is one such company, with its insistence on adhering to conservative banking practices in earning profits for its clients. In addition, it is actively working to reduce the number of risk-valued assets in its portfolio to adhere to the guidelines in Basel III. As of the first quarter of the year, it reduced these risky assets to $253 billion, which means it is on track to meet its target of $255 billion for 2013.

Finally, many hedge fund managers remain bullish on Morgan Stanley stock. For example, Eagle Capital Management reported that it had some $632 million worth of MS shares in its portfolio, accounting for nearly 4% of its total 13F portfolio, while Pzena Investment Management had $253 million or close to two percent of its portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.