Morgan Stanley, the second-biggest U.S. securities firm, reported earnings that beat analysts' estimates, led by record equity sales and trading revenue.
Morgan Stanley rose 6 percent in early New York trading after reporting a 42 percent drop in first-quarter net income, to $1.55 billion, or $1.45 a share. The average estimate for the three-month period ended Feb. 29 was $1.01 a share, according to a Bloomberg survey of 17 analysts.
Chief Executive Officer John Mack, who called the New York- based company's fourth-quarter loss ``embarrassing,'' reported higher profits and return on equity than Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. The better-than-expected results may help allay concern that Wall Street's access to capital is dwindling after Bear Stearns Cos. agreed to a takeover by JPMorgan Chase & Co. for a fraction of its market value.
``With Lehman, Goldman and Morgan all coming out and saying `here's how we're different,' we hope it will get everyone's concerns under control,'' said Ben Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $800 million and sold its Morgan Stanley stock earlier this year. ``Expectations were pretty low for this group, especially after the Bear Stearns news.''
First-quarter equity sales and trading revenue climbed 51 percent to $3.3 billion, the firm said in a statement, compared with a 19 percent drop reported yesterday by Goldman Sachs.
`Challenging' Conditions
``While many of our businesses are facing challenging market conditions that we expect to continue in the months ahead, we are satisfied with how Morgan Stanley navigated the ongoing market turbulence,'' Mack said in the statement.
Morgan Stanley staged its biggest gain in more than a decade yesterday, climbing 18 percent to $42.86 in New York Stock Exchange composite trading, as financial stocks rallied after Goldman and Lehman reported profits and the Fed cut its benchmark interest rate by 0.75 percentage point.
Morgan Stanley's revenue fell 17 percent to $8.3 billion, the company said. Return on equity, a measure of how effectively the firm reinvests earnings, dropped to 19.7 percent from 30.9 percent a year earlier.
``Their return-on-equity number was pretty surprising, especially after what we heard from Lehman and Goldman,'' said Douglas Ciocca, a portfolio manager at Renaissance Financial Corp. in Leawood, Kansas, which manages $1.7 billion, including Morgan Stanley stock.
Fixed Income
Revenue at its fixed-income sales and trading group dropped 15 percent to $2.9 billion, still its second-highest ever, after total asset writedowns of $2.3 billion linked to the collapse of the subprime mortgage market and leveraged loans.
Investment-banking revenue, including a 19 percent increase in fees for takeover advice, fell 10 percent to $1.1 billion. Revenue at the global wealth-management unit increased 6 percent to $1.6 billion.
In asset management, the firm reported a pretax loss of $161 million for the quarter as the unit lost money in real-estate investments and securities issued by structured investment vehicles.
``We have concerns about the capital-market sensitive businesses, a lot of the markets in which they operate are either severely depleted or shut down,'' said William Fitzpatrick, an analyst at Optique Capital Management Inc. in Racine, Wisconsin, which oversees $1.6 billion and sold its Morgan Stanley stock two months ago. ``We wanted out of the investment banks.''
Goldman's Earnings
Goldman, the world's biggest securities firm by market value, yesterday reported its steepest profit decline since 1999 as it took $2 billion of writedowns on loans and mortgages, and as revenue from investment banking and trading declined. The 53 percent drop was less severe than analysts had estimated, and Chief Financial Officer David Viniar said the company's stockpile of cash and liquid assets was ``stronger than it's ever been.''
Lehman gained 46 percent in NYSE trading yesterday after the company said profit fell a less-than-predicted 57 percent. The stock tumbled 19 percent a day earlier on concern it might follow in the footsteps of Bear Stearns. Chief Financial Officer Erin Callan told investors the firm hasn't lost access to so-called repo funding that Bear Stearns was denied by some counterparties, and has ``minimal reliance'' on commercial paper, a type of short-term financing that has dried up since the collapse of the mortgage-bond market.
Emergency Funds
Bear Stearns received emergency funding from the Fed on March 14 after a loss of confidence in the firm's assets led clients to withdraw assets and creditors to stop renewing short- term loans. Over the weekend, the Fed orchestrated and provided financing for a takeover by New York-based JPMorgan, the third- biggest U.S. bank by assets, for about $2.34 a share, compared with a closing price of $57 on March 13.
The Fed said March 16 it would allow brokers to borrow directly from the central bank using a facility traditionally reserved only for deposit-taking institutions.
``The system now in place is significantly better suited to serve the needs of today's financial markets, especially in periods of impaired liquidity and widespread counterparty risk aversion,'' Goldman analyst William Tanona said in a note to investors yesterday. He added Morgan Stanley to his ``conviction buy list'' and told clients the stock could reach $50 in six months.
As of Nov. 30, Morgan Stanley had $118 billion in so-called liquidity reserves, which includes cash deposits with banks and high-quality securities that can be used as collateral, according to a regulatory filing. The reserve included $62 billion at the parent company, $22 billion at bank subsidiaries and $34 billion in non-bank units.
Prime Brokerage
Some of Morgan Stanley's trading businesses, including the prime brokerage unit that serves hedge funds, may win customers from Bear Stearns, said Kenneth Crawford, a senior portfolio manager at St. Louis-based Argent Capital Management LLC, which oversees $900 million and holds Morgan Stanley shares. Goldman said yesterday that revenue from prime brokerage climbed 38 percent from a year ago as the firm won business from new and existing clients.
``Any business that Bear Stearns had probably has gone to someone else,'' Crawford said. ``To the degree that you're one of three competitors instead of four, that's a positive.''
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