Updated from 8:39 a.m. EDT
After almost a year at the firm, John Mack is making good on his promise to lead a turnaround at
On Wednesday, Morgan Stanley became the fourth big brokerage in 10 days to overshoot Wall Street's estimates as strong equity and fixed-income trading lifted profits an eye-popping 111% from a year ago. Meanwhile, the firm's second-string divisions -- asset management and global wealth management -- showed promising results, giving hope to Wall Street as a market correction looms.
In the second quarter, Morgan Stanley earned $1.96 billion, or $1.86 per share, compared with $928 million, or 86 cents a share, a year ago. Second-quarter revenue rose 48% to $8.9 billion. On average, analysts were forecasting earnings of $1.45 on sales of $7.87 billion in the most recent quarter.
"I could not be more pleased with the outstanding results the employees of Morgan Stanley delivered in the second quarter," Mack, the CEO, said in the release. "There is still a great deal of work to be done, but we are moving aggressively on many fronts and we see significant opportunities to create shareholder value."
Shares were up $2.83, or 5%, to $59.85 in early trading. Its report lifted shares of its competitors.
was up $3.19, or 2.2%, to $148.45,
was up $2.02, or 1.5%, to $134.16, and
was up $1.31, or 2.1%, to $63.68.
Like the other brokerages that reported last week, Morgan Stanley's trading division was its most impressive. Trading revenue, which includes equity and fixed-income trading, rose 108% to $3.7 billion in the quarter. Equity sales and trading and equity underwriting hit its highest level in six years, Morgan Stanley said. Fixed-income sales and trading revenue was up 95% to $2.4 billion from the same period last year. Investment banking revenue was also strong last quarter, up 39% to $1.1 billion.
Revenue from commodity trading was down from the record levels of last quarter, David Sidwell, executive vice president and chief financial officer, said on the earnings conference call, but remain strong.
The company "delivered these results...in an environment that became notably more challenging in the final weeks of the quarter," Sidwell said on the earnings call.
The company took on more risk on its own in-house investments. The aggregate average trading "value at risk," -- the metric which shows how much money the firm could theoretically lose in one day of trading -- was $96 million in the quarter, compared with $87 million in the second quarter of 2005 and $84 million in the first quarter of 2006.
But Wall Street was pleased with the performance of the company's other divisions as well. That's particularly gratifying to Mack, who spent much of his first year on the job trying to beef up asset and wealth management. Among others, Mack hired industry veteran James Gorman from Merrill Lynch to head global wealth and making numerous hires and a bolt on acquisition within the asset management group.
While the performance of these two groups this quarter were shadowed by the firm's trading desk, their relative success is good news for fans of balance at the firm.
The asset management group posted a 13% increase in net revenues from the same quarter last year to $723 million. It is still a work in progress, and funds continue to flow out of the group. But management has said they are determined to make the division work, and the company has made a number of changes to back up its commitment. During the quarter, the firm launched nine new products, made numerous firm hires within the group, and acquired Oxhead Capital Management, an equity-based hedge fund. Just last week, Morgan Stanley said that it raised $1 billion for the alternative investments business.
"We still saw net outflows, which isn't good, but it's still better than last quarter," says Jeffrey Harte, equity analyst at Sandler O'Neill. "All in all, revenues were pretty good; the revenue upside came from investment gains as opposed to fees. But if you take that out, Morgan Stanley was in line with my expectations, which is good."
The global wealth management group, which is in its first year under the leadership of industry veteran Gorman, saw revenue rise 14% to $1.4 billion from the same quarter last year.
"The revenue was a nice upside surprise in global wealth management. The revenue was a little more than I was expecting, which is always nice to see," Harte says. "It's a step in the right direction."
Elsewhere, revenue in the firm's Discover division, which manages credit card loans, rose 34% from the second quarter last year to a record $1.19 billion.
To view Lauren Silva's video take on this article, click here