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Morgan Stanley Has More Downside Risk

Fixed-income strength is baked into Morgan Stanley's share price. If the firm slips up, the stock will tank. If not, the shares are unlikely to rise significantly.
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Morgan Stanley

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shares would seem to have far more risk to the downside than upside as the securities firm prepares to report first-quarter earnings Wednesday.

As is almost always the case with securities firms,

fixed-income trading

, which Morgan Stanley and other banks lump in with currencies and commodities, will be the deciding factor. Following strong results in this area from

JPMorgan Chase

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Bank of America

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Goldman Sachs

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, similar strength from Morgan Stanley is already baked into the firm's share price. So if Morgan Stanley somehow slipped up, the stock will tank. Otherwise, the shares are unlikely to rise significantly.

Morgan Stanley is expected to earn 57 cents a share, according to the average of 22 analysts surveyed by

Thomson Reuters

. That would be the same number it reported in the first quarter of 2009 and an improvement over last quarter's 14-cent gain. Most analysts do not constantly refresh their estimates, however, and if the analysts were surveyed again today they would probably come in higher since Morgan Stanley's rivals have done so well.

Sandler O'Neill analyst Jeff Harte expects Morgan Stanley to post $2.3 billion in fixed-income trading revenue, which would be double a fourth quarter that was weak throughout the industry and 4% higher than a year ago, when Morgan Stanley lagged nearly all of its peers in fixed-income trading. Since then, the firm has beefed up its trading desk and is taking more risk.

Trading aside, Morgan Stanley is expected to see weak investment banking revenue, mirroring its peers. Many deals that have been announced and fees the banks have collected occurred too late to make it into first quarter numbers, but are expected to show up next quarter.

Wealth management is a big part of Morgan Stanley's strategy going forward, following the bank's acquisition of a controlling stake in Smith Barney from Citigroup. James Gorman, who took over as CEO from John Mack at the start of the year, has a wealth management background, and big things are expected from him in this business. However, those results are not expected to be a big driver of earnings yet.

Still, analysts at Societe Generale say they will be keeping an eye on how the takeover is progressing. Societe Generale analysts estimate integrating the business with Morgan Stanley's legacy wealth management unit will cost $450 million in 2010. Morgan Stanley is also targeting $1.1 billion in synergies by 2011, according to the Societe Generale report.

Expect compensation to be low for Morgan Stanley, following

vows by Gorman to rein it in

, and the restraint demonstrated by Goldman in recent quarters. Goldman set aside just 43% of its first-quarter revenue for compensation, the lowest ratio in the company's history. Last quarter, Goldman set aside no additional cash compensation, funneling all pay accrued during the quarter into stock-based awards.


Written by Dan Freed in New York