Morgan Stanley Shuffles Executives

Yesterday, Morgan Stanley (MS) announced that Ms. Sophia Drossos has been appointed as a senior investor of the company’s Investment Management unit.

Though, the news was announced through Morgan Stanley’s internal memo yesterday, the appointment had been made on August 16. The memo also stated that Mr. Edward Riguardi has become a member of Investment Management unit’s research team.

Ms. Drossos, who joined Morgan Stanley in July 2003, was earlier a co-head of the company’s foreign exchange strategy. She had earlier worked for the Federal Reserve Bank of New York’s markets group, the U.S. Department of State and the Federal Reserve board of governors. Mr. Riguardi had joined Morgan Stanley in August 2008 as an analyst.

In December 2009, Mr. Gregory Fleming had been appointed as the president of MSIM unit. He was the president and chief operating officer at Merrill Lynch & Co. before it was acquired by Bank of America Corporation (BAC) in early 2009.

These executive changes are a part of Morgan Stanley’s initiative to enhance the performance of its Investment Management unit. Since the financial crisis, the unit continues to suffer from significant losses.

Earnings Recap

Morgan Stanley’s second quarter 2010 earnings came in at 80 cents per share, substantially ahead of the Zacks Consensus Estimate of 47 cents and the loss of $1.36 in the year-ago quarter.

Results in the quarter were aided by robust top-line growth, resulting from higher trading revenues, commissions, asset management fees and improved interest income. Net revenues for the reported quarter were positively impacted by gains made in Morgan Stanley’s debt-related credit spreads. However, higher compensation and non-compensation expenses were the downside.

Estimate Revision Trends

Over the last 30 days, 3 of the 18 analysts covering Morgan Stanley have downgraded the estimate for the third quarter of 2010. Currently, the Zacks Consensus Estimate for the third quarter is operating earnings of 56 cents per share, an increase of 46.64% from the year-ago quarter.

For the full year 2010, 2 out of 18 analysts have reduced their estimates, while only 1 upward revision was witnessed. The Zacks Consensus Estimate for full year 2010 is operating earnings of $2.99, up 421.5% from the prior year.

Our Take

Morgan Stanley is facing major headwinds to maintain its competitive edge and regain its industry leading position after the financial crisis. However, we believe that the company has the potential to realize the full benefits of its strategic and cost-cutting initiatives. Moreover, inorganic growth initiatives with a healthy balance sheet continue to be significant growth drivers.

Morgan Stanley currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.

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