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Morgan Stanley Must Move Past Facebook, Downgrade

Written by: Antoine Gara 07/18/12 - 5:10 PM EDT
Tickers in this article: GS JPM FB C BAC MS

NEW YORK (TheStreet) - After reporting the biggest bank earnings beat in the first quarter, Morgan Stanley(MS) is again an outlier on Wall Street as investors brace for its second quarter results, due on Thursday morning.

In a quarter marked by fast-falling earnings expectations and a multi-billion dollar trading loss at JPMorgan (JPM) , Morgan Stanley encountered among the sector's biggest challenges as an underwriting mandate for Facebook's (FB) initial public offering fell flat and the bank faced the sharpest cuts in a sector-wide ratings downgrade by Moody's.

Now, second quarter results will help to show whether Morgan Stanley is strategically positioned to compete with larger universal banks - potentially putting a floor to battered share prices -- or whether its discount is warranted.

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Morgan Stanley's earnings will reveal the impact of Moody's two notch ratings downgrade on its trading operations compared to peers like Goldman Sachs(GS) and JPMorgan, who have a stronger toehold in key trading businesses. Meanwhile, earnings will also show any fallout from Morgan Stanley's botched Facebook IPO effort, which was hindered by aggressive pricing and flawed execution on the part of Nasdaq (NDAQ) .

"Earlier this year, Morgan Stanley won Wall Street bragging rights for leading the long awaited Facebook IPO. In making their pitch to Facebook, Morgan Stanley bankers promoted their firm's ability to distribute Facebook stock through its retail brokerage distribution channel. But blunders in the pricing process of the new issue have pulled defeat from the jaws of victory in a very public manner," wrote Bernstein Research analyst Brad Hintz, in a May note assessing the fallout of Facebook's botched IPO.

Execution will be on the minds of many as chief executive James Gorman continues to work to prove that he can deliver on Morgan Stanley's retreat from some principal trading businesses and its full force push into wealth management.

"The Morgan Stanley story has been an execution story for a long time," says Morningstar analyst Michael Wong, citing the company's push into brokerage and wealth management operations through its Morgan Stanley Smith Barney joint venture with Citigroup (C) .