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Here's Why Morgan Stanley (MS) Stock is a Strong Sell

Morgan Stanley MS posted an impressive bottom line beat when it released its first quarter earnings on the 18th of April.  The company beat our EPS consensus estimate by 19.57%, but that shouldn’t fool you into feeling bullish about MS stock.

There are some disturbing trends and fundamental metrics which should have you wondering why anyone would want to buy Morgan Stanley’s stock right now.  MS is a Zacks Rank #5 (Strong Sell), and its shares stand to lose some weight over the short term.

The banking sector has been seeing revenues declining due to volatility in the macroeconomic space.  From the energy slump to less activity from speculative investors, the big banks have had it rough.  Take Goldman Sachs GS, for example.  The company saw revenues shrink by 40%, with significant double digit declines across each of its segments compared to the same quarter last year.

Morgan Stanley is no exception, with declines across each of its segments compared to the first quarter of 2015.  Back then, the institutional securities segment accounted for $5.45 billion of the company’s revenues, but it has since shrunk down to $3.71 billion this quarter.  Morgan Stanley’s wealth management business helped to prop up revenues.  Outside of wealth management though, MS saw revenue declines north of 20% in each of its other segments.

Fundamental metrics help to show why Morgan Stanley’s shares don’t look like a great investment option right now.  The company’s current ratio is 0.82, which means that it may have to raise more capital in order to cover its short term liabilities.  The company is already pretty leveraged though, as it has a debt-to-capital of 66.87%.  To put that into perspective, the industry’s average debt-to-capital is just 20.42%.

Sales are projected to see a continued decline over the year, with gross sales expected to drop by 4.66%.  Earnings also have a pessimistic outlook this year, with EPS projected to shrink by 9.92%.  The top and bottom line outlook on the company is rather pessimistic.  Don’t look to this company for a large investment return over the short term.  There are superior gains to be had elsewhere.

Our EPS consensus estimate has been trending lower over the last 90 days.  For the current quarter, our estimate has dropped from $0.76 to $0.65.  It’s not too surprising to see a decline of this magnitude since there have been 14 negative earnings estimate revisions by analysts over the last 60 days.  In that same time span, no analysts have revised their estimates upwards.  Our current year consensus has seen a considerable drop over the last three months as well, going from an estimate of $2.97 to $2.44.

Bottom Line

Morgan Stanley stands out because it scores an “F” on our VGM Score.  This metric is critical to assessing any investment because it takes a weighted average across growth, value, and momentum related metrics.  Morgan Stanley’s Strong Sell rank is justified.  The large banking space in general looks very vulnerable right now, so it would be wise to avoid betting on big financial firms right now.

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