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Growth Stocks

Building Wealth

By Elliott H. Gue, on Jul. 22, 2013

The Portfolio’s top performer thus far, shares of Morgan Stanley (NYSE: MS) surged after the investment bank reported net revenue of $8.3 billion (excluding the contribution of positive debt revaluations)–up 26 percent from year-ago levels and down 2 percent sequentially. These solid quarterly results reflected double-digit revenue growth in all the firm’s major business lines.

Morgan Stanley’s institutional-securities segment leveraged its ongoing excellence and No. 2 ranking in global initial public offerings and mergers and acquisitions to generate year-over-year revenue growth of 40 percent.

But the big news came from wealth management, which posted its highest profit margins–18.5 percent–since the first quarter of 2008. On the final day of June, Morgan Stanley purchased Citigroup’s (NYSE: C) remaining 35 percent interest in the financial institutions’ former Morgan Stanley Smith Barney joint venture, which has been rebranded Morgan Stanley Wealth Management.

As we explained in the June 19 article, Four Wealth Builders, this acquisition is at the center of CEO James Gorman’s plan to grow wealth management’s profit margins to between 20 and 22 percent by 2016. During a conference call to discuss second-quarter results, management emphasized that this target doesn’t factor in any improvement in markets or uptick in interest rates. Favorable developments on either of these fronts would enable Morgan Stanley to expand wealth management’s profit margins to more than 23 percent.

The financial institution also reduced its risk-weighted assets in fixed income and commodities to $239 billion, putting the firm within striking distance of the $200 billion targeted by management.

Meanwhile, the Federal Reserve Board didn’t object to Morgan Stanley’s plan to repurchase $500 million shares, an announcement that contributed to the stock’s recent upside.

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