Stock Picks: MS Up, LMT Down

Investors banked on Morgan Stanley (MS) shares Wednesday after the investment bank snapped a three-quarter losing streak.

Wall Street's second-largest investment bank posted earnings of 38 cents a share, down from $7.38 a share in the year-ago quarter. But Wall Street analysts expected only a 27-cents-a-share profit; the recent market rally helped boost Morgan Stanley’s proprietary trading revenues and those revenues went straight to its bottom line. The bank allocated $5 billion for compensation during the third quarter, about $100 million less than last year. Rival Goldman Sachs (GS) made headlines for designating $5.4 billion in bonus money during the same quarter.

Chief Financial Officer Colm Kelleher said Wednesday that the bank is successfully reworking its business model and has repaid government loans through the TARP program. He said the cautious strategies that allowed Goldman and JPMorgan Chase (JPM) to post profits in earlier quarters were now paying off.

"We continue to be well positioned in and are capitalizing on the recovery in global capital markets while not limited by large loan portfolio or direct consumer exposure," he said on a conference call.

That was good news to Deutsche Bank analyst Michael Carrier.

"Overall, given some nervousness from investors heading into the quarter, we expect this to be something of a relief and the stock to do relatively well. While Morgan Stanley has more work to do, we like the progress," he wrote Wednesday.

William Blair & Co analyst Mark Lane said Morgan Stanley beat his estimate through stronger trading results and a higher margin within global wealth management, though some of that was offset by continued disappointing losses within asset management including further real-estate-related write-downs.

"The one remaining area of concern is commercial mortgages. Although the exposure is proving a drag on results, it is manageable in the context of the firm’s strong capital position, in our opinion," he wrote, noting $400 million in total real-estate-related write-downs for the quarter. "We see value in the stock, and Morgan Stanley’s business profile stands apart from some of
its major commercial and regional bank peers."

Bottom Line: Buy
Financial stocks will benefit from an improving economy early, and Morgan Stanley's methodical approach has it poised for growth.

Shares of defense contractor Lockheed Martin (LMT) lost altitude Wednesday after it warned that cutbacks in military aircraft spending prompted it to lower its 2010 outlook.

Lockheed reported a third-quarter profit of $2.07 a share, up from $1.92 a share a year ago. That included a four-cents-a-share loss from pension adjustments after a tax benefit. A year ago, Lockheed had a 12-cents a share gain. Revenue rose to $11.1 billion from $10.6 billion.

Wall Street analysts expected earnings of $1.83 a share on revenue of $11.4 billion. This year, Lockheed has lost key contracts, including the U.S. presidential helicopter; cutbacks in spending on the F-16 and F-22 fighter planes are expected to crimp its sales next year. Lockheed said it now expects earnings of $7.05 to $7.25 a share on revenue of $46.3 billion to $47.3 billion. Analysts forecast earnings of $7.89 a share and revenue of $47.6 billion.

" Our customers must, out of necessity, fundamentally re-evaluate their priorities and examine how they spend money,” CEO Bob Stevens said on a Wednesday conference call. “This re-evaluation has created a considerable amount of uncertainty across the industry as to which programs would be continued, and which would not, particularly with the transition to a new administration."

The news prompted Collins Stewart analyst James McIlree to cut his rating on the stock to Hold from Buy. "We believe the over-budget pressure and the company's lack of exposure to commercial business leveraged to a recovering economy will also limit earnings per shares and multiple upside," McIlree wrote.

Oppenheimer & Co. analyst Myles Walton said a ramp-up on the Joint Strike Fighter project could help the company, but he was concerned about the 2010 outlook. "Although investors were set up with low expectations, there was no relief rally given the disconnect from consensus came from a number of sources and included the cash outlook as well," he wrote. "Overall, we believe management used the quarter to reset expectations and tee up a return to the beat-and-raise strategy it has mastered in the past few years."

Bottom Line: Sell
It's the wrong time to bet on defense spending as the Obama administration directs funds from major weapons systems and tries to corral a rising deficit.