Morgan Stanley Deals Its Cards

Shares climbed Tuesday after the financial-services giant announced a plan to spin off its Discover unit

Morgan Stanley (MS) CEO John Mack apparently told investors what they wanted to hear on Dec. 19. The shares rose after the firm announced a spin-off of its Discover credit card unit -- and a fourth quarter profit that was better than expected, though lower than the previous year.

The New York financial-services heavyweight is the latest industry player to benefit from a better environment for stocks, whose prices have climbed since the summer. In spite of worries this year about the slowing U.S. housing market and rising interest rates, the global economy has managed to stay on a steady track.

Morgan Stanley's unit Discover, described by Morningstar earlier this month as "a small fish in the slowing credit card industry," has been doing better. The credit card unit had net revenues of $4.3 billion and income before taxes of $1.6 billion during the year ended Nov. 30, up 72% from fiscal 2005. Discover has taken steps to boost its growth in recent years, like a plan announced in January, 2005, to partner with GE Consumer Finance on a Wal-Mart Discover card.

"The spin-off will allow Discover to continue building on its strong brand and significant scale," Mack, who took over as Morgan Stanley's CEO in 2005, said in a press release Dec. 19. "We also believe the spin-off will unlock considerable value for the shareholders of Morgan Stanley."

Current Morgan Stanley shareholders will get tax-free shares in the proposed spin-off, which is expected to take place in June, July, or August 2007. "We favor the move, and expect Morgan Stanley to reinvest funds previously earmarked for the business in its other operations, which generally produce higher" return on equity, Standard & Poor's equity analyst Matthew Albrecht said in a research note. (S&P, like, is owned by The McGraw-Hill Companies.) Albrecht hiked his fiscal year 2007 earnings estimate, bringing a 12-month target price on the stock up $13 to $88 per share.

Morgan Stanley's stock price gained 3.4% to $83.09 per share in early trading on the New York Stock Exchange Dec. 19.

As far as the firm's overall profits go, Morgan Stanley said its net income was $2.21 billion during the fourth quarter ended Nov. 30, down 10.5% from the same period of 2005. During last year's quarter, Morgan Stanley included items like an after-tax gain of around $700 million from selling its aircraft leasing business.

Even so, the news beat expectations. Morgan Stanley's diluted earnings per share from continuing operations were $2.08 during the recent quarter. The mean analyst estimate had been for $1.77 per share, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

Morgan Stanley isn't the only Wall Street luminary to surprise investors this month with its fourth quarter results. Goldman Sachs (GS) stunned the market on Dec. 12 with news of a $9.5 billion profit for the fiscal year -- the biggest in the securities industry. Bear Stearns (BSC) followed a couple days later with news that its net income climbed to $563 million, up 38% compared to the same period last year.

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