When Will Morgan Stanley's Upturn in Investment Banking Materialize?

* Morgan Stanley shares are pulling back, we have our eye on the shares and are closely watching the $82-$84.25 support levels

* While Morgan delivered solid December quarter results, we continue to wait for the eventual upturn for its investment banking business.

* In the near term, management will focus on post-acquisition savings to drive further margin improvement

Shares of Action Alerts PLUS holding Morgan Stanley (MS)  were pulling back following the company's December quarter results that beat consensus expectations, but the management's earnings call comments suggest the upturn in investment banking has yet to emerge.

Given what we've seen of late, especially with the IPO market, doesn't make that comment about investment banking activity much of a surprise to us. Odds are some expected a quicker rebound as they were caught up in the market melt-up in November and December, but that is now hitting a sobering moment. That means we should see some rejiggering lower for revenue and EPS expectations later today and tomorrow, which is likely to push MS shares even lower.

The shares continue to have strong support between $82-$84.25, and we're inclined to add to our MS holdings as they approach that level. While we want to own MS shares for the eventual rebound in investment banking, we will remain disciplined investors.

Until we see that eventual upturn, the company's business will be driven by its Wealth and Investment Management businesses. Assets across those two businesses totaled $6.6 trillion and management reaffirmed its goal of $10 trillion. Hitting that target will include capturing greater asset dollars as Morgan continues to win over new clients, but there is no denying the large asset growth from $2 trillion before 2015 was acquisition related. It will likely take at least one or two more acquisitions to hit that target, and while management was rather mum on the subject it conceded it would be open to opportunities, especially those outside of the US.

Morgan has done a solid job integrating E-Trade, Eaton Vance, Smith Barney and other acquisitions. On the earnings call, management shared there is more work to be done post integration. We interpret this as wringing out more cost and synergies, which means profitability and margin improvement will be a focus of the new leadership. While a company can't cut to growth, steps to make the company more efficient now mean greater leverage and profits later, especially when investment banking rebounds. Could this take the form of some layoffs at Morgan Stanley? Possibly, especially given the recent wave of layoffs we've seen at Citigroup (C) and other companies.

On the housekeeping front, Morgan repurchased $1.3 billion in shares during the December quarter, leaving more than $17 billion under its current program. Given the year-end run in the shares, we don't blame Morgan for not being more aggressive with that program, but with the shares pulling back near term, we could see that activity pick back up.

Morgan also declared its next $0.85 per share quarter dividend will be paid on February 5 to shareholders of record on January 31. At the current share price that's a 3.9% annualized dividend yield, and another reason we would look to pick up the shares as they move closer to the support levels we've outlined above.

Action Alerts PLUS is long MS.