Morgan Stanley (MS) Up 9.2% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Morgan Stanley (MS). Shares have added about 9.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Morgan Stanley due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Morgan Stanley's Q3 Earnings Beat Estimates, IB Subdued
Morgan Stanley’s third-quarter 2023 earnings of $1.38 per share handily surpassed the Zacks Consensus Estimate of $1.27. However, the bottom line reflects a decline of 6% from the year-ago quarter.
Bucking the industry-wide trend, Morgan Stanley posted decent trading performance during the quarter. Fixed-income trading revenues decreased 11%, while equity trading income was up 2% year over year.
Moreover, as expected, the performance of the investment banking (“IB”) business was not very impressive. While equity underwriting fees increased 9%, fixed income underwriting income was down 31% and advisory fees tanked 35%. Therefore, total IB fees (in the Institutional Securities division) decreased 27% from the prior-year quarter.
Also, despite a significant increase in interest income (driven by higher rates), the company’s net interest income (NII) declined on substantially higher interest expenses.
Higher expenses and provisions were the other headwinds in the quarter.
Net income applicable to common shareholders was $2.26 billion, down 9% from the year-ago quarter. Our estimate for the metric was $2.1 billion.
Revenues Improve, Expenses Rise
Net revenues were $13.27 billion, up 2% from the prior-year quarter. The top line also beat the Zacks Consensus Estimate of $13.08 billion.
NII was $1.98 billion, down 21% year over year. We had projected NII of $1.94 billion for the third quarter.
Total non-interest revenues of $11.3 billion increased 8%. Our estimate for the metric was $11.12 billion.
Total non-interest expenses were $10 billion, up 5%. Our estimate for expenses was $9.94 billion.
Provision for credit losses was $134 million in the third quarter, up significantly from $35 million in the prior-year quarter. Our estimate for the metric was $90.1 million.
Quarterly Segment Performance
Institutional Securities: Pre-tax income was $1.2 million, down 26% from the prior-year quarter. Our estimate for the same was $981.2 million.
Net revenues were $5.67 billion, down 3%. The downside resulted from a fall in advisory revenues, fixed-income underwriting and fixed-income trading revenues. We had projected total revenues to be $5.33 billion.
Wealth Management: Pre-tax income totaled $1.71 billion, up 4% year over year. Our estimate for the same was $1.90 billion.
Net revenues were $6.4 billion, up 5%, driven by higher asset management revenues and transactional revenues. We had projected total revenues of $6.59 billion.
Total client assets were $4.79 trillion as of Sep 30, 2023, up 16% year over year. We had projected the metric to be $4.84 trillion.
Investment Management: Pre-tax income was $241 million, jumping substantially from $116 million in the year-ago quarter. Our estimate for the same was $152.6 million.
Net revenues were $1.34 billion, up 14%. The improvement was attributable to a rise in asset management and related fees, and performance-based income and other income. We had projected total revenues of $1.27 billion.
As of Sep 30, 2023, total assets under management or supervision were $1.39 trillion, up 9% from Sep 30, 2022. Our estimate for the metric was $1.42 trillion.
Capital Position Improves
As of Sep 30, 2023, the book value per share was $55.08, up from $54.46 in the corresponding period of 2022. The tangible book value per share was $40.53, up from $39.93 as of Sep 30, 2022.
Morgan Stanley’s Tier 1 capital ratio (advanced approach) was 18.1% compared with 17.1% in the year-ago quarter. Common equity Tier 1 capital ratio was 16.1%, up from 15.2% a year ago.
Share Repurchase Update
In the reported quarter, Morgan Stanley repurchased 17 million shares for $1.5 billion.
2023 Outlook
Management anticipates incurring nearly $325 million of additional integration-related costs. These are likely to be evenly spread across quarters, with almost two-third related to E*Trade and one-third related to Eaton Vance. At the end of Sep 30, 2023, integration of E*Trade was completed, and the company expects approximately $68 million of the above-mentioned charges to be incurred in the fourth quarter.
Management expects NII to trend lower in the fourth quarter on a sequential basis.
The tax rate is expected to be almost 23%.
Long-Term Objectives
The company expects an ROTCE of 20% or more. The efficiency ratio is expected to be less than 70%.
For the WM segment, the pre-tax margin is projected at more than 30%. Across the WM and IM segments, total client assets are expected to be $10 trillion.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -8.76% due to these changes.
VGM Scores
At this time, Morgan Stanley has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Morgan Stanley has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Morgan Stanley is part of the Zacks Financial - Investment Bank industry. Over the past month, The Charles Schwab Corporation (SCHW), a stock from the same industry, has gained 7.3%. The company reported its results for the quarter ended September 2023 more than a month ago.
The Charles Schwab Corporation reported revenues of $4.61 billion in the last reported quarter, representing a year-over-year change of -16.3%. EPS of $0.77 for the same period compares with $1.10 a year ago.
The Charles Schwab Corporation is expected to post earnings of $0.70 per share for the current quarter, representing a year-over-year change of -34.6%. Over the last 30 days, the Zacks Consensus Estimate has changed -4%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for The Charles Schwab Corporation. Also, the stock has a VGM Score of D.
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