Morgan Stanley’s MS initiatives to focus on businesses that are less dependent on capital markets and strategic buyouts will support financials. However, lower interest rates and elevated expenses are major concerns.
Over the past several years, it has been restructuring operations to focus on reliable revenue sources. Thus, the company is focusing on segments — Wealth Management and Investment Management — that are less dependent on capital markets. Driven by these efforts, aggregate contribution to net revenues from both the segments jumped from 26% in 2010 to 51% in 2019.
The planned acquisition of E*Trade Financial ETFC and Shareworks buyout in 2019 will likely further strengthen the Wealth Management segment’s financials. Also, the company is leveraging the business mix and global client footprint to boost Investment Management’s performance.
As of Mar 31, 2020, Morgan Stanley had a total debt of $407.4 billion, and cash and cash equivalents worth $131.5 billion. Nonetheless, its total debt to total capital of 69.1% at first quarter-end declined sequentially. The figure was also lower than the industry average of 73.9%. Thus, given the earnings strength, Morgan Stanley has lower credit risk and lesser likelihood of default on interest and/or debt repayments if the economic situation worsens.
The Zacks Consensus Estimate for earnings has moved 1.9% and 1.3% upward for 2020 and 2021, respectively, over the past seven days. Also, this Zacks #3 (Hold) Ranked stock has rallied 13.8% over the past year, outperforming the industry’s rise of 4.3%.
However, Morgan Stanley has been witnessing a steady rise in operating expenses, which recorded a four-year CAGR of 5.3% (till 2019). Though costs remained relatively stable in the first quarter, the same is likely to rise, given steadily increasing revenues (leading to higher compensation costs), investment in franchise and inorganic growth efforts.
A major portion of Morgan Stanley’s revenues comes from trading and investment banking activities, whose performance is largely dependent on the overall performance of the capital markets. A challenging operating environment has resulted in volatile client activities, and muted equity/debt issuances as well as mergers and acquisitions activity. With coronavirus-induced slowdown likely to persist in the near term, the company’s future performance depends on market developments and client volumes.
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