Solid Q4 Numbers From Morgan Stanley are Another Step in Bigger Growth Plan
In light of recent earnings reports from peers and rivals like JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC), the fourth quarter numbers from Morgan Stanley (NYSE:MS) posted on Thursday morning weren’t surprising. Indeed, MS stock owners saw some strangely familiar themes — banking business was good, bond trading was poor, and a one-time tax charge took a sizable toll on the GAAP bottom line.
Yet, the results themselves are worth a second, closer look in the context of being part of a very compelling work-in-progress. The revitalization effort begun back in 2013 is still underway, pointing to an impressive 2018 and beyond.
Morgan Stanley Earnings Recap
For the quarter ending in December, brokerage firm Morgan Stanley turned $9.5 billion worth of revenue into net income of $685 million, or a per-share profit of 29 cents. Those profit measures are misleading though. After backing out the one-time tax hit of $990 million related to new corporate tax rules recently put in place, Morgan Stanley actually earned $1.68 billion, for a profit of 84 cents per share of MS stock.
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Analysts were only expecting a top line of $9.2 billion and earnings of 77 cents per share. Morgan Stanley earned 81 cents per share and generated $9.0 billion in revenue during the comparable quarter of 2016.
The company’s hot and cold spots weren’t surprising. Morgan Stanley’s wealth management arm saw 10% revenue growth, in step with major market gains and the resulting renewed interest in equities. Its investment management arm, which is relatively small, grew 27%, lifted by the same rising tide. The only weak spot was its institutional securities division, which saw a modest decline in overall revenue — a decline that was almost entirely attributable to a sharp drop in fixed-income trading revenue. BofA and JPMorgan Chase, along with most other financial institutions, faced similar headwinds.
CEO James P. Gorman commented in the company’s Q4 news release, “Over the course of the full year we achieved the strategic objectives outlined two years ago. In 2017, pre-tax earnings grew by 18%, driven by a 10% increase in revenues, with growth across all our business segments. This, coupled with strong expense discipline demonstrates the Firm’s operating leverage. We enter 2018 with strong momentum aided by rising interest rates, tax reform and an evolving regulatory framework.”
Morgan Stanley is indeed moving into 2018 on the right foot, in more ways than one.
The Best is Yet to Come
While MS met several major milestones last year, the company’s current trajectory says more of the same progress could take shape in the foreseeable future.
One of the key milestones, by the way, was driving the expense ratio to less than 74% for all of 2017.
In 2013, Morgan Stanley embarked on a major effort to cull expenses and tighten its operations. Expenses were 84% of revenue then, but have since been driven down to 73% for all of last year. Conversely, pre-tax margins have widened from 18% then to 25.5% in 2017. Though at 73%, the expense ratio is already near its absolute sustainable low, MS intends to widen its pre-tax profits, planning on margins of between 26% and 28% through next year.
That should mean more money is paid back to owners of MS stock, one way or another, in the shadow of an impressive improvement on the front already. Shareholders were paid more than a quarter of a billion dollars worth of dividends last quarter while stock buybacks hit $5 billion. That $5.4 billion capital return dwarfed 2013’s $800 million figure, but also underscores the trajectory of what Morgan Stanley is giving back to shareholders.
And while the recent tax overhaul cost the investment bank nearly a billion dollars last year, the same tax code is also expected to lower Morgan Stanley’s effective tax rate from 2017’s 31% to a rate of between 22% and 25% for this year.
Looking Ahead for MS Stock
Morgan Stanley did not offer guidance with its fourth quarter and full-year report, but prior to the release of its earnings figures, analysts were modeling revenue of $39.4 billion and earnings of $4.35 per share of MS stock for 2018. Both compare favorably to sales of $37.9 billion and a profit if $3.60 per share for 2018.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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