It has been about a month since the last earnings report for Morgan Stanley (MS). Shares have added about 12.8% 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 drivers.
Morgan Stanley Q3 Earnings Top on Bond Trading, Advisory
Better-than-expected capital markets performance drove Morgan Stanley’s third-quarter 2019 adjusted earnings of $1.21 per share, which outpaced the Zacks Consensus Estimate of $1.10. Also, the figure increased 3% from the year-ago quarter. Results in the reported quarter excluded net discrete tax benefit.
Morgan Stanley recorded a rise in trading and investment banking revenues. Specifically, fixed income trading income jumped 21%, while equity trading income witnessed a fall of 1%. Overall trading revenues grew 10%.
Now coming to investment banking performance, advisory fees increased 8% and underwriting income was up 4%. Notably, improvement in underwriting income was driven by higher debt underwriting revenues (up 15%), partially offset by 9% fall in equity underwriting fees.
Further, higher net interest income, driven by rise in loan balance, supported the top line.
However, operating expenses witnessed a rise.
Net income applicable to Morgan Stanley was $2.17 billion, up 3%.
Trading, Investment Banking Aid Revenues, Costs Rise
Net revenues amounted to $10.03 billion, up 2% from the prior-year quarter. Also, the top line beat the Zacks Consensus Estimate of $9.68 billion.
Net interest income was $1.22 billion, up 30% from the year-ago quarter. This was largely due to a rise in interest income, partially offset by higher interest expenses.
Total non-interest revenues of $8.81 billion dipped 1% year over year.
Total non-interest expenses were $7.32 billion, up 4%.
Decent Segmental Performance
Institutional Securities: Pre-tax income from continuing operations was $1.31 billion, decreasing 16% year over year. Net revenues were $5.02 billion, up 2%. The rise was mainly driven by higher trading income and investment banking revenues, partially offset by significant decline in investment revenues.
Wealth Management: Pre-tax income from continuing operations totaled $1.24 billion, up 4%. Net revenues were $4.36 billion, down 1% year over year as decline in transactional revenues and lower net interest income were partially offset by higher asset management revenues.
Investment Management: Pre-tax income from continuing operations was $165 million, surging 62% from the year-ago quarter. Net revenues were $764 million, up 17%. The increase was mainly driven by rise in asset management fees and investment revenues.
As of Sep 30, 2019, total assets under management or supervision were $507 billion, up 8% on a year-over-year basis.
Strong Capital Position
As of Sep 30, 2019, book value per share was $45.49, up from $40.67 as of Sep 30, 2018. Tangible book value per share was $39.73, up from $35.50.
Morgan Stanley’s Tier 1 capital ratio was 18.4% compared with 19.0% in the year-ago quarter. Tier 1 common equity ratio was 16.2%, down from 16.7%.
Share Repurchase Update
During the reported quarter, Morgan Stanley repurchased shares worth $1.5 billion. This was part of the company's 2019 capital plan.
The company believes that “a low rate and a declining rate environment” is likely to adversely impact NII, partially offset by higher loan balances.
Management set an efficiency ratio target of less than 73% for 2019.
For the WM segment, NII growth is expected to be in line with the loan growth (which is projected to be mid-single-digits) in 2019. Also, the company expects margins of 26-28%.
The company expects 2019 effective tax rate to be relatively similar as 2018 level.
Over the medium-term, management targets a return on equity of 10-13% and return on tangible common equity ratio of 11.5-14.5%. The company looks to achieve 100% payout ratio going forward, subject to regulatory approval and any acquisition opportunities.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted 5.11% due to these changes.
At this time, Morgan Stanley has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision 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.
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