It has been about a month since the last earnings report for Morgan Stanley (MS). Shares have lost about 7.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Morgan Stanley due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Morgan Stanley Q3 Earnings Beat on Solid Underwriting
Surprisingly solid underwriting performance and decent trading income drove Morgan Stanley's third-quarter 2018 earnings of $1.17 per share, which easily outpaced the Zacks Consensus Estimate of $1.00. The figure also reflected 26% jump from the prior-year quarter.
Strong growth in equity underwriting fees (up 62%), debt underwriting revenues (up 15%) and higher revenues from equity trading (up 7%) more than offset weaknesses in bond trading and advisory businesses. Further, net interest income recorded an increase, driven by higher interest rates and loan growth.
Also, the company's capital ratios remained strong. However, operating expenses recorded a rise.
Net income applicable to Morgan Stanley was $2.1 billion, up 19% year over year.
Trading, Investment Banking Aid Revenues, Costs Rise
Net revenues amounted to $9.87 billion, a rise of 7% from the prior-year quarter. In addition, the top line surpassed the Zacks Consensus Estimate of $9.53 billion.
Net interest income was $936 million, jumping 20% from the year-ago quarter. This was largely driven by a rise in interest income, partially offset by higher interest expenses.
Total non-interest revenues of $8.94 billion grew 6% year over year, primarily supported by improvement in trading and investment banking.
Total non-interest expenses were $7.02 billion, up 5% year over year.
Quarterly Segmental Performance
Institutional Securities: Pre-tax income from continuing operations was $1.56 billion, increasing 26% year over year. Net revenues of $4.93 billion grew 13% from the prior-year quarter. The rise was mainly driven by higher trading income and underwriting revenues.
Wealth Management: Pre-tax income from continuing operations totaled $1.19 billion, up 7% on a year-over-year basis. Net revenues were $4.40 billion, increasing 4% from the prior-year quarter, driven by higher asset management revenues and net interest income, partly offset by a decline in transactional revenues.
Investment Management: Pre-tax income from continuing operations was $102 million, down 22% from the year-ago quarter. Net revenues were $653 million, a fall of 3% year over year. The decrease was mainly due toa fall in investment revenues, partly offset by higher asset management fees.
As of Sep 30, 2018, total assets under management or supervision were $471 billion, up 5% on a year-over-year basis.
Strong Capital Position
As of Sep 30, 2018, book value per share was $40.67, up from $38.87 as of Sep 30, 2017. Tangible book value per share was $35.50, up from $33.86 a year ago.
Morgan Stanley's Tier 1 capital ratio Advanced (Fully Phased-in) was 19.7% compared with 19.1% in the year-ago quarter. Tier 1 common equity ratio Advanced (Fully Phased-in) was 17.3% compared with 16.7% a year ago.
Share Repurchase Update
During the reported quarter, Morgan Stanley bought back around 24 million shares for nearly $1.2 billion. This was part of the company's 2018 capital plan.
In 2018, management expects NII growth to slow down, based on anticipated funding mix and higher deposit betas than experienced in 2017. Notably, the company expects Wealth Management NII to grow in 4-5% range.
Management expects equity underwriting activity levels to remain healthy, although near-term issuances could be impacted by macroeconomic uncertainties, geopolitical events and a typical seasonal slowdown.
For the WM segment, the company expects the stability and trends of last several quarters to continue. For the IM segment, it anticipates asset management fees to remain stable with potential unevenness in the investments line.
Management set an efficiency ratio target of less than 73% for 2018 and 2019.
For the WM segment, the company expects margins of 26-28% in 2018 and 2019. The target achievement will depend on execution of a number of revenue and expense initiatives including expense discipline, business growth, higher interest rates and loan growth.
The company expects effective tax rate of 22-25% for 2018. Since the vast majority of share-based award conversions are placed in the first quarter 2018, the company expects the tax rate for the remaining quarters to be at the upper end of this range.
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%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, Morgan Stanley has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Morgan Stanley has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.