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Morgan Stanley (MS) Earnings Assessment: Weathering the Financial Storm or Growth Ahead?

Morgan Stanley (MS) will be the latest big bank to release its third-quarter earnings this week. Read more to know how investors should position themselves ahead of its earnings release…

Leading global financial services firm Morgan Stanley (MS) will be the latest big bank to release its third-quarter earnings this week. The bank’s results, scheduled to be released on October 18, are expected to add to the insights related to the impact of higher interest rates on the financials of big banks.

In this piece, I have discussed why waiting for an opportune entry point in MS could be wise.

The bank earnings season has kicked off with major banks like JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), and Bank of America Corporation (BAC) releasing their third-quarter results. A key feature of the third quarter bank earnings has been the rise in net interest income (NII). The biggest U.S. banks have benefited from charging more on loans thanks to the 22-year high benchmark interest rates.

However, the high-interest rates have resulted in slow loan growth. MS’ EPS for the third quarter is expected to decline 14.2% year-over-year to $1.31. On the other hand, its revenue is expected to rise 1.8% year-over-year to $13.22 billion. Sluggish deal-making is expected to be the primary factor affecting its earnings.

According to GlobalData, 40,374 deals (comprising mergers and acquisitions, private equity, and venture financing deals) were announced globally during the first three quarters of 2023, representing a decline of 24.3% in volume as compared to 53,369 deals announced during the same period last year.

The bank’s investment banking segment is under pressure due to the headwinds, including expectations of an economic slowdown, the central bank’s hawkish monetary policy, and geopolitical issues, resulting in a decline in its underwriting and advisory businesses. According to Dealogic, global investment banking fees in the third quarter are down almost 17% year-over-year to $15.20 billion.

UBS analyst Brennan Hawken downgraded MS to Hold from Buy and lowered the price target to $84, down from $110. Additionally, Schorr reduced its price target on MS to $102 from $104 but maintained a buy rating on the stock.

MS’ stock has declined 14.1% over the past nine months but gained 4.6% over the past year to close the last trading session at $78.73.

Here’s what you might want to consider ahead of the bank’s upcoming earnings release:

Mixed Financials

MS’ net revenues for the second quarter ended June 30, 2023, increased 2.5% year-over-year to $13.46 billion. Its book value per share rose 1.4% over the prior-year quarter to $55.24. The company’s tangible book value per share increased 1.8% year-over-year to $40.79.

On the other hand, its net income applicable to MS declined 12.5% year-over-year to $2.18 billion. Its EPS came in at $1.24, representing a decline of 10.8% year-over-year. Also, its return on equity came in at 8.9%, compared to 10.1% in the prior year quarter. In addition, its return on tangible equity came in at 12.1%, compared to 13.8% in the year-ago quarter.

Mixed Analyst Estimates

Analysts expect MS’ EPS for fiscal 2023 is expected to decline 12.8% year-over-year to $5.55. Its revenue for fiscal 2023 is expected to increase 1.5% year-over-year to $54.46 billion. Its EPS and revenue for fiscal 2024 are expected to increase 22.2% and 5.8% year-over-year to $6.78 and $57.64 billion, respectively.

Stretched Valuation

In terms of forward non-GAAP PEG, MS’ 3.96x is 235.7% higher than the 1.18x industry average. Likewise, its 2.52x forward Price/Sales is 14.4% higher than the 2.21x industry average. Its 14.19x forward non-GAAP P/E is 60.2% higher than the 8.86x industry average.

Mixed Profitability

In terms of the trailing-12-month gross profit margin, MS’ 86.65% is 45.5% higher than the 59.55% industry average. Likewise, its 6.01% trailing-12-month Capex/Sales is 199.8% higher than the industry average of 2.01%.

On the other hand, MS’ 10.23% trailing-12-month Return on Common Equity is 10.3% lower than the 11.40% industry average. Likewise, its 0.05x trailing-12-month asset turnover ratio is 78.3% lower than the 0.21x industry average. Furthermore, the stock’s 18.86% trailing-12-month net income margin is 26.9% lower than the industry average of 25.81%.

POWR Ratings Reflect Uncertainty

MS has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MS has a C grade for Quality, consistent with its mixed profitability. Its 1.36 beta justifies its C grade for Stability.

MS is ranked #15 out of 20 stocks in the Investment Brokerage industry. Click here to access MS’ Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

Despite signs of green shoots during the third quarter, investment banks continue to weather the slump in deal-making. Additionally, the uncertain macroeconomic environment and the war in Israel could further delay the recovery in deal-making.

With deal-making unlikely to rebound in the near term, and given MS’ mixed fundamentals, profitability, and analyst estimates, it could be wise to wait for a better entry point in the stock.

How Does Morgan Stanley (MS) Stack Up Against Its Peers?

MS has an overall POWR Rating of C, equating to a Neutral rating. You may check out these B-rated stocks within the Foreign Banks industry: Banco Macro S.A. (BMA), KB Financial Group Inc. (KB), and Akbank T.A.S. (AKBTY). For exploring more Buy-rated Foreign Banks stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

MS shares were trading at $80.16 per share on Tuesday afternoon, up $1.43 (+1.82%). Year-to-date, MS has declined -3.25%, versus a 15.50% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.


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