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Morgan Stanley (MS) Down 2.8% Since Earnings Report: Can It Rebound?
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It has been about a month since the last earnings report for Morgan Stanley (MS - Free Report) . Shares have lost about 2.8% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it 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 Tops Q1 Earnings as Bond Trading Jumps
Continued strength in bond trading drove Morgan Stanley’s first-quarter 2017 earnings of $1.00 per share, which handily outpaced the Zacks Consensus Estimate of $0.90. Further, this shows an 82% surge from the prior-year quarter.
A drastic jump in bond trading revenues and underwriting revenues were primarily responsible for the significant improvement in earnings. Also, the company’s capital ratios remained strong.
However, weakness in advisory revenues (due to lower levels of completed M&A activity during the quarter) and lower net interest income (owing to a fall in corporate loans) were the downsides. Moreover, a rise in compensation costs resulted in higher operating expenses.
Net income applicable to Morgan Stanley was $1.9 billion, up 70% year over year.
Net revenue amounted to $9.7 billion, a jump of 25% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.1 billion.
Net interest income was $771 million, down 14% from the year-ago quarter. This was largely due to a drastic rise in interest expenses. However, total non-interest revenues of $9 billion grew 30% year over year, primarily supported by improvement in trading and investments.
Total non-interest expenses were $6.9 billion, up 15% year over year. The rise came on the back of a 21% increase in compensation and benefits.
Quarterly Segmental Performance
Institutional Securities: Pre-tax income from continuing operations was $1.7 billion, up 91% year over year. Net revenue of $5.2 billion rose 39% from the prior-year quarter. The improvement was primarily attributable to a significant increase in FICC income and higher underwriting fees, partly offset by lower advisory revenues and equity trading revenues.
Wealth Management: Pre-tax income from continuing operations totaled $973 million, an increase of 24% on a year-over-year basis. Net revenue was $4.1 billion, up 11% year over year, driven by higher asset management fee revenues, transactional revenues and net interest income.
Investment Management: Pre-tax income from continuing operations was $103 million, surging 134% from the year-ago quarter. Net revenue was $609 million, a rise of 28% year over year. The increase reflected investment gains in certain private equity and real estate funds as well as stable asset management fees.
As of Mar 31, 2017, total assets under management or supervision were $421 billion, up 4% on a year-over-year basis.
Strong Capital Position
As of Mar 31, 2017, book value per share was $37.48, up from $35.34 as of Mar 31, 2016. Tangible book value per share was $32.49, up from $30.44 as of Mar 31, 2016.
Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 19.9%, up from 17.4% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 17.4%, up from 15.6% in the prior-year quarter.
Share Repurchases
During the reported quarter, Morgan Stanley bought back around 17 million shares for nearly $750 million. This was part of the share buyback program announced by the company, under which shares worth up to $3.5 billion can be repurchased through second-quarter 2017.
Outlook
Management expects revenue growth of 3–5% annually through 2017. Also, net interest income is expected to keep rising in the upcoming quarters driven by efficient deployment of deposits and rise in interest rates.
Further, management affirmed its target of $4 billion yearly revenue from its fixed-income, currencies and commodities (FICC) unit despite its downsizing in the recent years. On the M&A front, pipelines and client dialogs are expected to remain strong. Equity and bond underwriting volumes are projected to improve in the upcoming quarters.
In Wealth Management segment, Morgan Stanley projects the stability and trends of last several quarters to continue. In Investment Management segment, it anticipates asset management fees to remain stable with potential unevenness in the investments line.
Morgan Stanley targets compensation to net revenue ratio (under flat rate environment) of 37% or below for Institutional Securities, 56% or below for Wealth Management and 40% or below for Investment Management.
Management expects efficiency ratio target of 74% for 2017. This is based on the assumptions of flat revenues. However, the company does not expect the flat revenue environment to continue, especially given the ongoing growth initiatives.
Further, the company remains on track for its company-wide initiative called Project Streamline. This will help in reducing expense by $1 billion by the end of 2017.
In the Wealth Management segment, the company expects to achieve margin of 23–25% in 2017 supported by loan and deposit growth, expense discipline and business growth and the interest rate increases in the future.
The company expects effective tax rate of 32–33% in 2017.
The company targets a ROE of 9–11% for 2017 on the assumptions that there are no material new capital requirements, no outside new litigation expenses or penalties, and global economic growth.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There have been one revision higher for the current quarter compared to one lower.
At this time, Morgan Stanley's stock has a poor Growth Score of 'F', however its Momentum is doing a lot better with a 'B'. However, the stock was allocated a grade of 'F' on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our styles scores.
Outlook
The stock has a Zacks Rank #2 (Buy). We are looking for an above average return from the stock in the next few months.
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Morgan Stanley (MS) Down 2.8% Since Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for Morgan Stanley (MS - Free Report) . Shares have lost about 2.8% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it 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 Tops Q1 Earnings as Bond Trading Jumps
Continued strength in bond trading drove Morgan Stanley’s first-quarter 2017 earnings of $1.00 per share, which handily outpaced the Zacks Consensus Estimate of $0.90. Further, this shows an 82% surge from the prior-year quarter.
A drastic jump in bond trading revenues and underwriting revenues were primarily responsible for the significant improvement in earnings. Also, the company’s capital ratios remained strong.
However, weakness in advisory revenues (due to lower levels of completed M&A activity during the quarter) and lower net interest income (owing to a fall in corporate loans) were the downsides. Moreover, a rise in compensation costs resulted in higher operating expenses.
Net income applicable to Morgan Stanley was $1.9 billion, up 70% year over year.
Trading Improvement Supports Revenues, Costs Escalate
Net revenue amounted to $9.7 billion, a jump of 25% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.1 billion.
Net interest income was $771 million, down 14% from the year-ago quarter. This was largely due to a drastic rise in interest expenses. However, total non-interest revenues of $9 billion grew 30% year over year, primarily supported by improvement in trading and investments.
Total non-interest expenses were $6.9 billion, up 15% year over year. The rise came on the back of a 21% increase in compensation and benefits.
Quarterly Segmental Performance
Institutional Securities: Pre-tax income from continuing operations was $1.7 billion, up 91% year over year. Net revenue of $5.2 billion rose 39% from the prior-year quarter. The improvement was primarily attributable to a significant increase in FICC income and higher underwriting fees, partly offset by lower advisory revenues and equity trading revenues.
Wealth Management: Pre-tax income from continuing operations totaled $973 million, an increase of 24% on a year-over-year basis. Net revenue was $4.1 billion, up 11% year over year, driven by higher asset management fee revenues, transactional revenues and net interest income.
Investment Management: Pre-tax income from continuing operations was $103 million, surging 134% from the year-ago quarter. Net revenue was $609 million, a rise of 28% year over year. The increase reflected investment gains in certain private equity and real estate funds as well as stable asset management fees.
As of Mar 31, 2017, total assets under management or supervision were $421 billion, up 4% on a year-over-year basis.
Strong Capital Position
As of Mar 31, 2017, book value per share was $37.48, up from $35.34 as of Mar 31, 2016. Tangible book value per share was $32.49, up from $30.44 as of Mar 31, 2016.
Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 19.9%, up from 17.4% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 17.4%, up from 15.6% in the prior-year quarter.
Share Repurchases
During the reported quarter, Morgan Stanley bought back around 17 million shares for nearly $750 million. This was part of the share buyback program announced by the company, under which shares worth up to $3.5 billion can be repurchased through second-quarter 2017.
Outlook
Management expects revenue growth of 3–5% annually through 2017. Also, net interest income is expected to keep rising in the upcoming quarters driven by efficient deployment of deposits and rise in interest rates.
Further, management affirmed its target of $4 billion yearly revenue from its fixed-income, currencies and commodities (FICC) unit despite its downsizing in the recent years. On the M&A front, pipelines and client dialogs are expected to remain strong. Equity and bond underwriting volumes are projected to improve in the upcoming quarters.
In Wealth Management segment, Morgan Stanley projects the stability and trends of last several quarters to continue. In Investment Management segment, it anticipates asset management fees to remain stable with potential unevenness in the investments line.
Morgan Stanley targets compensation to net revenue ratio (under flat rate environment) of 37% or below for Institutional Securities, 56% or below for Wealth Management and 40% or below for Investment Management.
Management expects efficiency ratio target of 74% for 2017. This is based on the assumptions of flat revenues. However, the company does not expect the flat revenue environment to continue, especially given the ongoing growth initiatives.
Further, the company remains on track for its company-wide initiative called Project Streamline. This will help in reducing expense by $1 billion by the end of 2017.
In the Wealth Management segment, the company expects to achieve margin of 23–25% in 2017 supported by loan and deposit growth, expense discipline and business growth and the interest rate increases in the future.
The company expects effective tax rate of 32–33% in 2017.
The company targets a ROE of 9–11% for 2017 on the assumptions that there are no material new capital requirements, no outside new litigation expenses or penalties, and global economic growth.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month. There have been one revision higher for the current quarter compared to one lower.
Morgan Stanley Price and Consensus
Morgan Stanley Price and Consensus | Morgan Stanley Quote
VGM Scores
At this time, Morgan Stanley's stock has a poor Growth Score of 'F', however its Momentum is doing a lot better with a 'B'. However, the stock was allocated a grade of 'F' on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our styles scores.
Outlook
The stock has a Zacks Rank #2 (Buy). We are looking for an above average return from the stock in the next few months.