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Why Is Morgan Stanley (MS) Down 3.1% Since the Last Earnings Report?
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A month has gone by since the last earnings report for Morgan Stanley (MS - Free Report) . Shares have lost about 3.1% 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 Beats Q2 Earnings on Equity Trading Gain
Continued strength in equity trading drove Morgan Stanley’s second-quarter 2017 earnings of 87 cents per share, which easily surpassed the Zacks Consensus Estimate of 76 cents. The reported figure was 16% above the prior-year quarter.
Higher underwriting fees, growth in equity trading income and stable advisory fees were primarily responsible for the significant improvement in earnings. Also, the company’s capital ratios remained strong.
However as expected, fixed-income, currency and commodities (FICC) income declined. Further, lower net interest income (owing to a fall in corporate loans) and a rise in operating expenses acted as headwinds.
Net income applicable to Morgan Stanley was $1.8 billion, up 11% year over year.
Net revenue amounted to $9.5 billion, a rise of 7% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.3 billion.
Net interest income was $751 million, down 18% from the year-ago quarter. This was largely due to a drastic rise in interest expenses. However, total non-interest revenues of $8.8 billion grew 7% year over year, primarily supported by improvement in trading and investments.
Total non-interest expenses were $6.9 billion, up 7% year over year. The rise was due to a 6% increase in compensation and benefits costs as well as 29% jump in other expenses.
Quarterly Segmental Performance
Institutional Securities: Pre-tax income from continuing operations was $1.4 billion, down 4% year over year. Net revenue of $4.8 billion rose 4% from the prior-year quarter. The improvement was mainly driven by a significant increase in underwriting income and equity trading revenues as well as stable advisory income, partially offset by decline in FICC income.
Wealth Management: Pre-tax income from continuing operations totaled $1.1 billion, a jump of 23% on a year-over-year basis. Net revenue was $4.2 billion, up 9% year over year, driven by higher asset management fee revenues and net interest income, partly offset by a fall in transactional revenues.
Investment Management: Pre-tax income from continuing operations was $142 million, jumping 20% from the year-ago quarter. Net revenue was $665 million, a rise of 14% year over year. The increase reflected higher investment revenues and asset management fees.
As of Jun 30, 2017, total assets under management or supervision were $435 billion, up 7% on a year-over-year basis.
Strong Capital Position
As of Jun 30, 2017, book value per share was $38.22, up from $36.29 as of Jun 30, 2016. Tangible book value per share was $33.24, up from $31.39 as of Jun 30, 2016. Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 18.9%, up from 18.8% in the year-ago quarter. Tier 1 common equity ratio Advanced (Transitional) was 16.6% compared with 16.8% in the prior-year quarter.
Share Repurchases
During the reported quarter, Morgan Stanley bought back around 12 million shares for nearly $500 million. This was part of the company's 2016 capital plan.
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.
Management expects equity activity levels to remain healthy although near-term issuances could be impacted by macroeconomic uncertainties and a typical summer slowdown.
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?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
At this time, the stock has an average Growth Score of C, a grade with the same score on the momentum front. 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.
Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.
Outlook
The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
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Why Is Morgan Stanley (MS) Down 3.1% Since the Last Earnings Report?
A month has gone by since the last earnings report for Morgan Stanley (MS - Free Report) . Shares have lost about 3.1% 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 Beats Q2 Earnings on Equity Trading Gain
Continued strength in equity trading drove Morgan Stanley’s second-quarter 2017 earnings of 87 cents per share, which easily surpassed the Zacks Consensus Estimate of 76 cents. The reported figure was 16% above the prior-year quarter.
Higher underwriting fees, growth in equity trading income and stable advisory fees were primarily responsible for the significant improvement in earnings. Also, the company’s capital ratios remained strong.
However as expected, fixed-income, currency and commodities (FICC) income declined. Further, lower net interest income (owing to a fall in corporate loans) and a rise in operating expenses acted as headwinds.
Net income applicable to Morgan Stanley was $1.8 billion, up 11% year over year.
Equity Trading Improvement Supports Revenues, Costs Rise
Net revenue amounted to $9.5 billion, a rise of 7% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.3 billion.
Net interest income was $751 million, down 18% from the year-ago quarter. This was largely due to a drastic rise in interest expenses. However, total non-interest revenues of $8.8 billion grew 7% year over year, primarily supported by improvement in trading and investments.
Total non-interest expenses were $6.9 billion, up 7% year over year. The rise was due to a 6% increase in compensation and benefits costs as well as 29% jump in other expenses.
Quarterly Segmental Performance
Institutional Securities: Pre-tax income from continuing operations was $1.4 billion, down 4% year over year. Net revenue of $4.8 billion rose 4% from the prior-year quarter. The improvement was mainly driven by a significant increase in underwriting income and equity trading revenues as well as stable advisory income, partially offset by decline in FICC income.
Wealth Management: Pre-tax income from continuing operations totaled $1.1 billion, a jump of 23% on a year-over-year basis. Net revenue was $4.2 billion, up 9% year over year, driven by higher asset management fee revenues and net interest income, partly offset by a fall in transactional revenues.
Investment Management: Pre-tax income from continuing operations was $142 million, jumping 20% from the year-ago quarter. Net revenue was $665 million, a rise of 14% year over year. The increase reflected higher investment revenues and asset management fees.
As of Jun 30, 2017, total assets under management or supervision were $435 billion, up 7% on a year-over-year basis.
Strong Capital Position
As of Jun 30, 2017, book value per share was $38.22, up from $36.29 as of Jun 30, 2016. Tangible book value per share was $33.24, up from $31.39 as of Jun 30, 2016. Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 18.9%, up from 18.8% in the year-ago quarter. Tier 1 common equity ratio Advanced (Transitional) was 16.6% compared with 16.8% in the prior-year quarter.
Share Repurchases
During the reported quarter, Morgan Stanley bought back around 12 million shares for nearly $500 million. This was part of the company's 2016 capital plan.
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.
Management expects equity activity levels to remain healthy although near-term issuances could be impacted by macroeconomic uncertainties and a typical summer slowdown.
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?
Analysts were quiet during the last one month period as none of them issued any earnings estimate revisions.
Morgan Stanley Price and Consensus
Morgan Stanley Price and Consensus | Morgan Stanley Quote
VGM Scores
At this time, the stock has an average Growth Score of C, a grade with the same score on the momentum front. 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.
Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.
Outlook
The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.