It has been about a month since the last earnings report for Morgan Stanley (MS - Free Report) . Shares have added about 3.2% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is MS due for a pullback? 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 drivers.
Morgan Stanley Q1 Earnings Beat on Trading Rebound
Trading rebound, higher interest income and improvement in advisory fees drove Morgan Stanley’s first-quarter 2018 earnings of $1.45 per share, which handily surpassed the Zacks Consensus Estimate of $1.28. The reported figure was 45% above the prior-year quarter.
As expected, both equity trading income (up 27%) and fixed income, currency and commodities income (up 8%) supported revenue growth. Further, equity underwriting fees (up 8%), advisory income (up 16%) and net interest income acted as tailwinds. Also, the company’s capital ratios remained strong.
However, lower debt underwriting fees (down 2%) was an undermining factor. Moreover, operating expenses recorded a rise.
Net income applicable to Morgan Stanley was $2.7 billion, up 38% year over year.
Rise in Trading Income Aids Revenues, Costs Rise
Net revenues amounted to $11.1 billion, a rise of 14% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $10.5 billion.
Net interest income was $975 million, jumping 26% from the year-ago quarter. This was largely driven by a rise in interest income.
Also, total non-interest revenues of $10.1 billion grew 13% year over year, primarily supported by improvement in trading.
Total non-interest expenses were $7.7 billion, up 10% year over year.
Quarterly Segmental Performance
Institutional Securities: Pre-tax income from continuing operations was $2.1 billion, increasing 22% year over year. Net revenues of $6.1 billion grew 18% from the prior-year quarter. The rise was mainly driven by higher trading income, advisory revenues and equity underwriting revenues, partially offset by lower debt underwriting income.
Wealth Management: Pre-tax income from continuing operations totaled $1.2 billion, up 19% on a year-over-year basis. Net revenues were $4.4 billion, increasing 8% from the prior-year quarter, driven by higher asset management fee revenues and net interest income, partly offset by a decline in transactional revenues.
Investment Management: Pre-tax income from continuing operations was $148 million, surging 44% from the year-ago quarter. Net revenues were $718 million, a rise of 18% year over year. The increase reflected higher asset management fees, partly offset by fall in investment revenues.
As of Mar 31, 2018, total assets under management or supervision were $469 billion, up 11% on a year-over-year basis.
Strong Capital Position
As of Mar 31, 2018, book value per share was $39.19, up from $37.48 as of Mar 31, 2017. Tangible book value per share was $34.04, up from $32.49 as of Mar 31, 2017.
Morgan Stanley’s Tier 1 capital ratio Advanced (Fully Phased-in) was 18.4% compared with 19.0% in the year-ago quarter. Tier 1 common equity ratio Advanced (Fully Phased-in) was 16.1% compared with 16.6% in the prior-year quarter.
During the reported quarter, Morgan Stanley bought back around 22 million shares for nearly $1.25 billion. This was part of the company's 2017 capital plan.
In 2018, management expects net interest income growth to slow down, based on anticipated funding mix and higher deposit betas than experienced in 2017.
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 Wealth Management segment, the company projects the stability and trends of last several quarters to continue. For the Investment Management 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 Wealth Management 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, 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?
It turns out, fresh estimates flatlined during the past month. There has been one revision higher for the current quarter compared to one lower.
Morgan Stanley Price and Consensus
At this time, MS has a great Growth Score of A, though it is lagging a lot on the momentum front with a D. However, 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.
Our style scores indicate that the stock is more suitable for growth investors than value investors.
MS has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.