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Why Is Morgan Stanley (MS) Down 6.9% Since Last Earnings Report?

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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 6.9% 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 the most recent earnings report in order to get a better handle on the important drivers.

Morgan Stanley Q1 Earnings & Revenues Beat

Despite weak trading and investment banking performance, Morgan Stanley’s first-quarter 2019 adjusted earnings of $1.33 per share outpaced the Zacks Consensus Estimate of $1.17. The figure was down 8% year over year. Results in the reported quarter exclude discrete tax benefits.

Higher net interest income, driven by rise in loan balance and higher rates, and investments supported the top line. Further, operating expenses witnessed a decline. Also, the company’s capital ratios remained strong.

Nonetheless, as expected, trading revenues declined as both equity and fixed income trading income fell 21% and 9%, respectively. Additionally, overall investment banking performance was disappointing. Underwriting revenues (both equity and fixed income) declined 22% and advisory fees fell 29%.

Net income applicable to Morgan Stanley was $2.43 billion, down 9% from the prior-year quarter.

Trading, Investment Banking Hurt Revenues, Costs Down

Net revenues amounted to $10.29 billion, a decline of 7% from the prior-year quarter. However, the top line beat the Zacks Consensus Estimate of $10 billion.

Net interest income was $1.01 billion, up 4% from the year-ago quarter. This was largely due to a rise in interest income, partially offset by higher interest expenses.

Total non-interest revenues of $9.27 billion fell 8% year over year, primarily due to dismal investment banking and trading performance.

Total non-interest expenses were $7.33 billion, down 4% year over year.

Decent Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $1.60 billion, decreasing 24% year over year. Net revenues of $5.20 billion fell 15%. The decline was mainly due to lower trading income and investment banking revenues.

Wealth Management: Pre-tax income from continuing operations totaled $1.19 billion, up 2%. Net revenues were $4.39 billion, relatively stable year over year, as a decline in transactional revenues was offset by higher asset management revenues and net interest income.

Investment Management: Pre-tax income from continuing operations was $174 million, up 18% from the year-ago quarter. Net revenues were $804 million, up 12%. The increase was mainly driven by stable asset management fees and higher investment revenues.

As of Mar 31, 2019, total assets under management or supervision were $480 billion, down 2% on a year-over-year basis.

Strong Capital Position

As of Mar 31, 2019, book value per share was $42.83, up from $39.19 as of Mar 31, 2018. Tangible book value per share was $37.62, up from $34.04 a year ago.

Morgan Stanley’s Tier 1 capital ratio Advanced was 19.6% compared with 18.3% in the year-ago quarter. Tier 1 common equity ratio Advanced was 17.3% compared with 16.0% a year ago.

Share Repurchase Update

During the reported quarter, Morgan Stanley bought back around 28 million shares for nearly $1.2 billion. This was part of the company's 2018 capital plan.

Outlook

Management set an efficiency ratio target of less than 73% for 2019.

For the WM segment, NII growth is expected to be in line with the loan growth (which is projected to be mid-single-digits) in 2019. Also, the company expects margins of 26-28%. 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 2019 effective tax rate to be relatively similar as 2018 level.

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%.

The company looks to achieve 100% payout ratio going forward, subject to regulatory approval and any acquisition opportunities.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Morgan Stanley has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Morgan Stanley has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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