With its focus on wealth and investment management, as opposed to growing its loan book, Morgan Stanley has managed to avoid some of the pitfalls that the other banks have faced.
The New York-based investment bank reported quarterly results on Thursday morning that came in well ahead of what Wall Street analysts had predicted. The company's credit loss provisions declined quarter over quarter and look much more favorable than its peers.
Let's dig deeper into the company's most recent quarter to see why I remain bullish on shares of Morgan Stanley.
Morgan Stanley announced third-quarter results on Oct. 15. The company's revenue of $11.7 billion was an almost 17% improvement from the previous year and topped estimates by $1.1 billion. Adjusted earnings per share increased 32 cents, or 25%, to $1.59 and was 31 cents higher than expected. Net income also increased 25%.
Each of the company's segments showed year-over-year growth.
Institutional Securities revenue grew 21% to $6.1 billion. Sales and trading, which represent two-thirds of segment revenue, improved 20% due to strength across products. Credit products led to 35% growth in fixed income. Equity sales and trading improved 14% due to increased client engagement, especially in Asia. Equity trading revenue of $2.26 billion was better than Morgan Stanley's equity trading rival Goldman Sachs' (GS, Financial) total of $2.05 billion.
Investment Banking grew 11% as equity underwriting benefited from higher sales from initial public offerings and institutional buying. This was offset by weakness in advisory, which was down due to lower merger and acquisition activity, and fixed income underwriting, which was lower due to a decrease in loan issuances.
Wealth Management was up almost 7% to $4.7 billion. Higher asset levels and better performance from fee-based business resulted in a 5.8% increase in asset management revenues. Transactional revenue delivered its second consecutive quarter of 48% year-over-year growth. Partially offsetting this growth was a 15% decrease in net interest revenue due to lower average interest rates.
Investment Management increased 38% to $1.1 billion. This segment benefited from asset management revenue growth of 20% on assets under management of $715 billion, a new company record. Investment revenues surged 146% on higher accrued carried interest and gains on investments.
Unlike many of its peers in the financial sector, Morgan Stanley doesn't provide much in the way of credit card or business lending. As a result, credit loss provisions decreased to $111 million from $239 million in the second quarter of the year.
Morgan Stanley initially traded down after the earnings report, but sits approximately 1% higher as of the time of writing. With a current share price of around $51 and expected earnings per share of $5.26 for the year according to Yahoo Finance, the stock has a forward price-earnings ratio of 9.7.
The stock has traded with a price-earnings ratio of 12.4 since 2010. I maintain my price-earnings ratio target range of 12 to 14 given the company's strong business performance and fewer loan-related headwinds relative to other financial companies.
Applying expected earnings per share to these valuation targets results in a share price range of $63 to $74. Reaching the low end of my target range would result in a share price appreciation of almost 24%.
The GuruFocus Value chart echoes my belief that the stock is undervalued.
The GF Value for shares of Morgan Stanley is $59.35. This isn't quite as bullish of a price target as my own, but would still result in an at least 16% gain in share price if achieved.
Morgan Stanley also offers a 2.7% dividend yield as well that would factor into total returns.
Morgan Stanley produced another solid quarter. The company isn't feeling the pressure of additional credit loss provisions due to Covid-19 because the company focuses more on wealth management. That focus paid off in the third quarter. Morgan Stanley also saw its equity trading revenue beat its chief rival. Despite this, Morgan Stanley continues to look quite cheap.
Business performance combined with a low valuation make Morgan Stanley an excellent option for investors looking for a financial sector stock.
Disclosure: The author has no position in any stocks mentioned in this article.
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