Morgan Stanley (MS, Financial) delivered an exceptional quarter, driven by contributions from acquisitions, investment banking and equity trading. The stock is higher by 95% over the last year, but the company’s performance has arguably warranted this advance.
Let’s look at the company and its most recent quarter to see why Morgan Stanley can still be bought.
Earnings highlights
Morgan Stanley reported earnings results on Oct. 14. Revenue grew almost 27% to $14.75 billion, which was $800 million ahead of what Wall Street analysts had predicted. Net income of $3.7 billion, or $1.98 per diluted share, compared very favorably to net income of $2.7 billion, or $1.66 per share, in the prior year. Earnings per share beat estimates by 31 cents.
Investment Securities had revenue growth of more than 22% to $7.5 billion. There were two areas where much of this growth was seen. First, investment banking revenue was up 67% on higher completed merger and acquisitions transactions. This comes on the heels of a 11% gain in the previous year. Second, equity trading was also strong, growing 24.4% year over year due to higher client engagement and strength in Asia. Equites revenue of $2.88 billion was $500 million better than what analysts had anticipated.
On the other hand, fixed income did drop 16%, in part due to a difficult comparable period in the prior year, but also because of a less volatile market environment. Still, the $1.64 billion of revenue from this business was above estimates. Provisions for credit losses dropped 79% to $24 million.
Wealth Management revenue improved 27.5% to $5.9 billion. Revenue for the asset management business grew 30% to a record $3.63 billion. This business benefited from higher assets levels and strong fee-based revenue in the advisor channel. Higher bank lending amounts, in combination with the addition of E*Trade, led to a 52% gain in net interest income. Fee-based client assets totaled $1.75 trillion compared to $1.33 trillion in the prior year, while fee-based asset flows nearly tripled to $70.6 billion. Net new assets of $135 billion was a company record.
The Investment Management segment grew 37.6% to $1.45 billion. Revenue from asset management nearly doubled, more than offsetting weakness in the performance-based income business. This segment has assets under management of $1.5 trillion, more than twice the amount held during the third quarter of 2020.
Morgan Stanley repurchased $3.6 billion worth of stock during the quarter at an average price of $99.44. The company added $12 billion to its share repurchase authorization in the previous quarter.
The company’s common equity tier 1 capital ratio fell 140 basis points from the prior year to 16%, but still shows that Morgan Stanley has a very strong capital position.
According to analysts surveyed by Seeking Alpha, Morgan Stanley is expected to earn $7.51 per share in 2021.
Takeaways
Morgan Stanley’s year-over-year growth rates are even more impressive when recalling that earnings per share, net income and revenue grew 25.2%, 22.7% and 16.2% in the third quarter of 2020. This past quarter’s results were facing one of the toughest comparison periods in recent memory, and the company more than delivered. The results in the most recent quarter show Morgan Stanley has transformed itself over the past few years, in part driven by strategic acquisitions that have caused a surge in revenue and assets under management.
The acquisitions of E*Trade and Eaton Vance, completed Oct. 5, 2020 and March 1, 2021 respectively, have been a source of strength for the company. These additions have brought in more than $400 billion in net new client assets through the first three quarters of 2021.
Morgan Stanley had an excellent showing in its investment banking business and its equities trading business, already the largest in the world, produced mid-20% year-over-year gains. And with such strong asset inflows, combined client assets totaled just over $6 trillion at quarter’s end.
The company’s expected earnings per share for the year speaks to the improved business. Achieving the midpoint for analysts’ estimates would be a 16.2% improvement from the prior year. To again illustrate how far improved of a business Morgan Stanley has become, this would represent a nearly 43% gain from 2019 levels.
Morgan Stanley has also turned into a very shareholder-friendly company. In addition to the $12 billion increase in share repurchases last quarter, the company doubled its dividend. As a result, the stock yields 2.8% even after the run up in share price. This is one of the highest yields that the stock has offered in the last 15 years.
Where investors might quibble with the stock is on its valuation. With a recent closing price of $101, Morgan Stanley trades with a forward price-earnings ratio of 13.4. According to Value Line, the stock has an average price-earnings ratio of 12 since 2011.
Looking at the stock in this light, Morgan Stanley appears slightly overvalued. However, the company’s most recent quarter showed that all of its businesses are operating at a high level and producing demonstrable higher results in almost every case. With the caveat that shares are a bit expensive, Morgan Stanley looks like an excellent name to own in the financial sector given its business performance and forward expectations.
