Morgan Stanley's Q1 Results Beat Wall Street Estimates

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Apr 20, 2015

In this article, let's take a look at Morgan Stanley (MS, Financial), a $72.64 billion market cap company, which is a financial holding company that provides various financial products and services to corporations, governments, financial institutions, and individuals worldwide.

Beating Consensus Estimates

Revenues rose to $9.91 billion, or $9.78 billion excluding accounting adjustments beating expectations of $9.17 billion. The bank posted a profit of $2.39 billion, higher than the $1.51 billion in the same period of 2014, as well as earnings per share beats analyst’s expectations ($1.14 vs $0.78). According to Chief Executive James Gorman, this was the strongest quarter in many years. These results seem to follow the trend of other banks like Goldman Sachs (GS, Financial) and JPMorgan Chase (JPM, Financial), who also did well in trading revenue. However, other banks have reported bad numbers, as in the case of Bank of America (BAC) and Citigroup (C).

Analyzing Morgan´s segments we found that:

  • Investment-banking and trading division generated $5.46 billion in the first quarter, up by 17%
  • Equities trading, revenue rose 33% from a year earlier to $2.27 billion and
  • Fixed income and commodities sales and trading net revenues rose from $1.7 billion to $1.9 billion.

Now, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
MS Morgan Stanley 4.99
GS Goldman Sachs 13.78
RJF Raymond James Financial 12.09
BK Bank of NY 8.32
Ă‚ Industry Median 7.83

The company has a current ROE of 4.99% which is lower than the industry median, and also it is lower than its peers. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Goldman Sachs could be the option, which has a better ratio than Raymond James (RJF, Financial) or Bank of NY (BK, Financial). It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Year ROE (%)
Dec 05 17.21
Dec 06 23.15
Dec 07 9.63
Dec 08 4.16
Dec 09 2.76
Dec 10 9.05
Dec 11 6.89
Dec 12 0.11
Dec 13 4.58
Dec 14 5.07

Returning Value

The New York-based bank is among the largest financial services firms in the U.S., with operations in investment banking, securities, and investment and wealth management.

The bank paid out of its earnings to investors in the form of cash dividends. It has recently increased its quarterly dividend to $0.15 from $0.10 a share. Further, Morgan repurchased approximately $250 million of its common stock and has announced a share repurchase of up to $3.1 billion of common stock beginning the next quarter for a one-year period.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 23.3x, trading at a discount compared to an average of 35.9x for the industry. To use another metric, its price-to-book ratio of 1.11x indicates a premium versus the industry average of 2.00x while the price-to-sales ratio of 2.12x is below the industry average of 5.45x. These ratios indicate that the stock is relatively undervalued, so it would be appropriate a buy recommendation.

The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $12,274, which represents a 4.3% compound annual growth rate (CAGR).

Final Comment

We are optimistic about an improvement of interest rates that should benefit the bank´s revenue and margins. Further, the plan of expanding the wealth management business should also increase revenues and provide a quota of more stable earnings.

Hedge fund gurus like Stanley Druckenmiller (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Jim Chanos (Trades, Portfolio) , Mario Gabelli (Trades, Portfolio) and Dodge & Cox have added this stock to their portfolios in the last quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned