Why Is Morgan Stanley (MS) Down 10.1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Morgan Stanley (MS). Shares have lost about 10.1% 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 catalysts.

Morgan Stanley Beats on Q2 Earnings Amid Trading Woes

Despite disappointing capital markets performance, Morgan Stanley’s second-quarter 2019 earnings of $1.23 per share outpaced the Zacks Consensus Estimate of $1.13. However, the figure reflected a fall of 2% from adjusted earnings recorded in the year-ago quarter.

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 equity and fixed income trading income fell 14% and 18%, respectively. Additionally, overall investment banking performance was disappointing. Advisory fees fell 18% and debt underwriting revenues decreased 22%, while equity underwriting fees inched up 1%.

Net income applicable to Morgan Stanley was $2.20 billion, down 10% from the prior-year quarter.

Trading, Investment Banking Hurt Revenues, Costs Decline

Net revenues amounted to $10.24 billion, a decline of 3% from the prior-year quarter. However, the top line beat the Zacks Consensus Estimate of $9.98 billion.

Net interest income was $1.02 billion, up 14% 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 $9.22 billion fell 5% year over year, primarily due to dismal investment banking and trading performance.

Total non-interest expenses were $7.34 billion, down 2% year over year.

Decent Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $1.46 billion, decreasing 19% year over year. Net revenues of $5.11 billion fell 11%. The decline was mainly due to lower trading income and investment banking revenues.

Wealth Management: Pre-tax income from continuing operations totaled $1.24 billion, up 7%. Net revenues were $4.41 billion, up 2% year over year as a rise in transactional revenues and asset management revenues was offset by lower net interest income.

Investment Management: Pre-tax income from continuing operations was $199 million, surging 42% from the year-ago quarter. Net revenues were $839 million, up 21%. The increase was mainly driven by stable asset management fees and higher investment revenues.

As of Jun 30, 2019, total assets under management or supervision were $497 billion, up 5% on a year-over-year basis.

Strong Capital Position

As of Jun 30, 2019, book value per share was $44.13, up from $40.34 as of Jun 30, 2018. Tangible book value per share was $38.44, up from $35.19 a year ago.

Morgan Stanley’s Tier 1 capital ratio Advanced was 18.9% compared with 19.0% in the year-ago quarter. Tier 1 common equity ratio Advanced was 16.7% compared with 16.6% a year ago.

Share Repurchase Update

During the reported quarter, Morgan Stanley bought back around 26 million shares for nearly $1.2 billion. This was part of the company's 2018 capital plan.

How Have Estimates Been Moving Since Then?

Estimates review followed a flat path over the past two months.

VGM Scores

At this time, Morgan Stanley has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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