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Morgan Stanley (MS) Down 3.7% Since Last Earnings Report: Can It Rebound?

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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 3.7% 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 Q4 Earnings Beat, Revenues & Costs Rise Y/Y

Morgan Stanley’s fourth-quarter 2021 adjusted earnings of $2.08 per share easily outpaced the Zacks Consensus Estimate of $2.00. The bottom line reflects a rise of 8% from the year-ago quarter’s level.

Morgan Stanley’s trading business did not perform significantly well. Fixed income trading revenues declined 31% year over year, while equity trading income rose 13%.

The performance of the IB business was strong. Equity underwriting fees decreased 15% from the prior-year quarter’s level, while fixed income underwriting rose 7%. Advisory fees were up 30% year over year. Therefore, IB fees improved 6%.

Higher net interest income, mainly driven by a rise in total loan balance (up 24%) and a plunge in interest expenses, supported the top line.

However, mounting operating expenses hurt results to some extent.

Including integration-related expenses for the E*Trade Financial and Eaton Vance deals, net income applicable to common shareholders was $3.6 billion, up 10% from the year-ago quarter’s number.

For 2021, adjusted earnings per share of $8.22 surpassed the Zacks Consensus Estimate of $7.95. The reported figure represents a rise of 25% from the previous year. Net income applicable to common shareholders (GAAP basis) was $14.6 billion, up 39% year over year.

Revenues Improve, Expenses Rise

Quarterly net revenues were $14.5 billion, up 7% from the prior-year quarter. The top line lagged the Zacks Consensus Estimate of $14.8 billion.

Net revenues for 2021 were $59.8 billion, up 23% from the prior year. The top line missed the Zacks Consensus Estimate of $60 billion.

The quarterly net interest income (NII) was $2.1 billion, up 12% from the year-ago quarter. The upside was largely due to a 14% decline in interest expenses.

Total non-interest revenues of $12.4 billion increased 6% year over year.

Total non-interest expenses were $9.6 billion, up 5% year over year.

Provision for credit losses was $5 million, up 25% from the prior-year quarter.

Quarterly Segmental Performance

Institutional Securities: Pre-tax income was $3 billion, down 6% from the prior-year quarter. Net revenues were $6.7 billion, down 4%. The upside was driven by an increase in investment banking revenues and equity trading revenues, partly offset by lower fixed income trading revenues.

Wealth Management: The segment includes the results of E*Trade Financial. Pre-tax income totaled $1.4 billion, up 32% year over year. Net revenues were $6.3 billion, increasing 10%, driven by higher net interest income and asset management revenues.

Total client assets as of Dec 31, 2021, were $4.9 trillion, up 23 % year over year.

Investment Management: The segment includes the results of Eaton Vance. Pre-tax income was $508 million, rising 159% from the year-ago quarter’s level. Net revenues were $1.8 billion, surging 59%. The upswing was driven by higher asset management and related fees.

As of Dec 31, 2021, total assets under management or supervision were $1.6 trillion, up significantly from $781 billion as of Dec 31, 2020.

Strong Capital Position

As of Dec 31, 2021, book value per share was $55.12, up from $51.13 recorded in the corresponding period of 2020. Tangible book value per share was $40.91, down from $41.95 as of Dec 31, 2020.

Morgan Stanley’s Tier 1 capital ratio (advanced approach) was 19.3% compared with 19.8% in the year-ago quarter. Common equity Tier 1 capital ratio was 17.5%, down from 17.7%.

Capital Deployment Update

In the reported quarter, Morgan Stanley repurchased shares worth $2.8 billion.

Outlook

The company expects $500 million of incremental NII in the WM segment in 2022, based on the year-end forward curve. Moreover, another $200 million is expected from the reversal of fee waivers in the IM segment.

Loan growth for 2022 is projected to be $20 billion.

The tax rate in 2022 is expected to be in line with that reported in 2021.

2021-2022 Objectives

The company expects ROTCE between 14 and 16%. The efficiency ratio is expected to be 69-72%.

The WM segment’s pre-tax margin is projected at 26-30%.

Long-Term Objectives

The company expects an ROTCE of 20% or more. The efficiency ratio is expected to be less than 70%.

For the WM segment, the pre-tax margin is projected at more than 30%. Across the WM and IM segments, total client assets are expected to be $10 trillion.

How Have Estimates Been Moving Since Then?

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

VGM Scores

Currently, Morgan Stanley has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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 these revisions indicates a downward shift. Notably, Morgan Stanley has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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