Why Is Morgan Stanley (MS) Down 1.3% Since Last Earnings Report?
A month has gone by since the last earnings report for Morgan Stanley (MS). Shares have lost about 1.3% 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 its most recent earnings report in order to get a better handle on the important drivers.
Morgan Stanley’s Q4 Earnings & Revenues Lag on Trading Woe
Weak trading and underwriting performance affected Morgan Stanley’s fourth-quarter 2018 adjusted earnings of 73 cents per share, which lagged the Zacks Consensus Estimate of 90 cents. The figure also reflected 13% decline from the prior-year quarter.
Dismal underwriting (both equity and fixed income) revenues (down 25%) and fixed income trading revenues (down 30%) hurt Morgan Stanley’s quarterly results. Additionally, net interest income recorded a fall.
However, stable equity trading income and improvement in advisory revenues (up 41%) acted as tailwinds. Further, operating expenses witnessed a decline. Also, the company’s capital ratios remained strong.
Net income applicable to Morgan Stanley was $1.53 billion, up substantially from $643 million in the prior-year quarter.
In 2018, adjusted earnings of $4.61 per share missed the Zacks Consensus Estimate of $4.86. However, the figure was up 28% year over year. Net income applicable to Morgan Stanley was $8.74 billion, up 43%.
Trading, Investment Banking Hurt Revenues, Costs Down
Net revenues amounted to $8.54 billion, a decline of 10% from the prior-year quarter. In addition, the top line lagged the Zacks Consensus Estimate of $9.44 billion.
In 2018, net revenues rose 6% year over year to $40.11 billion. However, it marginally missed the Zacks Consensus Estimate of $40.99 billion.
Net interest income was $989 million, down 1% from the year-ago quarter. This was largely due to a rise in interest expenses, partially offset by higher interest income.
Total non-interest revenues of $7.56 billion fell 11% year over year, primarily due to dismal investment banking and trading performance.
Total non-interest expenses were $6.69 billion, down 5% year over year.
Quarterly Segmental Performance Disappoints
Institutional Securities: Pre-tax income from continuing operations was $780 million, decreasing 37% year over year. Net revenues of $3.84 billion fell 15%. The decline was mainly due to lower trading income and underwriting revenues.
Wealth Management: Pre-tax income from continuing operations totaled $1.1 billion, down 12% on a year-over-year basis. Net revenues were $4.14 billion, decreasing 6% due to a decline in transactional revenues, partly offset by higher asset management revenues and net interest income.
Investment Management: Pre-tax income from continuing operations was $74 million, down 8% from the year-ago quarter. Net revenues were $684 million, up 5%. The increase was mainly driven by higher asset management fees, partially offset by fall in investment revenues.
As of Dec 31, 2018, total assets under management or supervision were $463 billion, down 4% on a year-over-year basis.
Strong Capital Position
As of Dec 31, 2018, book value per share was $42.20, up from $38.52 as of Dec 31, 2017. Tangible book value per share was $36.99, up from $33.46 a year ago.
Morgan Stanley’s Tier 1 capital ratio Advanced (Fully Phased-in) was 19.4% compared with 19.3% in the year-ago quarter. Tier 1 common equity ratio Advanced (Fully Phased-in) was 17.0% compared with 16.9% a year ago.
Share Repurchase Update
During the reported quarter, Morgan Stanley bought back around 27 million shares for nearly $1.2 billion. This was part of the company's 2018 capital plan.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
Currently, Morgan Stanley has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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 this revision indicates a downward shift. Notably, 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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