Mario Tama
Elevator Pitch
I maintain my Hold investment rating for Morgan Stanley (NYSE:MS). I previewed Morgan Stanley’s Q1 2022 earnings in my previous article for MS written on April 12, 2022. In my latest update, I review the company’s most recent Q2 2022 financial results.
Morgan Stanley doesn’t deserve a Sell rating, although its recent second-quarter earnings were below expectations. MS is more of a Hold, after considering the company’s shareholder capital return initiatives and the stock’s current valuations.
What Were Morgan Stanley’s Expected Earnings?
Prior to Morgan Stanley’s earnings announcement last week, the sell-side analysts had expected its non-GAAP adjusted EPS to decrease by -15% YoY from $1.89 in the second quarter of 2021 to $1.61 in Q2 2022.
Did Morgan Stanley Beat Earnings?
MS reported its financial results for the second quarter of this year on July 14, 2022 before the market opened.
Morgan Stanley failed to deliver an earnings beat, as its actual Q2 2022 non-GAAP adjusted EPS was $1.44 which was -11% lower than the market’s consensus bottom line forecast of $1.61 as highlighted in the preceding section. The Q2 2022 EPS of $1.44 was also equivalent to YoY and QoQ contractions of -24% and -30%, respectively.
In the next section, I go into more detail about the key Q2 2022 financial metrics for Morgan Stanley.
MS Stock Key Metrics
A review of the key second-quarter metrics for MS indicates that its financial results were not as bad as what its earnings miss suggests. In other words, it was a mixed financial performance for Morgan Stanley in the recent quarter.
On the negative side of things, the poor performance of Morgan Stanley’s institutional securities business was the key reason for the company’s below-expectations bottom line in Q2 2022.
In my earlier April 12, 2022 article for MS, I warned that “the institutional securities business might be an even bigger concern as compared with its wealth and investment management business segments”, and this has turned out to be true.
Revenue for Morgan Stanley’s institutional securities business segment decreased by -20% QoQ and -14% YoY to $6,119 million in the second quarter of this year. The institutional securities segment’s pre-tax profit fell by -38% YoY and -44% QoQ to $1,554 million in the recent quarter. Morgan Stanley’s institutional securities business did poorly in Q2 2022, due to the fact that “the backdrop was challenging for Investment Banking, particularly underwriting” as per MS management’s comments at the July 14, 2022 Q2 2022 earnings call.
On the positive side of things, Morgan Stanley’s investment management and wealth management business segments performed reasonably well in Q2, despite a challenging market environment.
On a QoQ basis, the wealth management business’ income before tax declined by a modest -3% to $1,521 million in the second quarter of 2022. The investment management segment even saw its pre-tax income grow by +9% QoQ to $188 million in Q2 2022. Both the wealth management and investment management businesses have done way better than the institutional securities segment which witnessed a -44% QoQ drop in pre-tax profit over the same period.
At the company’s Q2 2022 investor call, Morgan Stanley credited the superior financial performance of its investment management segment to an “expanded product set”, and highlighted “scale and rising rates” as the key factors contributing to the wealth management business’ modest operating earnings decline.
I touch on the post-Q2 earnings outlook for Morgan Stanley in the subsequent section.
What To Expect After Earnings
Morgan Stanley’s earnings should continue to be depressed in the quarters ahead, but the company’s shareholder capital return initiatives should provide support for its share price.
As discussed in the preceding section, Morgan Stanley’s investment and wealth management segments have been more resilient in the recent quarter as compared to its institutional securities business. But if the economy further weakens, it is inevitable that all of Morgan Stanley’s businesses will eventually underperform, considering expectations of a slower pace of equity fundraising and a decline in management fees.
Looking ahead, MS is only expected to better its prior Q1 2022 EPS of $2.06 in the first quarter of 2024 based on the Wall Street analysts’ consensus financial projections.
On the flip side, Morgan Stanley revealed in its Q2 2022 financial results press release that it is hiking its quarterly dividend payout by +11% from $0.700 per share previously to $0.775 per share going forward. This translates into a decent annualized forward dividend yield of 3.9% based on Morgan Stanley’s last stock price of $78.86 as of July 18, 2022.
At the same time, MS also disclosed a new share buyback authorization amounting to $20 billion, which is equivalent to almost 15% of its market capitalization. Notably, there is no expiry date associated with this $20 billion share repurchase authorization, which is positive in my opinion. This is because Morgan Stanley has no pressure to complete the share repurchases within any specific period of time, and that allows MS to be opportunistic in buying back its own shares only when the stock is perceived to be undervalued.
In conclusion, I expect Morgan Stanley’s shares to find support at current levels, after declining by -21.3% year-to-date. Even though earnings recovery and growth might take a while, the appealing dividend yield and the capacity for share buybacks should ensure that the downside for Morgan Stanley’s shares is limited.
Is MS Stock A Good Investment Long Term?
MS stock isn’t a good investment for the long term at this point in time. Morgan Stanley is at a fair valuation now, as the expected improvement in its RoTCE or Return on Average Tangible Common Shareholders’ Equity over time has been priced in.
Based on a justified P/B ratio valuation methodology, a stock’s fair price-to-tangible book or P/NTA ratio is calculated by dividing the difference between RoTCE and the perpetuity growth rate by the difference between the cost of equity (r) and the perpetuity growth rate (g) or P/NTA=(RoTCE-g)/(r-g). The fair price-to-tangible book ratio for MS is 2.0 times, assuming a RoTCE of 20%, a cost of equity of 10%, and a 0% perpetuity growth rate. As a reference, Morgan Stanley’s goal is to achieve a sustainable RoTCE or Return on Average Tangible Common Shareholders’ Equity of over 20% in the long run.
According to valuation data sourced from S&P Capital IQ, the market currently values Morgan Stanley at a trailing twelve months’ price-to-tangible book multiple of 1.98 times which is exactly what its fair P/NTA ratio should be.
Is MS Stock A Buy, Sell, Or Hold?
MS stock is a Hold. Morgan Stanley isn’t a Buy, as there will be pressure on its earnings in the near term in view of the current economic environment. But it isn’t a Sell either, as the ability to leverage on buybacks and a decent 3.9% dividend yield should provide support for its stock price.
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