Morgan Stanley Stock Is Trading Above Its Near Term Potential

[Updated 05/20/2021] Morgan Stanley Update

After a more than 200% rally since the March 23 lows of last year, at the current price near $86 per share, we believe Morgan Stanley’s stock (NYSE: MS) is trading above its near term potential. The bank has seen its stock increase from $28 to $86 off the March 2020 bottom compared to the S&P 500 which increased almost 85% – the stock is leading the broader market by a considerable margin and has gained 26% YTD. The favorable investor sentiment toward MS stock could be attributed to better than expected results in each of the last four quarters mainly due to strong growth in sales & trading and investment banking businesses. Further, it also benefited from a generally  positive investor outlook toward U.S. bank stocks in 2021 – benchmark Dow Jones U.S. Banks Index (up 33% YTD), due to the approval of stimulus packages, accelerated Covid-19 vaccination drives, and the Fed’s decision to maintain near-zero rates.

In the recently reported first-quarter FY2021 results, Morgan Stanley posted total revenues of $15.7 billion – up 61% y-o-y. The company enjoyed positive growth across all the segments, with institutional securities (sales & trading and investment banking) contributing the major share – the segment grew 66% y-o-y in the quarter. Notably, the equity underwriting revenues grew almost 3.5x y-o-y, mainly driven by higher deal volumes of IPOs, blocks, and follow-on offerings. Further, the bank witnessed strong asset growth in both wealth management and investment management segments. The wealth management revenues grew 47% y-o-y driven by record net new assets and fee-based flows of $105 billion and $37 billion. Similarly, the investment management revenues increased by 90% due to the impact of the Eaton Vance acquisition and positive net fund inflows.

The main driver of Morgan Stanley’s revenue growth in 2020 and the first quarter of FY2021 was sales & trading and investment banking. While higher trading volumes are benefiting sales & trading revenues, growth in underwriting deal volumes (both debt origination and equity issuance) is driving investment banking fees. However, we expect the higher deal and trading volumes to normalize in the subsequent quarters, with the recovery in the economy. This means that the above segments will likely see stagnant growth in FY2021. Further, interest rates are unlikely to see an immediate revival to the pre-Covid-19 levels, hurting MS’ top-line. On the flip side, Morgan Stanley’s wealth management and investment management divisions have posted strong growth in assets. The wealth management total client assets, which received a big boost from the acquisition of discount broker-dealer E*TRADE in the last quarter of 2020, has increased 6% sequentially to $4.2 trillion by the end of the first quarter. Similarly, the investment management Assets under Management (AuM) increased 82% from $781 billion at the end of December 2020 to $1.4 trillion by the end of March. Overall, we expect the positive growth in wealth management and investment management segments to enable Morgan Stanley’s revenues to touch $54.6 billion in FY2021. Additionally, Morgan Stanley’s P/E multiple changed from around 8x in 2018 to just below 11x in 2020. While the company’s P/E is just above 13x now, this leaves some scope for downside when the current P/E is compared to levels seen in the past years – P/E multiple of around 11x at the end of 2020 and just below 10x in 2019. Our dashboard “What Factors Drove 117% Change In Morgan Stanley Stock Between 2018-End And Now?” provides the key numbers behind our thinking.

[Updated 03/19/2021] Current Rally In Morgan Stanley Stock Is Not Sustainable

Having gained more than 200% since the March 23 lows of last year, at the current price near $84 per share, we believe Morgan Stanley’s stock (NYSE: MS) is overpriced. Morgan Stanley, a market leader in the Equity Trading space in the U.S., has seen its stock increase from $28 to $84 off the March 2020 bottom compared to the S&P 500 which increased almost 75%. The stock is leading the broader market by a huge margin and is trading 49% above its pre-Covid-19 peak in February 2020. The main reason behind the meteoric stock growth was the consecutive earnings beat in each of the last three quarters. This was primarily driven by strength in sales & trading and investment banking businesses – Morgan Stanley reported total net revenues of $48.2 billion (up 16% y-o-y) for the full year 2020 mainly due to a 37% y-o-y jump in sales & trading and a 26% growth in investment banking revenues. That said, the net interest income of the wealth management division, which contributes around 10% of the total revenues, did suffer a 5% drop in the year due to the lower interest rate environment. 

Securities markets have witnessed high trading activity throughout 2020. Further, the underwriting deal volume was higher than the usual level, partially due to higher debt origination deals. This has benefited the sales & trading and investment banking space across all the major investment banks in 2020, and Morgan Stanley is no exception. However, market volatility and investment banking deal volumes are likely to normalize in the coming months, with the recovery in economic conditions. Further, interest rates are unlikely to see an immediate revival to the pre-Covid-19 levels. Both these factors will likely hurt the bank’s revenues in the year. On the flip side, Morgan Stanley’s wealth management division has received a significant boost with the acquisition of discount broker-dealer E*TRADE – E*TRADE was integrated with the wealth management segment at the start of October 2020. The division had total client assets of $3.99 trillion at the end of 2020 – up by 48% y-o-y. Overall, we expect the positive growth in wealth management and investment management segments will enable Morgan Stanley’s revenues to touch $49 billion in FY2021. Additionally, Morgan Stanley’s P/E multiple changed from around 8x in 2018 to just below 11x in 2020. While the company’s P/E is close to 13x now, this leaves some scope for downside when the current P/E is compared to levels seen in the past years – P/E multiple of around 11x at the end of 2020 and just below 10x in 2019. Our dashboard “What Factors Drove 112% Change In Morgan Stanley Stock Between 2018-End And Now?” provides the key numbers behind our thinking.

[Updated 01/04/2021] After A 150% Rise, Morgan Stanley Stock Is Unlikely To Continue

After almost a 150% gain since the March 23 lows of the last year, at the current price of $69 per share we believe Morgan Stanley Stock (NYSE: MS) is overpriced. Morgan Stanley, one of the top five investment banks in the U.S and a market leader in the Equity Trading space, has seen its stock rally from $28 to $69 off the recent bottom compared to the S&P which moved around 70% – the stock is leading the broader markets by a huge margin and is up 34% from the levels seen at the end of 2019. The stock growth could be attributed to the Q3 earnings beat and positive revenue growth – cumulative nine months revenues of $34.6 billion were 13% above the year-ago period, mainly driven by a 23% jump in sales & trading business followed by a 17% rise in investment banking.

Morgan Stanley’s stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it expensive as, in reality, consumer demand will likely be lower than the previous year.

The company’s revenues grew around 3% from $40.1 billion in 2018 to about $41.4 billion in 2019, which translated into a 4% increase in the net income figure over the same period. This was mainly due to a slight increase in the net income margin from 22.1% in 2018 to 22.3% in 2019.

While the company has seen some growth in revenue over 2018-2019, its P/E multiple has increased. We believe the stock is overpriced and is unlikely to see much upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 73% Change In Morgan Stanley Stock Between 2018-End And Now?” has the underlying numbers.

Morgan Stanley’s P/E multiple has changed from just above 8x in FY 2018 to around 10x in FY 2019. The company’s P/E has benefited from Q2 and Q3 earnings beats and is just below 13x now. This leaves some space for downside risk when the current P/E is compared to levels seen in the past years – P/E multiple of around 10x at the end of 2019 and 8x at the end of 2018.

So Where Is The Stock Headed?

Morgan Stanley has reported better than expected performance in the first nine months of 2020. This was mainly due to a jump in its sales & trading revenues driven by higher trading activity and growth in the investment banking segment due to higher underwriting deal volume. Both the higher trading volumes and increased activity in the investment banking space were due to the impact of the Covid-19 pandemic and the resulting economic slowdown. However, as the economic conditions improve, we expect these factors to normalize in the coming months. Hence, revenues from the above segments are expected to take a hit. Additionally, the lower interest rate environment is likely to hurt its net interest income from wealth management loans – cumulative nine months net interest income from wealth management segment declined by 12% y-o-y. Overall, Morgan Stanley’s revenue is likely to suffer in the near term, acting as a reality check for the investors.  

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

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