Skip to Content
Stock Analyst Update

Don't Pop the Champagne Yet for Morgan Stanley

Though the narrow-moat firm had a great quarter, this profitability level isn't sustainable.

Mentioned:

 Morgan Stanley (MS) practically fired on all cylinders in the first quarter of 2018, but a return to normal in its institutional securities segment and a potential slowing in the wealth management business can be signs for caution. The company reported record net income to common shareholders of $2.6 billion, or $1.45 per diluted share, on $11 billion of revenue. Return on equity was an exceptional 14.9% and return on tangible equity was 17.2%. We continue to believe that the company can generate strong returns through a business cycle, hence our narrow-moat rating for Morgan Stanley, but believe that this quarter’s returns were abnormally good. We don’t anticipate making a material change to our $50 fair value estimate for the firm, as this quarter’s results don’t change our over-a-cycle profitability forecast.

The institutional segment should normalize lower. Similar to other capital market-related firms that benefited in the first quarter from asset price volatility and increased investor engagement, institutional trading revenue was the standout performer, increasing 26% from the previous year and 64% sequentially to $4.4 billion. $4.4 billion is approximately 40% higher than the trailing three-year average, and the 35% operating margin in the institutional group compares with a three-year average of about 28%. It’s clear that this profitability level isn’t sustainable.

The wealth management segment was a bit mixed. Its pretax operating margin is breaking new ground at 26.5%, but client assets and net interest income slightly dipped sequentially. The small decrease in client assets may be mainly due to choppy asset prices in the quarter, but there could be some fundamental changes in net interest income. Net interest income may be affected by Morgan Stanley’s deposit base becoming strained and having to stretch for higher cost funding sources.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.