Morgan Stanley Earnings: Strong Results in Wealth and Equities Offset Softer Investment Banking

Key Morningstar Metrics for Morgan Stanley

• Fair Value Estimate: $127.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Morgan Stanley’s Earnings

Morgan Stanley MS reported second-quarter earnings results, with investors looking for signs of strength across the investment banking and trading businesses during a volatile quarter.

Why it matters: Strong results from the largest trading and investment banks suggest investors have shelved concerns related to trade policy, inflation, and growth headwinds. We believe this is premature, but concede that quarterly results were strong. Morgan Stanley shares traded down around 3% after its earnings release, but we view this as having more to do with unrealistic market expectations than any fundamental weakness, as it comfortably topped FactSet consensus estimates for both revenue and EPS.

• The firm’s core wealth business, the key driver of our wide moat rating, continues to fire on all cylinders. Net new assets of $59 billion (3.9% annual growth) topped our $23 billion estimate, attesting to the allure of the firm’s platform during a seasonally low period.
• Investment banking was weaker, particularly in the attractive mergers and acquisitions advisory, where the firm saw revenue decline by 14.0% annually despite decent market results (up 5.3%, per Dealogic). That business is inherently lumpy, so we don’t harbor serious concern yet, but we encourage investors to monitor progress there.

The bottom line: As we digest results, we plan to maintain our $127 fair value estimate, with our long-term forecasts for 5%-6% midterm top-line growth and 30%-31% operating margins intact.

• We’re constructive regarding the industry outlook, as banks should benefit from improving investment banking appetite and a lighter regulatory touch, but we believe this upside is already priced in. Our banking coverage trades at a 14% cap-weighted premium to our intrinsic valuations.
• We’re less optimistic regarding trading revenue, which looks cyclically high. Our math suggests banks are overearning by as much as 20%-30% in trading relative to long-term trends.