Near-Term Goals Achievable for Morgan Stanley

We believe that narrow-moat Morgan Stanley MS can meet its updated near-term financial goals, but we also believe that investors shouldn’t get carried away with the company’s long-term aspirational goals. The company ended 2019 with another consistent, good quarter. Morgan Stanley reported net income to common shareholders of $2.1 billion, or $1.30 per diluted share, on $10.9 billion of net revenue. Quarterly net revenue in 2019 averaged about $10.4 billion and ranged from $10.2 billion to $10.9 billion. While the company has built up its recurring revenue via the growth of its wealth and investment management segments, which now constitute about 50% of net revenue, its institutional securities business’ quarterly revenue in 2019 was in a tight range of $5 billion-$5.2 billion, demonstrating diversification benefits from different security types and geographies. Even the fixed-income trading business, which had been a sore spot for a number of years, earned over $1 billion of revenue each quarter. For the whole year, net revenue increased 3.3% to $41.4 billion, net income to common shareholders increased 3.5% to $8.5 billion, and the company had an adjusted return on tangible common equity of 12.9%. We don’t anticipate making a material change to our $51.50 fair value estimate, and we assess the shares as being fairly valued.

Morgan Stanley inched up its near-term financial goals while also laying out some longer-term aspirations. Assuming that the global economy doesn’t enter a recession, which seems probable for at least the next year, the company’s two-year goals look achievable. The company is aiming for a return on tangible common equity of 13%-15%. Morgan Stanley already achieved an adjusted ROTCE of 12.9% in 2019 and 13.2% in 2018. The wealth management segment operating margin goal is 28%-30%. Over the previous eight quarters, the wealth management segment had an operating margin above 28% in two quarters.

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