Recent Deals to Bolster Morgan Stanley’s Earnings

Narrow-moat Morgan Stanley's MS recent acquisitions will bolster earnings over the next year as its institutional securities revenue normalizes lower. Morgan Stanley reported net income to common shareholders of $2.6 billion, or $1.66 per diluted share, on $11.7 billion of net revenue during the third quarter. We don’t anticipate making a material change to our $56 fair value estimate for Morgan Stanley and assess shares as fairly valued.

Net revenue increased 15% from the previous year, but was down 14% sequentially. The year-over-year growth in net revenue was due to the unusual economic and business environment we find ourselves in with many corporations tapping Morgan Stanley's underwriting services to bolster capital in the face of an uncertain economy, as well as to take advantage of historically low interest rates.

This contributed to investment banking revenue growing 12% from the previous year. Uncertainty has also led to high trading volumes and 20% growth in institutional trading revenue. However, as we remarked last quarter (when economic uncertainty was even more pronounced and revenue was even higher), institutional group revenue is abnormal right now and should trend lower over the next several quarters.

For the third quarter, institutional securities segment revenue declined 24% sequentially. While we believe there's room for institutional securities revenue to go even lower, this is an overall industry trend with Morgan Stanley's institutional securities group remaining as strong as ever.

Recent acquisitions will bolster earnings over the next year, while institutional segment revenue declines. On Oct. 2, Morgan Stanley completed its acquisition of online broker E-Trade. The deal was valued at $13 billion at the time of announcement. The previous week, the bank announced a $7 billion acquisition of asset manager Eaton Vance, which is expected to close in the second quarter of 2021.

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