Holding On To Morgan Stanley As New CEO Faces Headwinds To Earnings And M&A Activity (NYSE:MS)

Inventory & Business Snapshot

To have a good time my first yr as a contributing analyst on In search of Alpha, I’m closing out 2023 by protecting one of many first shares I coated final spring, and in certainly one of my favourite sectors to write about, financials and banking.

Some fast details about Morgan Stanley (NYSE:MS) are that it’s NYC-based, trades on the NYSE, has roots going again to the Thirties, entered the retail brokerage house with its 2020 acquisition of E-Commerce, and along with that has a diversified portfolio of enterprise segments that embody wealth administration, funding banking, buying and selling, analysis, and funding administration.

My prior ranking in August known as for holding this inventory, and since then it has gone up +6.3%

In comparison with my preliminary ranking in Could after I acknowledged this inventory as a long-term purchase alternative, it has since gone up +13%.

Current sector efficiency from SA market knowledge reveals that the financials sector has improved practically 30% within the final 3 years, but in addition has proven YTD enchancment of +10%.

That is related in contemplating how a lot the sector bullishness in financials may very well be contributing to this inventory persevering with to rise or not.

Scoring Matrix

We use a 9-point scoring technique that appears at this inventory holistically and assigns a complete ranking rating, utilizing a rating matrix.

Right now’s Score

Primarily based on the rating whole within the rating matrix, this inventory is getting a ranking of maintain.

It is a reiteration of my August ranking of maintain.

In comparison with the consensus ranking on In search of Alpha, I’m agreeing this time with the quant system.

Dividend Earnings Progress

What I’m in search of is confirmed 10 yr dividend progress, and you’ll see from my pattern line I traced that this inventory supplied simply that.

For instance, it went from an annual dividend of $0.20/share in 2013 to $2.95/share in 2022, which is a +1,375% progress in 10 years. As a dividend investor, if I acquired 100 shares in 2013 and simply held them till 2022, my annual dividend earnings on 100 shares could be $295.

Much more importantly, from the 2023 dividend historical past we see that FY23 has an annual dividend that’s as much as $3.25/share, so it continues to develop properly, and in addition has not interrupted its quarterly dividend regardless of the 2008/2009 monetary sector disaster or the 2020/2021 pandemic.

Additionally, because the earnings assertion continues to point out profitability and over $2B in quarterly earnings, I’d make an informed guess that the corporate is able to have the ability to proceed at its present dividend tempo going into 2024.

For the explanations talked about, on this ranking class I give it a robust purchase.

Dividend Yield vs Friends

Right here I’m trying to decide one inventory with one of the best dividend yield for my capital invested, amongst 4 banking-sector friends, utilizing In search of Alpha’s yield comparability software:

To assemble this peer group, I picked 4 giant monetary shares which are US-based and have a serious market presence in comparable enterprise strains reminiscent of buying and selling, funding banking, asset administration, and wealth administration.

Of this peer group, Morgan Stanley had one of the best trailing dividend yield at 3.47%, whereas Charles Schwab (SCHW) got here in final at 1.44%. Within the center have been Goldman Sachs (GS) and JPMorgan Chase (JPM).

I count on some continued modest bullishness on this sector, particularly after the Fed’s December assembly, and going into 2024, so this might trigger the yield to say no considerably additional.

I feel the info reveals on this class it earns a purchase ranking, with a yield of round +3.5% and successful this peer group. I’d not name it a robust purchase right here until we’re yields previous 5%. As somebody talked about in a remark not too long ago, you may also park capital in sure Certificates of Deposit (CDs) that pay over 5%, so I feel taking note of a aggressive dividend yield is related on this excessive price atmosphere since that’s how I plan my portfolio.

Income Progress

From the earnings assertion knowledge, let’s briefly talk about YoY income progress.

Impressively, the agency achieved $13.13B in whole income in Q3, vs $12.95B in Sept 2022, a +1.38% YoY progress.

From their quarterly outcomes, we are able to study that two segments that drove income progress have been wealth administration and funding administration.

Wealth administration noticed “larger common asset ranges in comparison with a yr in the past. The quarter included continued sturdy optimistic fee-based flows of $22.5B.”

Funding administration noticed income “elevated in comparison with a yr in the past on larger asset administration revenues and AUM of $1.4T.”

A weak spot remained funding banking, which noticed 27% declines pushed by decrease M&A exercise.

One other notable knowledge level to say is said to the excessive rate of interest atmosphere. We are able to see from the earnings assertion that whereas curiosity/dividend earnings climbed on a YoY foundation, so did curiosity expense. In actual fact, it went from $3.59B in Sept 2022 to $11.32B in Sept 2023, a 215% YoY improve. This clearly had an impression on YoY web curiosity earnings progress that noticed a decline.

With that stated, my forward-looking outlook on income progress sustainability going into 2024 is that the elevated price atmosphere will proceed to stress web curiosity margins for some time longer however won’t worsen than they’re, whereas improved fairness markets will drive larger fee-based income on property managed as portfolio values go up, and if financial headwinds calm we might see an uptick in M&A exercise which can profit the funding financial institution.

In actual fact, an October research by the worldwide Boston Consulting Group highlighted that “M&A Set to Decide Up in 2024 Regardless of Ongoing Headwinds.” The article went on listing a driver of potential elevated deal exercise:

main assist for dealmaking will come from the abundance of obtainable capital held by sovereign wealth funds, non-public fairness and enterprise capital traders, and a few giant firms.

From the proof I introduced, on this class I’d name it extra of a maintain than a purchase, on the premise that YoY income progress was virtually flat and there may be continued stress on curiosity margins, nonetheless there may be additionally potential tailwind in 2024 from the components I discussed, which might drive income efficiency enhancements subsequent yr and the share value together with it.

Earnings Progress

Utilizing the identical earnings assertion, we are able to see that there was a drop in earnings in Q3 to $2.4B, vs $2.63B in Sept 2022, an 8.7% YoY decline.

From quarterly outcomes, the corporate speaks of some drivers of upper bills together with larger comp expense. We are able to additionally see from the earnings assertion that whole working bills grew to $9.14B in Q3, from $8.7B in the identical quarter a yr prior.

As for forward-looking outlook, weak or flat top-line income progress if it continues can even impression the bottom-line since bills have risen nonetheless the general inflationary atmosphere has improved, so I feel these enterprise prices impacted by value inflation will enhance going into 2024.

Supporting this sentiment is knowledge from Statista that reveals month-to-month inflation is not too long ago nicely beneath the height it hit in summer time 2022:

Subsequently, I’d name this inventory a maintain on this class, since earnings declined by lower than 10%, and the agency is in a predicament of comparatively flat YoY income progress mixed with rising bills, however on the identical time the macro components going into 2024 appear to shed some optimistic mild, which is why I’d hate to dump shares on this agency simply but.

Fairness Optimistic Progress

I additionally take into account optimistic fairness progress as one of many key fundamentals of any critical enterprise. From the stability sheet, we see that it is a very equity-rich agency at $100.15B in whole fairness as of Q3, nonetheless falling from $102.08B in Sept 2022, a 1.89% YoY decline.

I’m not too involved about this agency’s capital state of affairs, as its Q3 outcomes present a CET1 ratio of 15.5% which is way above any regulatory minimums beneath Basel III guidelines.

Remember that Morgan Stanley additionally has its personal financial institution known as Morgan Stanley Personal Financial institution, so it’s beneath continued scrutiny and oversight of banking regulators within the US. It additionally means it might faucet into any one of many Fed’s numerous instruments within the occasion of a liquidity downside.

Morgan Stanley as a complete can be thought of a world systemically vital financial institution, in response to 2022 knowledge from the Monetary Stability Board.

My outlook right here requires a maintain of this inventory then, on the premise that fairness progress declined nonetheless guide worth stays sturdy as does capital ratios and the huge dimension and scale of this agency and its function within the monetary markets I feel places extra eyes on it to attempt to stop a monetary meltdown earlier than it happens, attributable to classes realized in 2008 and the systemic impact it might have.

That doesn’t imply it’s not susceptible to monetary shocks, however that mechanisms have been put in place by the Fed to attempt to scale back systemic threat ought to they happen.

Share Worth vs Shifting Common

In a nutshell, I’ll maintain this matter temporary because the YCharts above speaks for itself.

We are able to see the present share value of $93.55 is about +11% above the 200-day easy transferring common that I’m monitoring (orange line).

That’s fairly the leap, particularly off of its October lows that have been approaching $70. On the identical time, although, it’s nonetheless beneath its January highs that reached previous $100.

We additionally can’t ignore the sector bullishness I discussed earlier, serving to to drag this top off.

I’ll name this share value a maintain at this stage, since I feel the higher purchase alternative was this fall and now we face a possible for continued bullishness on this sector however the query is how a lot. So, I’d not be able to promote simply but, but in addition wouldn’t purchase at this value contemplating their income and earnings didn’t actually impress.

Had the share value been nearer to the transferring common, and earnings/income had grown by double-digits in Q3, I’d have known as it a purchase.

Valuation: Worth-to-Earnings

From valuation knowledge we are able to see that the ahead P/E ratio is 16.94, or +50% above the sector common.

Driving this a number of of practically 17x is unquestionably the bullish share value, which was confirmed by the worth chart and in addition the declining earnings progress which fell practically 9% YoY. This creates a large rift between value and earnings on this case, and I’d name it overvalued on this case.

Earnings have a methods go to if they are going to catch as much as this overheated share value, so I count on the overvaluation to final a bit, therefore I’ll name it a promote on this particular class.

Valuation: Worth-to-E book Worth

Additionally from valuation knowledge, we are able to see the ahead P/B ratio of 1.69 can be about +38% above its sector common.

In relation to share value and fairness, I have already got proven that the share value could be very bullish/overheated whereas the fairness progress is virtually flat, though this agency’s guide worth is fairly excessive to start with at over $100B in optimistic fairness.

On this context, I’d name it a maintain and never a promote, since I feel a a number of of 1.7x guide worth is just not overvalued on this context. Had the share value been bullish however the fairness had proven double-digit declines, then I’d be extra pessimistic on this valuation, however on this case now we have flat fairness progress.

Threat Evaluation

A threat to say, although maybe not an enormous one, is the truth that there may be at all times threat when new administration arrives on the high, because it might change the technique and gameplan for a agency.

Within the case of Morgan Stanley, all eyes will probably be on incoming new CEO Ted Decide.

Business portal Mint.com had this to say in a late-December article:

When Ted Decide takes over as the brand new CEO of Morgan Stanley subsequent week, the three-decade financial institution veteran’s frank method and regular hand will assist him steer the agency by means of a dealmaking stoop.

Quick Firm had this to say in its October piece on the brand new CEO:

Ted is a strategic chief with a robust monitor document of constructing and rising our consumer franchise, growing and retaining expertise, allocating capital with sound threat administration, and carrying ahead our tradition and values.

In my view, the agency choosing a longtime firm insider sends the message that the main target is on stability and safety, because the board just about will know what to anticipate from Ted Decide. This won’t be a Silicon-Valley wunderkind however a real banker, so I’d argue that it will likely be in Morgan’s favor to stay to its fundamentals and that’s being a Wall Avenue financial institution.

And, though M&A is an space needing progress, as I discussed earlier than it’s such a diversified agency by now that it has penetrated retail brokerage with E-Commerce, and in addition has a well-established wealth administration store. Primarily based on Forbes journal’s listing of America’s high wealth advisors in 2023, Morgan had 4 of the highest 20 wealth advisories within the nation.

So, I feel this new CEO will do what he is aware of finest and that’s banking, and in my view that may be a good factor and simply what Morgan Stanley wants if it is going to outcompete its friends.

I say primarily based on this threat of recent management, I’d truly give it a purchase ranking as a result of one of the best factor for this agency is a return to its fundamentals, and I feel Ted Decide can try this.

Fast Abstract

To reiterate, I’m retaining my maintain ranking on this inventory from August.

Key drivers of this impartial sentiment are flat income and earnings progress, a bullish share value and overheated sector, whereas additionally the chance for confirmed dividend earnings progress and potential enhancements in 2024 to web curiosity margins and M&A exercise as new management takes the helm.

If I used to be buying and selling this one, my portfolio technique of holding this inventory could be for the aim of continued and secure dividend earnings and progress, and anticipated additional value progress which can present some modest unrealized positive aspects for our portfolio.

As I write this on the final buying and selling day of 2023, I need to thank my readers on your assist on this my first yr on this platform and need to take this chance to welcome your feedback on Morgan Stanley as a result of your constructive, evidence-based suggestions is efficacious. Let’s proceed the dialogue on this inventory as we head into a brand new buying and selling yr!