Morgan Stanley (MS)

Equity
US
Financial Services

RISK

RETURN

Key risk factors

Strong trading liquidity

Limited default risk

Modest price volatility

Key return factors

Solid dividends

Overvalued vs peers

Somewhat favourable analyst view

Company profileMorgan Stanley, a financial holding company, provides various financial products and services to corporations, governments, financial institutions, and individuals in the Americas, Europe, the Middle East, Africa, and Asia. It operates through Institutional Securities, Wealth Management, and Investment Management segments. The Institutional Securities segment offers capital raising and financial advisory services, including services related to the underwriting of debt, equity, and other securities, as well as advice on mergers and acquisitions, restructurings, real estate, and project finance. This segment also provides sales and trading services, such as sales, financing, prime brokerage, and market-making services in equity and fixed income products consisting of foreign exchange and commodities; corporate and commercial real estate loans, which provides secured lending facilities and financing for sales and trading customers, and asset-backed and mortgage lending; and wealth management services, investment, and research services. The Wealth Management segment offers financial advisor-led brokerage and investment advisory services; self-directed brokerage services; financial and wealth planning services; workplace services, including stock plan administration; annuity and insurance products; securities-based lending, residential real estate loans, and other lending products; banking; and retirement plan services to individual investors and small to medium-sized businesses and institutions. The Investment Management segment provides equity, fixed income, liquidity, and alternative/other products to benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, and third-party fund sponsors and corporations through institutional and intermediary channels. Morgan Stanley was founded in 1924 and is headquartered in New York, New York.

Valuation: Overvalued

Multiple

TTM

NTM

P/E

17.40

14.90

PEG

2.30

P/B

1.70

1.50

P/CR

5.80

P/RIBPT

4.80

P/IBPT

14.00

From a historical and forecasted perspective, the stock is overpriced compared to similar stocks. In particular, the stock is overpriced on P/E, 'expensive' on P/IBPT, overvalued on P/RIBPT. Editor's note: P/CR is Price to Core Revenue (CR), similar to P/S for corporates. CR = Net interest income + Net fee & commission income. P/IBPT is Price to Income Before Provisioning and Taxes (IBPT), similar to EV/EBITDA for corporates. IBPT = Core revenue -- Operating expenses + Non-recurring income. P/RIBPT is Price to Recurring Income Before Provisioning and Taxes (RIBPT), similar to P/FCF for corporates. RIBPT = Core revenue -- Operating expenses.

Performance: Mixed

The stock has been growing steadily in the past six months, adding 14% in total. The stock has outperformed its global peers from the same sector and industry (as shown above), surpassing them by 10ppts in total. At the same time, the stock's performance relative to its the peers from the same country and sector is different. The stock outperformed these peers by 15ppts over the past six months and grew 5ppts faster in the past month. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Somewhat favourable

The average target price is 107 and suggests 2% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 118.0. This translates into 13% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 73.6. This is equivalent to 30% downside potential in the worst case.

Profitability: Average

RoE

Morgan Stanley reported a return on equity (RoE) of 9.5% in the last 12 months, up from 9.0% in FY23. The market consensus projects a RoE of 11.0% in FY24, again behind the peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 0.8% in the last 12 months, an increase from 0.8% in FY23. The market analysts predict that RoA will be 0.9% in FY24, again weaker than the peers.

C/I

In the last 12 months, the cost-to-income ratio (C/I) grew to 127.8%, above the peers. The consensus estimate for FY24 for CI is 130.3%, again above of the peers.

Growth: Average

EPS

Core revenue

IBPT

RIBPT

MS reported revenue of USD 28 847mn in the last 12 months, down 0% from FY23. The institution earned USD 13 049 mn of interest before provisioning and taxes (IBPT) in the trailing 12 months (TTM), growth of 3% from FY23 At the same time, the dynamics of a more stable income, as measured by recurring income before provisioning and taxes (RIBPT), were drastically different. EPS grew 6% from FY23 to USD 5.54. Market expects EPS to reach USD 6.83 in FY24.The core revenue growth has been constrained in the last several years (negative-to-neutral), while IBPT has had a falling trend in the recent years (negative). Net income has fallen in recent years (negative). Free cash flow, at the same time, performed better than IBPT could suggest, with a slowly growing trend. We emphasize the highly volatile dynamics of IBPT and RIBPT.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been good and slightly above its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Limited

The solvency (credit quality) of MS is strong. The credit profile rests on (a) a midly insufficient capital position, (b) relatively poor asset quality, (с) a very strong corporate governance framework, (d) below average earnings power and cost efficiency, and (e) its slightly weak liquidity profile.

Volatility: Modest

In normal market circumstances, MS is as volatile as an index. Put differently, without outstanding market volatility or shocking company news, the stock's price will remain relatively stable. The stock's losses on its worst days (less than 1-5% of the time) will range from low to minimal. We would also like to highlight the minimal intraday volatility of the instrument. Finally, it may be affected by inherently volatile sector.

Stress-test: Modest

In highly turbulent market conditions, MS is as volatile as an index. In other words, the stock will fall less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be low. At the same time, due to inherently volatile sector, its maximum losses could be limited.

Selling difficulty: Very low

MS boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.