Morgan Stanley on Tuesday reported second-quarter results that largely beat Wall Street expectations — though weakness in a key segment warrants closer monitoring even as stocks shake off earlier declines. Revenue for the three months ended June 30 rose 11% year over year to $15.02 billion, beating expectations of $14.3 billion, according to estimates compiled by LSEG. Earnings per share rose nearly 47% from the year-ago period to $1.82, beating the $1.65 expected, according to LSEG. Morgan Stanley Why we own it: We own Morgan Stanley for the rebound in IPO and M&A activity along with growth in wealth management, which provides more stable fee-based income. We also view the bank’s excess capital as supporting further shareholder returns through buybacks and dividends, while also providing additional growth investment. Competitors: Goldman Sachs Club Portfolio Weight: 3.5% Latest Purchase: October 18, 2023 Launched: July 12, 2021 Conclusion This was a pretty strong quarter overall. In addition to revenue and earnings beats, Morgan Stanley delivered better-than-expected results in nearly all of the firm’s key metrics. This includes the efficiency ratio, where a lower number is better, along with return on tangible equity (ROTCE), tangible book value per share and the common equity tier 1 (CET1) ratio. . ROTCE is an important metric in evaluating financial institutions, such as determining what multiple to put on tangible book value, which is $42.30 per share. Morgan Stanley’s second-quarter ROTCE of 17.5% beat expectations of 15.7%, according to estimates compiled by Bloomberg. The CET1 ratio, meanwhile, shows a financial institution’s ability to return cash to shareholders through buybacks and dividend payments. Therefore, we are very happy to see a continued increase here from 15.1% to 15.2%. Additionally, total client assets increased to $7.2 trillion, representing further progress toward management’s goal of reaching $10 trillion over the long term. The star of the show was Morgan Stanley’s Institutional Securities segment, which houses all of the firm’s traditional Wall Street operations. Segment revenue of $6.98 billion easily beat analysts’ expectations, and all three major subsegments — investment banking, equity trading and fixed-income trading — also beat consensus. On the call, CFO Sharon Yeshaya said the division benefited from “the strength of the integrated investment bank in the US and international markets. Higher activity in Asia contributed to the results.” Unfortunately, the results came up short in both the Wealth Management and Investment Management segments. Investors pay particular attention to Wealth Management, in particular, because it provides a more stable, fee-based income stream and building this business has been a major focus in recent years. Weakness in Wealth Management is why Morgan Stanley shares initially fell on Tuesday morning’s release. We then saw the stock recover only to take another hit as management commented on the call in that “third quarter [net interest income] will be largely driven by the path of wipeouts, and NII may fall modestly in the third quarter.” Wipeouts occur when a checking account exceeds a predetermined limit and the balance is “washed away” into higher-yielding accounts such as a stock market fund. money So why is the stock up nearly 1% in the face of a lack in Wealth Management and comments that NII in the division could be down again in the current quarter Indeed, management said during the call, talking about dynamics in Wealth Management Wealth, he believes that “NII should impact higher as it looks next year to a continued recovery in investment banking.” The investor base is willing to give management a little more benefit of the doubt in the past, when it comes to Wealth Management weakness in 2025, which is in focus now that we’re in the back half of 2024. The final wrinkle in why the stock is up on Tuesday: The current odds that Wall Street is betting on former President Donald Trump to win the election in November, which investors generally see as a positive for financial deregulation. Those election bets could drive some of the divergence between the Dow Jones Industrial Average and the Nasdaq on Tuesday. They also help us understand why Morgan Stanley shares were able to bounce back higher and hit a new all-time high at the start of the earnings call, although the stock is off session highs in afternoon trading. Patience with Morgan Stanley is warranted, although we will continue to monitor the dynamics in Wealth Management. Results in that segment are likely to improve after the current quarter, and the investment banking recovery still has a lot of room to go, with guidance pointing to the backlog continuing to widen. Plus, even at current stock levels, we collect a dividend yield of roughly 3.4%, while the potential is higher to see deregulation in the coming years. As a result, we are raising our price target to $120 from the $98 we expect by 2025. However, we are maintaining our 2 rating, which means we will expect a pullback to buy more shares. Segment Comment Looking at the segment sales portion of the earnings table below, Institutional Securities revenue handily beat estimates, driven by better-than-expected results across all subsegments. Investment banking income grew 51% year over year, with advisory fees increasing over 30%, equity underwriting fees increasing over 56%, and fixed income fees increasing nearly 71% from the period of the previous year. On the call, Chief Financial Officer Yeshaya said the firm’s investments in that segment “are starting to have an impact as capital markets improve and activity picks up.” Equity trading revenue rose 18% from a year ago on strength broad based in both main lines of business and in different geographical regions. Fixed income trading revenue rose 16% year-over-year “driven by higher results in credit reflecting strong financing and foreign exchange revenues on higher client engagement,” the firm explained in the announcement of its earnings. Total expenses for the segment (not shown in the table) increased 6.6% to $4.88 billion, as a result of a 3.4% increase in compensation expenses and a 9.6% increase in non-compensation expenses. Pre-tax margin was 29%, up from 17% in the year-ago period. Morgan Stanley’s Wealth Management segment’s earnings disappointed due to weakness across the board. Asset management income increased by over 15% from the year-ago period, setting a new record thanks to higher asset levels and the impact of positive fee-based asset flows. Still, the firm raised $36 billion in net new assets in the quarter, short of the $57.5 billion Wall Street analysts were expecting, to bring its year-to-date total to $131 billion. Fee-based flows were $26 billion, marking the seventh consecutive quarter above $20 billion. “We are seeing a steady migration of assets from advisor-led brokerage accounts to fee-based accounts, evidence that investments in our client acquisition pipeline are paying off,” said Yeshaya. Fee-based assets are over $2 trillion. Transaction income fell 10% on a reported basis, but it increased 5% when excluding the brand market impact of investments related to certain deferred cash employee compensation programs. The increase was related to an increase in equity-related transactions. Net interest income came up short, as mentioned earlier, falling over 16% from the year-ago period. Driving the decline was a reduction in average write-off deposits as customers reallocated some of their money in search of higher interest rates. Total spending for the segment rose less than 1% year over year to $4.95 billion. Pre-tax margin in the segment was 26.8%, slightly below the 27% the Street was calling for. Notably, Morgan Stanley’s deferred cash-based compensation program was a roughly 100 basis point headwind to pretax margin. The Investment Management segment, by far the smallest of the three, beat expectations at the top, although total assets under management came in slightly short of expectations. Asset management and related fees increased nearly 6% from the year-ago period with higher average assets under management, which benefited from rising asset values. Performance-based and other income has more than tripled, but it still remains largely insignificant given its size in the context of the firm as a whole. Total expenses for the segment increased 4.7% annually to $1.16 billion, with compensation and non-compensation expenses increasing by mid-single-digit percentage points. Equity returns Morgan Stanley repurchased 8 million shares in the second quarter, at an average purchase price of $95.96 per share. The result is a return of equity to shareholders of $750 million, up from $1 billion in the first quarter. Given the firm’s 15.2% CET1 ratio, Morgan Stanley has plenty of excess capital at its disposal to continue investing in growth and return some to shareholders. (Jim Cramer’s Charitable Trust is long MS. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. 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In this photo illustration, the logo for E-Trade, the online trading platform owned by Morgan Stanley, is displayed on the company’s website on May 13, 2024 in Chicago, Illinois.
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Morgan Stanley on Tuesday reported second-quarter results that largely beat Wall Street expectations — though weakness in a key segment warrants closer monitoring, even as the stock shook off earlier declines.