Morgan Stanley shares soared to all-time highs Wednesday after third-quarter beats on the bank’s top and bottom lines, with strength seen across the board. Revenue for the three months ended Sept. 30 increased nearly 16% year over year to $15.38 billion, outpacing expectations of $14.4 billion, according to estimates compiled by LSEG. Earnings per share (EPS) jumped over 36% versus the year-ago period to $1.88, exceeding the $1.58 expected, according to LSEG. MS YTD mountain Morgan Stanley YTD Club stock Morgan Stanley was up 7.5%. At one stage it was even higher, punching through our $120 price target. We are setting a new PT of $130 and keeping our wait-for-a-pullback 2 rating in deference to the stock’s hot streak — up over 13% from its July high before the August market swoon and up 33% from its Aug. 5 low. Bottom line This was as clean a quarter as anyone could have asked for. Morgan Stanley outpaced expectations in just about every aspect of each operating division and put up very strong quarterly results in terms of firmwide key performance indicators. Last quarter, when the results weren’t quite what we were looking for, we told members that patience was warranted, and we would likely see dynamics improve in wealth management — a key focus area for investors who want to see the bank’s durable fee-based revenue streams continue to grow. That’s exactly what we saw with Wednesday morning’s release. Investment banking also shined as it did for its rivals, including fellow Club name Wells Fargo , which saw its overall earnings report and commentary on Friday blow the doors off. Wells Fargo stock on Wednesday was trying to extend its winning streak to nine straight sessions. We continue to believe that the improvements we’re seeing at Morgan Stanley in terms of efficiency and disciplined execution will magnify the tailwinds of a resilient U.S. economy and stimulus activity internationally. Commentary Return on tangible common equity (ROTCE) is an important metric in valuing financial institutions, such as determining what multiple to put on tangible book value, which came in at $43.76 per share. Morgan Stanley’s third-quarter ROTCE of 17.5% blew away expectations of 14.8%, according to estimates compiled by Bloomberg. On a year-to-date basis, the bank has realized an 18.2% ROTCE. The common equity tier 1 (CET1) ratio, meanwhile, indicates a financial institution’s ability to return cash to shareholders via buybacks and dividend payments. For that reason, we’re very happy to see that stand at 15.1%. That’s a hair lower than the 15.3% the Street was expecting but not too concerning. Total client assets across wealth management and investment management have now exceeded $7.5 trillion, a nearly $1.4 trillion increase over what we saw a year ago as management continues to execute on its mission of reaching $10 trillion over the long term. The overall efficiency ratio , which is calculated by dividing total non-interest expenses by net revenue — so lower is better — came in well below expectations and declined 300 basis points versus the year-ago period – though importantly did not come at the cost of continued investments in the business. On the call, CFO Sharon Yeshaya noted that in addition to revenue growth, the efficiency ratio improvement was the result of “disciplined prioritization of our controllable spend.” Morgan Stanley repurchased $750 million worth of shares in the third quarter — 8 million shares total — at an average purchase price of $99.94 each, which in light of Wednesday stock price looks like a pretty good move for shareholders. Given its 15.1% CET1 ratio, Morgan Stanley has plenty of excess capital at its disposal to both continue investing in growth and return excess capital to shareholders. Morgan Stanley Why we own it : We own Morgan Stanley for the rebound taking place in IPO and M & A activity along with growth in wealth management, which provides more durable fee-based revenues. We also view the bank’s excess capital as supportive of further shareholder returns via buybacks and dividends while also providing for additional investments in growth. Competitors : Goldman Sachs Weight in Club portfolio : 3.5% Most recent buy : Oct. 18, 2023 Initiated : July 12, 2021 Segments Institutional Securities in the third quarter benefited from strong international performance, with management calling out an acceleration in activity exiting the quarter, indicating the fourth quarter was also off to a strong start. In line with our thesis, CEO Ted Pick noted on the call that “a broadening equity market and evolving interest rate policy are favorable backdrops for our markets businesses.” Morgan Stanley’s large footprint allowed the firm to benefit from “shifting expectations around the size and timing of the Fed’s first rate cut” during the quarter, the change in monetary policy at the Bank of Japan and Chinese stimulus. Investment banking saw a pick-up in equity underwriting due to higher IPO activity and fixed income underwriting increased significantly from a year ago. Wealth management reported record revenue and a record pre-tax profit. Net new assets in the quarter were about $64 billion, well above the $53.5 billion expected and brings year-to-date net new assets to $195 billion, a 5% annualized increase versus where we started the year. Yeshaya said that “year-to-date flows are on pace to exceed last year, supported by an ongoing contribution of assets from advisor-led brokerage accounts to fee-based accounts.” The CFO expects net interest income “to be modestly down from the third quarter results largely on the back of lower rate expectations consistent with the forward curve.” That’s not too much of a concern given the Street has been looking for about $1.73 billion of net interest income in the current quarter. The pre-tax profit margin of 28.3%, a key watch item for investors given the increased focus on fee-based performance, outpaced the 26.8% consensus estimate and represents a very strong sequential increase versus the 26.8% we saw in the prior quarter. Investment management got a boost from higher asset management and related fees, which came on the back of an increase in assets under management. On the call, Yeshaya highlighted the benefits of the prior acquisition of Eaton Vance. 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Morgan Stanley shares soared to all-time highs Wednesday after third-quarter beats on the bank’s top and bottom lines, with strength seen across the board.
