Morgan Stanley (MS) is one of the largest financial institutions in the world, with approximately $1.52 trillion of assets under management (as of June 30). Shares of MS have gained 87% over the past year and 38% year-to-date.

However, MS has witnessed a significant decline in its interest income since last year, owing largely to continued dovish monetary policy. Though the Fed forecasts two interest rate hikes in 2023, the current deceleration in economic growth due to concerns over the spread of the COVID-19 Delta variant might push that timeline back further.

Furthermore, recent concerns regarding a potential market correction coupled with a rising crackdown by China on ADRs of Chinese companies are expected to reduce the number of IPOs and SPAC deals in the near term. Consequently, MS’ revenues from its investment banking segment are expected to decline.

Here’s what could shape MS’ performance in the near term:

Disappointing Sequential Performance

MS’ second-quarter results indicate decelerating sequential growth. The company’s net revenues declined 6% sequentially to $14.76 billion in the fiscal second quarter ended June 30, 2021. This can be attributed to a 10% decline in investment banking’ revenues, a 21% decline in trading  revenues, and a 20% decline in commissions and fees revenues. Its EBT fell 15% from the prior quarter to $4.57 billion, while its net income declined 16% sequentially to $3.51 billion. Its adjusted EPS came in at $1.89, down 1% from the prior quarter value.

Its adjusted ROE slumped 300 basis points sequentially to 14.1%, while its tier 1 leverage fell 70 basis points to 7.4%.

Modest Growth

A $56.16 billion  consensus revenue estimate for its fiscal year 2021 represents a 16.5% improvement year-over-year. The company’s EPS is expected to increase 7.3% from the same period last year to $6.93 in the current  year.

However, analysts expect MS’ revenues to come in at $56.02 billion next year, indicating a 0.3% decline from the year-ago value. The Street expects MS’ EPS to rise 2.2% year-over-year to $7.08 in its fiscal year 2022. Furthermore, the company’s EPS is expected to increase at a 6.1% CAGR over the next five years.

MS has an impressive earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.

Stretched Valuation

In terms of non-GAAP forward P/E, MS is currently trading at 37.30x, which is 39% higher than the 26.83x industry average. In addition, its 2.62 non-GAAP forward PEG ratio  is 44.4% higher than the 1.82 industry average.

Moreover, the stock’s 13.12 and 28.42 respective forward Price/Sales and Price/Cash Flow multiples are significantly higher than the 4.03 and 22.75 industry averages.

Consensus Rating and Price Target Reflect Upside

Of the 15 Wall Street analysts that rated MS, 12 rated it Buy, while three rated it Hold. The $103.67 12-month median price target indicates a 9.7% potential upside. The price targets range from a low of $89.00 to a high of $115.00.

POWR Ratings Depict Uncertain Prospects

MS has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

MS has a C grade for Stability and Quality. The stock’s slightly high 1.54 beta justifies the Stability grade. Also,  the company’s mixed profit margins are in sync with its  Quality grade. MS’ 89.16% trailing12-month gross profit margin is 45.4% higher than the 61.34% industry average. However, its 24.86% net income margin is 13.7% lower than the 28.82% industry average. 

Of the 24 stocks in the B-rated Investment Brokerage industry, MS is ranked #20.

In addition to the grades highlighted, we have rated MS for Growth, Momentum, Sentiment, and Value. Get all MS ratings here.

View the top-rated stocks in the Investment Brokerage industry here.

Bottom Line

The Fortune 500 company is an industry leader and the fourth most admired company in the financial services space. However, with benchmark indexes susceptible to a sharp pullback in the near term and with an intensified Chinese crackdown threatening the $2 trillion Chinese ADR market, MS  is expected to see decelerating growth in the near term. Thus, we believe investors should wait for the industry to stabilize before investing in the stock.

MS shares fell $0.35 (-0.37%) in premarket trading Monday. Year-to-date, MS has gained 39.27%, versus a 18.44% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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