Morgan Stanley (MS) missed Wall Street estimates by a wide margin after MS revenue was hit hard by weak trading volumes and a soft market for stock and bond offerings.
MS stock was crushed in early morning action, toppling more than 6% at the opening bell.
MS has famously been pivoting away from riskier activities to more stable sources of revenue such as wealth management. It’s a strategy that has served the firm well in the years following the financial crisis, but as the latest results show, perhaps MS hasn’t gone far enough.
The buying, selling and underwriting of securities still accounted for about 40% through the first six months of the year. As we’ve seen with all banks, trading in the lucrative fixed income, currencies and commodities markets has been subdued for some time now.
At the same time, turbulence in the equity market and rate-hike uncertainty in the debt market is curbing investors’ appetite for stock and bond offerings.
Like every other bank, MS is cutting costs as fast as it can, but not fast enough to offset a top-line in full retreat.
Before we get into the gruesome details, here’s what went right for MS in the most recent period:
- MS got its piece of the action in the frenzied market for mergers and acquisitions. Fees from advising on deals rose 42% to $557 million.
- Wealth management — a legitimate area of strength in this reimagined MS — posted a 6% rise in profit to $509 million.
- Wealth management accounted for 47% of total revenue.
- Firm-wide costs dropped 6% to $6.29 billion year-over-year.
MS Stock Having a Very Bad Year
There are disappointing quarters, and then there’s what MS just coughed up. Net income declined 40%, which is bad enough, but what the market really cares about is how adjusted profit and revenue come in against expectations.
By that all-important yardstick, MS face-planted into concrete.
For the third quarter just ended, the investment bank had net income of $1.02 billion, or 48 cents per share. That’s a steep drop from the $1.69 billion, or 83 cents per share booked a year ago.
Excluding debt-valuation adjustments and legal reserves, earnings were 42 cents per share. Analysts polled by Thomson Reuters had expected earnings of 62 cents per share.
Yup, a bottom-line miss of 20 to 28 cents cents per share will get your stock clocked.
On an adjusted basis, revenue fell 13% to $7.77 billion, which was well short of the $8.54 billion forecast. The highlights of what went wrong:
- Trading revenue from fixed income, currencies and commodities declined 42% to $583 million
- Trading revenue from equities was flat year-over year at $1.77 billion.
- Although profit from wealth management rose, revenue fell 3.5% to $3.64 billion.
- Investment banking revenue retreated 15% despite a hot market for mergers and acquisitions.
The market most likely overreacted to the MS earnings report (it almost always overreacts in the very short term), but that doesn’t necessarily mean MS stock is a buy on the dip. Shares are now down about 18% for the year-to-date, and recently proved they can fall even farther. After all, MS stock hit a 52-week low less than a month ago.
Patient investors might want to consider MS at current levels, but tactical investors should expect narrow range-bound trading at best.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
