No one’s going to deny that Morgan Stanley (NYSE:MS) has recently enjoyed a significant resurgence. Last year, MS stock gained a respectable 24%. More importantly, it beat out rival Goldman Sachs Group Inc (NYSE:GS) by a country mile. Of course, no one profits from past performance. Does MS still have something left for investors this year?
If its just-released first quarter results are any indication, Morgan Stanley stock has the right stuff. As our own William White reported, MS registered an earnings per share haul of $1.45, well above Wall Street consensus of $1.25. Furthermore, in the year-ago quarter, the financial institution only managed to hit $1 EPS. Thus, things are definitely on the upswing.
The rest of the income statement was just as impressive, if not more so. On the revenue front, the company hauled in $11.1 billion, which is a quarterly record. Analysts expected $10.36 billion. Net income was a record as well, jumping to $2.7 billion, up 37% from the $1.97 billion reported last year.
All things considered, this was a massive victory for Morgan Stanley. Someone just needs to tell that to MS stock. Shares barely budged on the news. It’s indicative of the currently frustrating consolidation phase that the company finds itself in.
Year-to-date, Morgan Stanley stock has pretty much broken even. Is this a harbinger, or will shares finally wake up? MS has room for improvement, but the upside is fundamentally limited. Let me explain.
The Details Aren’t Great for MS Stock
The devil is in the details, and while I’m not finding anything scandalous with Morgan Stanley, I think you should be aware of some facts; namely, not everything in the Q1 report was outstanding.
For instance, equities trading and fixed income, commodities and currencies trading delivered strongly for MS. The former category exceeded Wall Street forecast by 16%, while the latter category by nearly 14%. What didn’t do so well was wealth management, which is Morgan Stanley’s core business.
Against a $4.5-billion forecast, the investment firm only managed to bring in $4.4 billion. It’s not a bad miss, per se, only slightly more than 2%. However, when every other division is outperforming and contributing to record sales and earnings, it stands out.
This is further down the road, but millennials generally avoid the stock market. As this generation gets older — yes, it will happen — they’re set to put less money at work than Baby Boomers or Generation X. That’s a major problem for MS, especially considering their wealth-management division’s underperformance.
Plus, I like to think that blockchain and cryptocurrencies will influence where millennials and Gen-Z invest.
Where we see a nearer-term opportunity is in the technicals. Between 2014 through 2017, the average price-earnings ratio for MS stock was just under 13.9. If we use this year’s average share price against forecasted EPS (inclusive of the Q1 actual results), we calculate an 11.64 P/E ratio.
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Obviously, that’s undervalued relative to the average P/E, so I see some upside. Assuming Morgan Stanley continues hitting its quarterly marks, I can see MS stock hitting $66 to $70. But that’s a big assumption, considering that the company’s core business is the black sheep. Looking at longer-term trends, this business isn’t likely to improve.
An Aging Industry Getting Older
The other concern that I have with Morgan Stanley stock is that its industry is fading. Sure, these financial institutions are the bedrock of American capitalism. However, the young demographic doesn’t care about that. As I mentioned earlier, with emerging technologies like blockchain, we could see a dramatic rethinking of wealth management.
Again, that’s decades down the road. But the frustration now is that even Wall Street is unexcited about Morgan Stanley’s prospects. If the markets believed that MS stock was the real deal, I find their silence on the Q1 report deafening. Overall, these were great, record-breaking numbers, yet it wasn’t enough to convince investors to open their wallet.
Realistically speaking, we have a 25% to 30% upside potential from current levels. How likely is it to get there? Let’s just say I’m not regularly checking the stats on MS stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
