Morgan Stanley Reports Strong Q4 Earnings, Beating Expectations
Morgan Stanley reported adjusted earnings-per-share (EPS) on Tuesday morning that exceeded expectations, signaling strong performance in the fourth quarter. The revenue for the three months ended Dec. 30 increased 1% year-over-year to $12.9 billion, surpassing the consensus estimate of $12.75 billion. Earnings-per-share fell 10% on an annual basis to $1.13, but still exceeded the expected $1.01 by a wide margin. Despite this positive report, Morgan Stanley’s new CEO, Ted Pick, expressed caution about the macroeconomic landscape, setting a tone of skepticism and leading to a tough session for the stock.
New CEO of Morgan Stanley Shows Caution amid Macro Concerns
During his first post-earnings conference call as CEO, Ted Pick expressed his concerns about two possible headwinds for Morgan Stanley in the future. The first is related to geopolitical conflicts potentially intensifying, while the second revolves around the state of the U.S. economy in 2024. These comments from the new CEO added to the cautious sentiment surrounding the stock, dampening investor confidence.
Morgan Stanley Stock Faces Tough Session with 5% Decline
Morgan Stanley’s stock experienced a significant decline of 5% following the earnings report. The negative sentiment can be attributed to the caution expressed by the new CEO as well as the initial perception of a missed EPS. This decline marked the fifth consecutive session of losses for the stock. However, it is important to note that both Morgan Stanley and Wells Fargo saw their stocks surge at the end of 2023, which indicates that short-term performance may not accurately reflect long-term prospects.
Topline Strength Drives Better-Than-Expected Q4 Results for Morgan Stanley
Despite the tough session for the stock, Morgan Stanley’s fourth quarter results were largely better than expected. The strength in the topline was driven by revenue beats in all three primary operating segments. The bounce back in Wealth Management and Investment Banking was particularly pleasing, as poor performance in the third quarter had weighed heavily on the stock. It is important to look at the adjusted earnings numbers that exclude one-time charges, such as the Federal Deposit Insurance Corporation (FDIC) special assessment, to get a better understanding of the company’s valuation on a go-forward basis.
Morgan Stanley Sets Long-Term Goals Despite One-Time Charges Impacting 2023 Performance
Although Morgan Stanley faced one-time charges throughout 2023, including the FDIC special assessment and severance expenses, the management reiterated their commitment to achieving long-term goals. These goals include a 20% return on tangible common equity (ROTCE), a 70% efficiency ratio, a 30% pre-tax margin in Wealth Management, and over $10 trillion in total client assets. By excluding the one-time charges, the full-year efficiency ratio and ROTCE numbers improve. Additionally, the common equity tier 1 (CET1) ratio remains well above the regulatory requirement, providing room for more capital return to shareholders and cushioning against future regulatory changes.
With the strong Q4 performance and long-term goals in mind, we reiterate our 1 rating for Morgan Stanley’s stock and increase our price target to $98 per share from $95. While the current price level of $85 may be a good entry point, it is not enough of a pullback for us to add more shares to our large position. We would like to see a greater pullback before considering additional investments.
Analyst comment
Positive: Morgan Stanley Reports Strong Q4 Earnings, Beating Expectations
Neutral: New CEO of Morgan Stanley Shows Caution amid Macro Concerns
Negative: Morgan Stanley Stock Faces Tough Session with 5% Decline
Positive: Topline Strength Drives Better-Than-Expected Q4 Results for Morgan Stanley
Positive: Morgan Stanley Sets Long-Term Goals Despite One-Time Charges Impacting 2023 Performance
As an analyst, the market is likely to react negatively in the short term due to cautious comments from the new CEO and the decline in stock price. However, the strong Q4 results and long-term goals suggest potential for future growth, leading to a positive outlook and a potential increase in the stock price.
