Morgan Stanley Stock Dropped 5% Yesterday, What To Expect?

Morgan Stanley’s stock (NYSE: MS) has lost approximately 7% YTD, as compared to the 9% rise in the S&P500 over the same period. Further, the stock price decreased 5.2% yesterday vs a 0.74% increase in the broader index. Notably, the drop came after the news of a regulatory probe against the bank’s wealth management unit was reported by the Wall Street Journal. Overall, the stock is currently trading at $87 per share, which is 9% below its fair value of $95 – Trefis’ estimate for Morgan Stanley’s valuation.

Amid the current financial backdrop, MS stock has shown strong gains of 20% from levels of $70 in early January 2021 to around $85 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase in MS stock has been far from consistent. Returns for the stock were 43% in 2021, -13% in 2022, and 10% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that MS underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – it has been difficult over recent years for individual stocks; for heavyweights in the Financials sector including JPM, V, and MA, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

The bank reported better-than-expected revenue figures in the fourth quarter of 2023. It posted total revenues of $12.9 billion – up 1% yoy, mainly driven by a 5% gain in investment banking and a marginal increase in the sales & trading segments . Further, wealth management and investment management revenues were on par with the previous year’s figure. On the cost front, total noninterest expenses as a % of revenues witnessed an unfavorable increase in the quarter. Overall, it led to a 35% drop in the adjusted net income to $1.4 billion.

The company’s top line grew 1% yoy to $54.14 billion in FY 2023. The wealth management revenues improved by 8% yoy, but the impact was almost offset by lower investment banking and sales & trading income. On the expense side, provisions for credit losses increased from $280 million to $532 million in the year. Further, total noninterest expenses rose by 6% yoy. Altogether, the adjusted net income was down 19% yoy to $8.53 billion.

Moving forward, we expect the same trend to continue in Q1. Overall, Morgan Stanley’s revenues are estimated to remain around $56.8 billion in FY2024. Additionally, MS’s adjusted net income margin is likely to see some improvement in the year, leading to an adjusted net income of $9.82 billion and an annual GAAP EPS of $6.26. This coupled with a P/E multiple of just above 15x will lead to a valuation of $95.

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