Morgan Stanley Earnings Preview: Will Increased Wealth Management Business Pay Off?

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Morgan Stanley (NYSE: MS) is one of the largest financial services companies in the U.S. and is currently trading at historically low levels.  The company’s stock hit an all-time high of $90.95 in 2007, before the financial crisis, and even after the crisis was trading at over $30 until as recently as March 2011 (see chart below – it would have been nice to buy at $6.71 back in 2009!).  Now, with the stock trading under $20, investors will be listening intently when the company reports earnings on Monday the 14th of this month.

<img src="/media/images/user_14267/ms-chart_large.png" />

Morgan Stanley operates in three segments. Institutional Securities (36% of net revenues) includes capital raising, financial advisory services, corporate lending, market-making activities, and other related businesses.  The Global Wealth Management Group (57%) provides brokerage and investment advisory services, wealth planning, annuities, and banking services through their Morgan Stanley Wealth Management, formerly Morgan Stanley Smith Barney (MSSB) joint venture with Citigroup (NYSE: C), of which Morgan Stanley owns a 65% stake.  Finally, the Asset Management segment (7%) provides similar services as the Global Wealth Management Group, however to institutional clients.

Recent growth developments include buying an additional stake in MSSB from Citigroup.  In fact, Morgan Stanley intends to acquire the entire remaining stake from Citigroup before June 2015.  The company (and most analysts) tends to agree, as they see Global Wealth Management as the major source of growth going forward. 

So what should investors look for on earnings day? First, the numbers: Morgan Stanley is expected to report fourth quarter earnings of 31 cents per share, and total year earnings of -1 cent per share, according to consensus estimates.  Just speaking from a numerical standpoint, expect a very positive reaction if the company beats or even meets these expectations, as the last three consecutive quarters were all below estimates. 

During the conference call, pay specific attention to the benefits the company is seeing (or anticipating) from the expansion of their Global Wealth Management (GWM) business. Morgan Stanley has been devoting a lot more of its resources to GWN over the past few years, and in fact, it only accounted for 31% of the company’s revenues in 2007 compared to the previously mentioned 57% today.  The company itself has said that it anticipates growing net interest income as a result of expanded GWM business, so listen closely for any updates on this front.  Also listen for the company to comment on any expected increase in trading and investment banking activity, as is widely expected to be seen in all financial services companies.  Their comments on this issue could also set the tone for other companies’ reports later on in earnings season.

In terms of valuation, it is hard to estimate using traditional P/E analysis since earnings are expected to be almost zero for 2012.  However, Morgan Stanley is expected to earn $1.99 per share in 2013 and grow their earnings further to $2.33 in 2014.  Therefore, Morgan trades at 9.95 times forward earnings.  For comparison’s sake, Goldman Sachs (NYSE: GS), probably the closest rival by business model, trades at a slightly higher multiple of 10.5 times 2013 earnings (Goldman reports on Wednesday the 16th, and most of the same concerns about trading activity apply there as well).  These are both trading at discounts to the sector’s historical average of 12-15 times earnings, however the market will need to see some positive catalysts before the share prices jump to the next level.  If it turns out that Morgan Stanley’s increased dedication to its wealth management business pays off, it would not be unreasonable to see the stock back in the 30’s within the next year or two, provided the next several quarters go their way.


KWMatt82 owns shares of Goldman Sachs Group, Inc.. The Motley Fool recommends Goldman Sachs Group, Inc.. The Motley Fool owns shares of Citigroup Inc . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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