Morgan Stanley (MS) is scheduled to report its fourth-quarter results on January 16. Wall Street expects the bank to post marginally higher revenue, while its EPS is expected to decline year-over-year. Investors would be closely monitoring the bank’s investment banking revenues and management guidance on when a recovery is expected in the dealmaking space.

In this piece, I have discussed why waiting for an opportune entry point in the stock could be wise.

For the fourth quarter, MS’ EPS is expected to decline 16.8% year-over-year to $1.09. However, its revenue is expected to rise 0.6% year-over-year to $12.82 billion. The company has a solid earnings history, having beaten the consensus estimates in each of the trailing four quarters.

The bank’s net interest income will likely contract in the fourth quarter. Analyst estimates for MS’ net interest income for the fourth quarter stand at $1.88 billion, compared to $2.32 billion in the prior-year quarter and $1.98 billion in the previous quarter.

MS has been affected by the slump in dealmaking. Its investment banking revenues declined 23.7% year-over-year in the third quarter. The bank is in the middle of a transition after new CEO Ted Pick succeeded James Gorman on January 1.

According to Dealogic, dealmaking revenue has been at its lowest level in a decade. During the first three quarters of 2023, fees from dealmaking, IPOs, and bond underwriting collectively for the five banks with Wall Street operations were down 12.4% compared to the same period in 2022.

MS’ asset and wealth management segments are expected to continue their solid performance. Moreover, its trading revenues are expected to have picked up in the fourth quarter, driven by the strong performance of the equity markets toward the end of 2023.

Recently, MS has agreed to pay $249.40 million to the Department of Justice and Securities and Exchange Commission to end a long-standing criminal and civil investigation into its block trading for customers. The settlement would resolve charges of deception, fraud, and compliance failures over so-called block trades.

In a statement, MS said, “We are pleased to resolve these investigations and are confident in the enhancements we have made to our controls around block trading, including strengthening our policies, procedures, training and surveillance.”

Over the past three months, the stock has gained 15.3%, and it has declined 0.9% over the past year to close the last trading session at $89.70.

Here’s what you might want to consider ahead of its upcoming earnings release.

Mixed Financials

MS’ net revenues for the third quarter ended September 30, 2023, increased 2.2% year-over-year to $13.27 billion. Its book value per share rose 1.1% over the prior-year quarter to $55.08. The company’s tangible book value per share increased 1.5% year-over-year to $40.79.

On the other hand, its net income applicable to MS declined 8.5% year-over-year to $2.41 billion. Its EPS came in at $1.38, representing a decline of 6.1% year-over-year. Also, its return on equity came in at 10%, compared to 10.7% in the prior year quarter. In addition, its return on tangible equity came in at 13.5%, compared to 14.6% in the year-ago quarter.

Mixed Analyst Estimates

Analysts expect MS’ EPS for fiscal 2023 to decline 13.2% year-over-year to $5.52. Its revenue for fiscal 2023 is expected to increase 0.6% year-over-year to $54.01 billion. Its EPS and revenue for fiscal 2024 are expected to increase 17.1% and 4.5% year-over-year to $6.47 and $56.41 billion, respectively.

Stretched Valuation

In terms of forward non-GAAP PEG, MS’ 2.15x is 42.9% higher than the 1.50x industry average. Likewise, its 2.73x forward Price/Sales is 3.7% higher than the 2.63x industry average. Its 16.24x forward non-GAAP P/E is 58.4% higher than the 10.25x industry average.

Mixed Profitability

In terms of the trailing-12-month gross profit margin, MS’ 86.54% is 43.3% higher than the 60.37% industry average. Likewise, its 6.09% trailing-12-month Capex/Sales is 207.4% higher than the industry average of 1.98%.

On the other hand, MS’ 10.14% trailing-12-month Return on Common Equity is 13.6% lower than the 11.72% industry average. Likewise, its 0.05x trailing-12-month asset turnover ratio is 77.9% lower than the 0.21x industry average. Furthermore, the stock’s 18.37% trailing-12-month net income margin is 26.9% lower than the industry average of 25.13%.

POWR Ratings Reflect Uncertainty

MS has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MS has a C grade for Quality, consistent with its mixed profitability. Its 1.41 beta justifies its C grade for Stability.

MS is ranked #17 out of 20 stocks in the Investment Brokerage industry. Click here to access MS’ Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

Despite signs of green shoots in dealmaking during the fourth quarter, MS’ investment banking revenues are expected to remain muted. An improved rate outlook for the year is expected to boost IPOs and mergers and acquisitions, which could benefit MS. Moreover, a fall in interest rates could cause bonds to rise, thereby benefiting MS’ fixed income business.

Despite the chances of a recovery in dealmaking this year, risks of a slowing economy, the Fed keeping interest rates higher for longer due to sticky inflation, and a delay in rate cuts could extend the slump in dealmaking.

Given the uncertainty surrounding the banking sector and MS’ mixed fundamentals, profitability, and analyst estimates, it could be wise to wait for a better entry point in the stock.

How Does Morgan Stanley (MS) Stack Up Against Its Peers?

MS has an overall POWR Rating of C, equating to a Neutral rating. You may check out these B-rated stocks within the Foreign Banks industry: Banco Santander, S.A. (SAN), Erste Group Bank AG (EBKDY), and KB Financial Group Inc. (KB). For exploring more Buy-rated Foreign Banks stocks, click here.

What To Do Next?

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MS shares were trading at $89.70 per share on Monday morning, down $0.81 (-0.89%). Year-to-date, MS has declined -3.81%, versus a 0.29% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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