Morgan Stanley 2Q22 Research Report - George Runoff

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George Runo P b cE Re ea c M a Sa (MS-NYSE) Market Data Financial Ser ices G R 613-371-8094 @ a .c Current Price $84.09 Da a a A 2, 2022 Market Cap (bln) $144.63 Net Debt (bln) $355.27 C a O Enterprise Value (bln) $499.90 Morgan Stanle , a nancial holding compan , provides various Shares Outstanding (bln) 1.72 nancial products and services to corporations, governments, Dividend Yield 4% nancial institutions, and individuals in the Americas, Europe, 52-Week Range $72.05-$109.73 the Middle East, Africa, and Asia. It operates through % 52-Week High -23% Institutional Securities, Wealth Management, and Investment % 52-Week Low 17% Management segments. The Institutional Securities segment 5- r Projected Growth (Annual) 22% o ers capital raising and nancial advisor services, including services related to the underwriting of debt, equit , and other securities, as well as advice on mergers and acquisitions, Ke Multiples restructurings, real estate, and project nance. This segment also provides sales and trading services, such as sales, P/E (FY23) 10.86 nancing, prime brokerage, and market-making services in P/E (FY22) 12.68 equit and ed income products consisting of foreign EV/EBITDA 25.49 e change and commodities; corporate and commercial real EV/Revenue 9.29 estate loans, which provides secured lending facilities and PEG 0.57 nancing for sales and trading customers, and asset-backed and mortgage lending; and wealth management services, Ke Financial Data investment, and research services. The Wealth Management segment o ers nancial advisor-led brokerage and investment advisor services; self-directed brokerage services; nancial EPS (FY23) $7.74 and wealth planning services; workplace services, including EPS (FY22) $6.63 stock plan administration; annuit and insurance products; EBITDA (bln) $19.61 securities-based lending, residential real estate loans, and Revenue (bln) $53.81 other lending products; banking; and retirement plan services Operating Margin 36% to individual investors and small to medium-si ed businesses and institutions. The Investment Management segment S ce: Ya F a ce, M a Sa e provides equit , ed income, liquidit , and alternative/other A Da a N -GAAP products to bene t/de ned contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, and third-part fund sponsors and corporations through institutional and intermediar channels. Morgan Stanle was founded in 1924 and is headquartered in New York, New York. DISCLOSURE: T ac d c db a a d d d a a d a b da ddd d c a d c . Morgan Stanley (MS-NYSE) Public Equity Research Summary of 2Q23 Results Poor 2Q23 Performance. July earnings showed a realized EPS of $1.44, which underperformed the estimated EPS of $1.56 by 8.3%. Revenue decreased 12.7% q/q, marking the first sharp movement in light of miniscule gains/losses for 4 straight quarters. The 2Q22 earnings mark a 23.81% decline in EPS y/y, broadening the losses felt by Morgan Stanley in 2022. Pessimistic Markets Impact Earnings. Losses were driven by a collapse in IPO, Debt and Equity issuance in 2022, marking a sharp reversal of the deal boom that boosted earnings in 2020. This collapse can be attributed to a broader decline in financial assets due to fears of recession in light of global economic instability, partially due to the Russia/Ukraine conflict. Strong Trading Performance Amidst Investment Banking Weakness. CEO James Gorman stated that good trading results “helped partially counter weaker investment banking activity” in the 2Q23 earnings release, with Equities trading producing $2.96 billion in revenue in the quarter, above the $2.77 billion estimate, while fixed income trading revenue of $2.5 billion handily exceeded the $1.98 billion estimate. Underperformance in Wealth Management and Investment Management. The firm’s giant wealth management division produced $5.74 billion in revenue, below the $5.99 billion estimate, as lower asset values cut management fees. Investment management revenue fell 17% to $1.41 billion from last year. Increases in Share Buybacks. Morgan Stanley repurchased $2.7 billion of its own stock during the latest quarter. Additionally, the firm’s board approved a new $20 billion share buyback program. 2 Morgan Stanley (MS-NYSE) Public Equity Research Segment Revenue Source: Businesswire, Morgan Stanley Second Quarter 2022 Earnings Results 3 Morgan Stanley (MS-NYSE) Public Equity Research 4 Morgan Stanley (MS-NYSE) Public Equity Research Comparable Company Analysis More Expensive Relative to Industry Average. Morgan Stanley has a P/E (FY23) of 10.86x, which is 8.9% higher than the industry average of 9.97x. This suggests that the Morgan Stanley stock is more expensive than others in its industry. Projected Growth Rate Advantage. Morgan Stanley is projected to grow at a rate of 22% annually over the next 5 years, a figure 3% higher than the industry average projected annual growth rate of 19%. Superior PEG. The market implies a PEG of 0.57x for Morgan Stanley, compared to an industry average of 1.42x. This suggests that its more expensive price relative to the industry average is reasonable given its growth rate. Bigger Company, Similar Revenues/Earnings. Morgan Stanley has an EV/EBITDA and EV/Revenue of 25.49x and 9.29x respectively, multiples that are both substantially higher than the industry averages of 18.88x and 4.92x respectively. This suggests that relative to its size, the company is not making as much as its comparable companies. This however, seems more reasonable when compared to the $100bn+ market cap comparable companies, which show an average EV/EBITDA and EV/Revenue of 17.74x and 7.86x respectively. EBITDA Margin Advantage? Morgan Stanley has a 4% advantage on its comparable company average in terms of EBITDA margin. This average however factors in comparable companies of all market capitalization, and examining the EBITDA margin of its large cap comparable companies shows a 47% average, compared to Morgan Stanley's 36%. This implies inefficiency within Morgan Stanley when compared to its nearest competitors. 5 Morgan Stanley (MS-NYSE) Public Equity Research Comparable Companies Valuation, Risk Factors, and Upside Potential General Risk Factors. (1) Industry fundamentals with respect to customer demand or product/service pricing could change and adversely impact expected revenues and earnings; (2) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter prospective valuation. Company Specific Risk Factors. Exposure to Market Volatility. Morgan Stanley, as one of the largest investment banks in the world, faces an extreme exposure to global economic conditions through its wealth management, investment management, institutional securities and trading segments including; (1) Interest rate volatility; (2) Market liquidity; (3) Index volatility; (4) Foreign exchange rates; (5) Commodity prices; and (6) Credit spread. Considering the turbulent economic conditions that have presented themselves in 2022, a market downturn would prove damaging to Morgan Stanley. Exposure to Default Risk. Morgan Stanley, as an institutional lender, faces a large risk exposure in the event of a credit default wave. Regulatory Risk Factors. Investment banking as a sector has faced a myriad of regulatory scrutiny by the United States government in recent years. The introduction of new regulations barring firms such as Morgan Stanley from partaking in profitable activities (especially activities already heavily involved in revenues) would negatively impact future outlooks. 6 Morgan Stanley (MS-NYSE) Public Equity Research Upside Potential. (1) Morgan Stanley’s increased share buyback program indicates insider confidence in the company, and suggests that there is long term upside potential to be had; (2) Morgan Stanley has, within the last 5 years, bolstered efforts to grow their wealth management division through the acquisition of companies such as Etrade and Eaton Vance. This aggressive expansion bodes well for Morgan Stanley, as the company evolves to fit changing consumer demand in a modern economy; (3) Morgan Stanley as a hegemonic financial institution has heavy correlation to the global economy, and although in the short term the outlook of the global economy is grim, in the long term history has shown that the economy tends to perform well. If the firm is able to avoid any grand operational mistakes, it is likely that it too will follow this trend. 7