Morgan Stanley's decline on Q3 results is too severe and may lead to a buying opportunity

Published Fri, Oct 14 20221:26 PM EDTUpdated Fri, Oct 14 20221:51 PM EDT

Club holding Morgan Stanley (MS) reported weaker-than-expected results for its third-quarter before the opening bell Thursday. But the stock, which fell nearly 5%, was being punished too harshly, given much of the difficulties reflect the realities of this year's tough macroeconomic backdrop and terrible equity market. Earnings per share of $1.47 missed the $1.49 expected by Wall Street analysts. Revenue of $12.99 billion came up short of the $13.3 billion consensus. Breaking things down further: Net-interest income rose 10% to $2.51 billion, beating expectations of $2.48 billion. Non-interest revenue fell 3% to $10.48 billion, missing expectations of $11.01 billion. Bottom line It was not the best quarter. At the firm level, management continues to execute well against massive external headwinds — and as a result, we believe Morgan Stanley remains a good investment because it stands to benefit greatly as the operating environment improves. Until that improvement, however, our patience will be rewarded via dividend payments and share buybacks, which remember are even more effective and accretive in the long-term at lower share prices. Near-term pain does lead to long-term gains when you have a buyback program at work. We sleep easier knowing the firm is well capitalized to weather an economic downturn, as indicated by its healthy Common Equity Tier 1 ratio (CET1), a measure of bank capital versus risk-weighted assets and a sign of the bank's ability to endure financial stress. On the earnings call, CEO James Gorman said, "From a markets perspective, we expect continued volatility as the Federal Reserve continues to tighten policy such to bring down inflation to acceptable long-term levels. This is an environment where it behooves management to be prudent, but balanced. Our wholesale retreat from the markets is not called for but at the same time, I must be more cautious in credit-sensitive parts of the business. Fortunately, the business model changes for the past decade or more, plus t