We're raising our Morgan Stanley price target despite the stock's post-earnings decline

Published Tue, Jan 16 20242:33 PM EST

Morgan Stanley on Tuesday morning reported an adjusted earnings-per-share beat. But as we saw with Wells Fargo on Friday, EPS had initially looked like a miss. That, coupled with Morgan Stanley's new CEO expressing macro caution, set the tone for a tough session for the stock. Revenue for the three months ended Dec. 30 increased 1% year-over-year to $12.9 billion, outpacing expectations of $12.75 billion, according to the consensus estimate compiled by Bloomberg. Earnings-per-share fell 10% on an annual basis to $1.13, exceeding the $1.01 expected. EPS numbers from the major financial institutions have been messy this quarter as analysts account for a Federal Deposit Insurance Corporation (FDIC) special assessment imposed on big banks to pay for the rescue of regional banks after last year's failure of Silicon Valley Bank. Morgan Stanley's EPS of $1.13 excludes the one-time FDIC payment and other one-time legal charges taken in Q4. MS 1Y mountain Morgan Stanley 1 year Shares of Morgan Stanley were on a five-session losing streak with Tuesday's post-earnings 5% decline. However, Morgan Stanley — and for that matter, Wells Fargo — saw their stocks surge into the end of 2023. We had been cautioning members that banks may have been coming into the quarterly prints too hot. Not helping matters, on his first post-earnings conference call as CEO, Ted Pick said he sees two possible headwinds ahead: "The first is geopolitical, that global conflicts intensify and the second is the state of the U.S. economy over the course of 2024." Bottom line Morgan Stanley's fourth quarter was largely better than expected, with topline strength resulting from revenue beats in all three primary operating segments. We're especially pleased to see the bounce back in Wealth Management and Investment Banking — the former, in particular, as poor performance in the third quarter weighed heavily on shares. It's important to consider quarterly EPS excluding these one-time charges because it provides a better basis for valuation on a go-forward basis. Looking at the adjusted earnings numbers is always standard operating procedure. But this quarter, EPS has been muddled by the FDIC special assessment — which is the result of the SVB collapse in March 2023 and the subsequent troubles at other regionals, and not due to any missteps by Morgan Staley. The reported efficiency ratio did reflect a miss versus consensus estimates, however, it appears to be largely in line with expectations when factoring out the legal and FDIC charges. Those one-time charges also appear to be the main reason non-compensation expenses came in above estimates and certainly weighed on the firm's return on tangible common equity (ROTCE). Nonetheless, management reiterated their longer-term commitment to achieving a 20% ROTCE and a 70% efficiency ratio, along with a 30% pre-tax margin in Wealth Management and more than $10 trillion in total client assets. For the full-year 2023, the firm's efficiency ratio came in at 77%, ROTCE was 12.8%, and the pre-tax Wealth Management margin was 24.9% in 2023. Total client assets ended last year at $6.6 trillion. However, it's important to note that one-time charges of nearly $900 million taken throughout the full year — including one-time legal matters, the FDIC charge, and severance expenses — resulted in a 164 basis point headwind for the efficiency ratio and a 105 basis point headwind on ROTCE. So, excluding these factors, we get a full-year efficiency ratio closer to 75.5% and a ROTCE closer to 13.9%. Morgan Stanley's full-year Wealth Management pre-tax margin was also closer to 25.5% when excluding the FDIC special assessment associated with that segment. Full-year earnings per share would have also been 44 cents higher. Also included in full-year expenses was $293 million relating to the now-complete integration of E-Trade. So, as we look ahead to 2024, Morgan Stanley should be valued with the understanding that 2023 saw over $1 billion in one-time items that don't represent normal operations. Lastly, the firm's common equity tier 1 (CET1) ratio, which measures capital versus risk-weighted assets, despite being a tick below expectations, remains well above the firm's 13.3% minimum regulatory requirement. That level provides ample room to return more cash to shareholders and a strong cushion to absorb any increased regulator requirement in the future. With all that in mind, we're reiterating our 1 rating and bumping our price target up to $98 per share from $95. We see the current $85 level as a good entry point. But for the Club's large position, it's not enough below our cost basis to buy here. For us, we'd like to see more of a pullback before we add shares. Companywide Q4 results Looking at the Segment Sales part of the earnings table above, Institutional Securities saw an across-the-board and overall beat in the quarter. Investment banking revenue advanced 5% from last year, driven entirely by a 25% increase in fixed-income underwriting revenues. Advisory revenues and equity underwriting revenues were both down marginally versus the year-ago period. Equity trading revenue rose 1% from last year — benefitting from the absence of markdowns that hit the segment last year, though this was offset by higher funding and liquidity costs. Fixed-income trading revenue was up 1.1% — benefitting from higher commodities-related revenue and increased client activity, though this was partially offset by lower credit product sales. Total expenses for the segment (not seen on the table) increased by 13% to $4.51 billion, with growth in both compensation and non-compensation expenses. The pre-tax margin reported was 8.3% down from 15.6% in the year-ago period. Excluding one-time items, the pre-tax margin was closer to 15.75%, reflecting an improvement year-over-year. Morgan Stanley's Wealth Management segment sales were mixed for the quarter. But the entire segment was able to exceed expectations. Asset management revenue increased 6% from last year, reflecting higher asset levels and the impact of positive fee-based asset flows. The firm gathered net new assets in the quarter of $47 billion, bringing full-year 2023 additions to $282 billion. Transactional revenue increased nearly 17% but was largely unchanged when excluding the impact of mark-to-market gains on investments associated with employee deferred compensation plans. Net interest income revenue fell a little over 13% from last year but was right in line with Street expectations. Still, it disappointed investors looking for flat comps. The bank attributed the declines to a change in the deposit mix that was only partially offset by the tailwind of higher interest rates. Total expenses for the segment increased 10% annually to $5.24 billion. Pre-tax margin at the segment was 21.5%, which includes one-time items. The Investment Management segment delivered an overall beat. Asset management and related fees were up a little over 2% from last year on higher average assets under management, which benefited from increased asset values. Performance-based income and other was down more than 32% from a year ago. Total expenses for the segment declined by a little less than 4% annually to $1.2 billion, as a result of lower compensation associated with carried interest. Capital returns Morgan Stanley repurchased 17 million shares in the fourth quarter, at an average purchase price of $75.23 per share, a great level given where shares are now, even with Tuesday's pullback. The result is a return of capital to shareholders of $1.3 billion. At current share-price levels, Morgan Stanley has an annual dividend yield of 4%. (Jim Cramer's Charitable Trust is long MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Ted Pick, co-president of Morgan Stanley, speaks during a Bloomberg Television interview in New York, US, on Thursday, Oct. 26, 2023.

Jeenah Moon | Bloomberg | Getty Images