Commanding a huge market cap of roughly $140.20 billion, leading investment bank Morgan Stanley (MS) is slated to disclose its fiscal 2024 first quarter results on April 16, 2024.

Wall Street forecast for the first quarter appears less-than-stellar, with a projected 5.3% year-over-year drop in earnings per share, reaching $1.65, and a slight drop in its revenue amounting to $14.39 billion.  While the company’s fourth-quarter results topped analyst estimates, its results were impacted by two one-time regulatory charges.

These charges comprised a $286 million fee associated with a special assessment by the Federal Deposit Insurance Corp and a further $249 million legal expense to settle a criminal investigation and a Securities and Exchange Commission (SEC) probe regarding the unauthorized disclosure of block trades.

MS CEO Ted Pick highlighted that despite challenges posed by a mixed market environment and various headwinds, the company delivered a solid Return On Average Tangible Common Shareholders’ Equity (ROTCE) of 12.8% during the fiscal year 2023.

However, Pick cautioned about significant downside risks, including escalating geopolitical conflicts and the state of the U.S. economy, which could present major challenges for the bank this year.

Moreover, several federal regulators, including the SEC, the Office of the Comptroller of the Currency (OCC), and other Treasury Department offices, are investigating MS’ client vetting processes within its wealth-management division for potential money laundering risks, so the bank’s shares have taken a major blow recently.

The stock has climbed marginally over the past nine months but plunged 7.6% year-to-date to close the last trading session at $86.19.

Here are the fundamental aspects of MS that could influence its performance in the near term:

Mixed Financials

For the fiscal fourth quarter that ended on December 31, 2023, MS’ net revenue increased 1.2% from the year-ago value to $12.90 billion. On the other hand, the company’s net income and EPS came in at $1.54 billion and $0.85, down 40% and 32.5% from the prior-year quarter, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, MS is trading at 13.57x, 35.5% higher than the industry average of 10.01x. Likewise, its forward non-GAAP PEG of 1.79x is 41.6% higher than the industry average of 1.27x. Furthermore, the stock’s forward Price/Book multiple of 1.51x is 50.4% higher than the 1.01x industry average. 

Mixed Profitability

The stock’s trailing-12-month gross profit margin and CAPEX/Sales of 86.47% and 6.36% are 44.8% and 218% higher than the 59.73% and 2% industry averages, respectively.

However, its trailing-12-month net income margin of 16.95% is 28.1% lower than the industry average of 23.57%. Likewise, MS’ trailing-12-month asset turnover ratio of 0.05x is 78.6% lower than the 0.21x industry average.

POWR Ratings Exhibit Mixed Prospects

MS’ mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has a C grade for Stability, justified by its 24-month beta of 1.09. Furthermore, it has a C grade for Quality, which aligns with its mixed profitability metrics.  

Within the Investment Brokerage industry, MS is ranked #17 out of the 20 stocks.

Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Momentum, and Sentiment. Get all MS ratings here.

Bottom Line

MS appears to face a setback amid intense scrutiny from multiple federal agencies. Furthermore, considering the bank’s mixed fundamentals, stretched valuation, conservative analyst estimates, and a cautionary note from the CEO regarding potential headwinds in 2024, investors may want to consider keeping an eye on the company’s shares and wait for a more favorable entry point.

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

While MS has an overall grade of C, equating to a Neutral rating, you may also check out these other stocks within the Investment Brokerage industry: Oppenheimer Holdings Inc. (OPY), Piper Sandler Companies (PIPR), and Stifel Financial Corp. (SF), carrying B (Buy) ratings. To explore more Investment Brokerage stocks, click here.

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MS shares were trading at $87.69 per share on Monday morning, up $1.50 (+1.74%). Year-to-date, MS has declined -5.04%, versus a 8.69% rise in the benchmark S&P 500 index during the same period.

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