Home Stocks Morgan Stanley Stock Jumps on 56% Rise in Investment Banking Revenue

Morgan Stanley Stock Jumps on 56% Rise in Investment Banking Revenue

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Key Points

  • Morgan Stanley stock rose some 7% Wednesday on robust Q3 earnings.
  • The firm saw a 56% increase in investment banking revenue.
  • The stock is up 29% YTD. Should you buy now?

The financial services giant easily topped estimates with a 36% earnings bump in Q3. Is the stock a buy?

If there is a common theme for third quarter earnings among financial services firms, it’s investment banking. The large banks that have reported thus far have benefitted from a sharp rise investment banking revenue, including Morgan Stanley (NYSE:MS).

The venerable bank surpassed both earnings and revenue estimates in the quarter, thanks to a 56% increase in investment banking income.

Overall, Morgan Stanley posted a 16% increase in revenue in the third quarter to $15.4 billion, which easily topped estimates of $14.3 billion.

Net income rose 33% year over year to $3.2 billion. Earnings per share increased 36% to $1.88 per share, far exceeding the $1.59 per share median estimate among analysts.

Investors were impressed with the results, as Morgan Stanley stock jumped some 7% in early trading on Wednesday.

Firing on all cylinders

Morgan Stanley had a great quarter across the board, as all three of its major businesses were accelerating.

Within Institutional Securities, which includes investment banking and institutional trading, revenue increased 19% to $5.7 billion. Investment banking revenue made up the bulk of the gains, rising 56% to roughly $1.5 billion. The increase was sparked by a jump in mergers and acquisitions, particularly in the EMEA, and fixed income underwriting. On the trading side, equity revenue rose 21% and fixed income 3%.

Morgan Stanley’s largest business, Wealth Management, saw revenue soar 14% higher year over year to $7.3 billion. Morgan Stanley is the largest U.S.-based wealth manager with more than $4 trillion in assets under management. Worldwide, it is second only to Zurich-based UBS (NYSE:UBS). This business includes its brokerage, financial planning, and advisory business for high-net-worth investors. In Q3, Morgan Stanley saw revenue from transaction increase 10% while asset management revenue rose 19%.

The third major business, Investment Management, had a 9% increase in revenue to $1.46 billion, buoyed by rising asset levels as markets moved higher in the quarter.

“The firm reported a strong third quarter in a constructive environment across our global footprint,” CEO Ted Pick said. “Institutional Securities saw momentum in the markets and underwriting businesses on solid client engagement. Total client assets have surpassed $7.5 trillion across Wealth and Investment Management supported by buoyant equity markets and net asset inflows.”

Morgan Stanley’s edge

Morgan Stanley stock is up about 7% following the Q3 earnings release and it has gained some 29% year-to-date.

One of the advantages that Morgan Stanley has over some of its large competitors, particularly in this market, is that it doesn’t have a major consumer banking operation. The institutions with large consumer banks are dealing with high deposits costs and lofty provisions for credit losses to account for economic uncertainty.

When there is a bull market like this, Morgan Stanley stock can really run, because a strong stock market lifts all of its businesses, without the potential drag of having a large consumer banking arm.

Plus, because of the dominance and strength of its Wealth Management business, it tends to perform fairly well even when markets are not running hot. That’s because the wealthy clientele it caters to is not as financially impacted by challenging markets or economic conditions.

The proof is in the long-term returns that handily beat the S&P 500. Over the past year, Morgan Stanley stock is up 55%, while its five-year annualized return is 23%. Further, it has a 10-year annualized return of 14%, which beats the S&P 500’s annualized return of 12%.

Is Morgan Stanley stock a buy?

With such strong returns, including today’s surge, investors have to watch the stock’s valuation. Right now, it still looks pretty good, with a P/E ratio of 18, which is up from 14 a year ago, and a forward P/E of 14. While higher, the numbers are still below the S&P 500 median.

I’d be a little wary buying Morgan Stanley stock on today’s jump, but this is a great company with some robust tailwinds within investment banking and wealth management. Perhaps wait for the stock price to settle a bit and revisit it then as a solid long-term option in the financial sector.

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Dave Kovaleski
Senior News Writer

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