We have taken some hits with the market this year, but I feel confident the bulk of the selling is behind us; we just need to remain patient, suggests Hilary Kramer, editor of Value Authority.
I believe our stocks will generate solid long-term results from current prices, simply given low valuations, return of capital through dividends and share buybacks, and moderate growth from operations.
On June 21, we added the financial services giant, Morgan Stanley (MS) to our buy list. The company was formed in 1935 after the Glass-Steagall Act forced JP Morgan and Co. to separate its investment banking business from the rest of the company.
Since then, Morgan Stanley has grown exponentially, with revenue of $59.75 billion last year. The company operates three segments:
1. Institutional Securities provides investment banking services, including equity and debt underwriting, and mergers and acquisitions advisory services. This unit also offers brokerage services for institutional investors, including equity and debt sales. This segment accounted for 50% of revenues and 60% of net income in 2021.
2. Wealth Management offers brokerage and financial advisory/planning services to individuals and small- to mid-size businesses. Through its 2020 acquisition of E*TRADE, the segment also has a self-directed brokerage service and provides insurance products such as annuities, along with real estate loans. In 2021, this segment accounted for 41% of revenues and 31% of net income.
3. Investment Management manages money in a variety of strategies and asset classes for institutional and individual clients. This segment accounted for 9% of revenues and net income in 2021.
The post financial crisis era has been very good to Morgan Stanley. With markets strong, earnings per share (EPS) increased from $1.25 in 2011 to $8.03 in 2021, with growth across all three segments of the company.
MS also grew book value per share nicely in the period, increasing it from $31.42 to $55.12 even as MS paid a generous dividend. Book Value Growth is important in financials as the increase in net worth is a sign that earnings quality was high and the company has additional net assets to generate a greater amount of future earnings.
The company just released weaker-than-expected results for its second quarter. MS reported second-quarter EPS of $1.39, vs. $1.85 last year, on an 11% decline in revenues. Results were below expectations for $1.56 per share, largely due to an extra ordinarily high amount of regulatory expense related to a specific matter.
Other than that, I think the quarter went pretty much as expected, with investment banking revenues down more than 50% as underwriting dried up. Trading results were the one bright spot, as the company’s clients were active in the volatile market.
Wealth Management provided stability, with operating income flat at $1.55 billion. Even before the financial crisis, Morgan Stanley wanted a bigger presence in fee-based retail investing, stemming from their acquisition of Dean Witter in 1997. Morgan Stanley continued to invest heavily in Wealth Management post financial crisis as it sought greater stability in earnings, and it paid off in the first quarter.
The stock is cheap at its current price, which is well below February’s high of $110. Once markets start to normalize, Morgan Stanley should do very well. Buy below $78. My target is $90. The 3.7% dividend yield will add to total returns.