Morgan Stanley stock (NYSE: MS) dropped greater than 44% – falling from $50 in the conclusion of 2019 to approximately $28 in late March – then spiked 83% to approximately $51 now. This usually means that the stock has touched on the amount seen at the conclusion of 2019.
You will find two obvious reasons for this – The Covid-19 epidemic and financial downturn intended that market expectations for 2020 along with also the near-term consumer demand fell. This may cause substantial losses for companies and individuals alike, affecting their loan repayment capacity and exposing Morgan Stanley to large wealth direction loan losses. The multi-billion-dollar Fed stimulus provided a floor, and the stock recovery owes much to that.
But this isn’t the end of the story for Morgan Stanley stock
Trefis estimates Morgan Stanley’s valuation to be around $58 per share – about 15% above the current market price – based on an upcoming trigger explained below and one risk factor.
The trigger is an improved trajectory for Morgan Stanley’s revenues over the second half of the year. We expect the company to report $42.4 billion in revenues for 2020 – 2)4% higher than the figure for 2019. Our forecast stems from our belief that the economy is likely to open up in Q3. While cases are still rising in many parts of the world, we see many countries preparing different phases of opening up the economy in Q3. Further, as the lockdown restrictions are easing in most of the world, consumer demand is likely to pick up, too. The company has derived positive growth in Q1 and Q2 mainly due to strength in its trading arm, followed by higher investment banking revenues. This jump could be attributed to the Fed stimulation, which set the ground for businesses to raise corporate debt, benefiting both underwriting business and also the sales & trading division of the bank. This has largely offset the impact of weak revenues in other segments. While the trading income is expected to decline as compared to the first two quarters, it is likely to drive positive growth in the second half as well. Overall, we see the company reporting an EPS in the range of $4.92 for FY2020.
Thereafter, Morgan Stanley’s revenues are expected to slightly drop to $42 billion in FY2021, mainly due to a drop in the sales & trading business. Further, the bank has regularly invested in share repurchases and is likely to buy back stock close to 2019 levels, leading to an EPS of $5.02 for FY2021.
Finally, how much should the market pay per dollar of Morgan Stanley’s earnings? Well, to earn close to $5.02 per year from a bank, you’d have to deposit about $555 in a savings account today, so about 110x the desired earnings. At Morgan Stanley’s current share price of roughly $51, we are talking about a P/E multiple of just above 10x. And we think a figure closer to 12x will be appropriate.
That said, Investment Banks are riding on the wave of higher trading volume and growth in underwriting deals, which is a volatile business. Growth looks less promising, and long-term prospects are less than rosy. What’s behind this?
The economic downturn could cause significant losses for businesses and individuals alike, impacting their loan repayment capability. This could result in sizable losses for Morgan Stanley, as it has a substantial loan portfolio of wealth management loans. The bank generated approximately 43% of its earnings from this wealth management business in 2019. Further, as the economy slows down, it will likely become expensive for the bank to attract funding, negatively impacting all its operations. We expect the bank’s net income margin to decline from 20.5% in 2019 to 17.7% by FY 2021.
The same trend is visible across Morgan Stanley’s peer – Citigroup. Its earnings are expected to benefit from positive growth in its trading arm and investment banking business in FY2020. However, its margins are very likely to suffer due to build-up in provisions for credit losses in anticipation of bad loans. This would explain why Citigroup’s stock currently has a price of just below $53 but looks slated for an EPS of around $6.13 in FY2021.
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