Morgan Stanley on Tuesday reported second-quarter results that largely exceeded Wall Street expectations — though weakness in one key segment warrants closer monitoring even as the stock shook off earlier declines. Revenue for the three months ended June 30 increased over 11% year over year to $15.02 billion, outpacing expectations of $14.3 billion, according to estimates compiled by LSEG. Earnings per share jumped nearly 47% versus the year-ago period to $1.82, exceeding the $1.65 expected, according to LSEG. Morgan Stanley Why we own it : We own Morgan Stanley for the rebound taking place in IPO and M & A activity along with growth in wealth management, which provides more durable fee-based revenues. We also view the bank’s excess capital as supportive of further shareholder returns via buybacks and dividends while also providing for additional investments in growth. Competitors : Goldman Sachs Weight in Club portfolio : 3.5% Most recent buy : Oct. 18, 2023 Initiated : July 12, 2021 Bottom line This was an overall pretty strong quarter. In addition to the revenue and earnings beats, Morgan Stanley put up better-than-expected results on nearly all key firmwide metrics. This includes the efficiency ratio, where a lower number is better, along with return on tangible common equity (ROTCE), tangible book value per share and the common equity tier 1 (CET1) ratio. ROTCE is an important metric in valuing financial institutions, such as determining what multiple to put on tangible book value, which is $42.30 per share. Morgan Stanley’s second-quarter ROTCE of 17.5% topped expectations of 15.7%, according to estimates compiled by Bloomberg. The CET1 ratio, meanwhile, indicates a financial institution’s ability to return cash to shareholders via buybacks and dividend payments. For that reason, we’re very happy to see a sequential increase here from 15.1% to 15.2%. Additionally, total client assets increased to $7.2 trillion, representing further progress toward management’s goal to reach $10 trillion over the long term. The star of the show was Morgan Stanley’s Institutional Securities segment, which houses all of the firm’s traditional Wall Street operations. Segment revenue of $6.98 billion easily topped analyst expectations, and all three main subsegments — investment banking, equity trading and fixed-income trading — surpassed consensus, too. On the call, CFO Sharon Yeshaya said the division benefited from the “strength of the integrated investment bank across U.S. and international markets. Higher activity in Asia contributed to results.” Unfortunately, results came up short in both the Wealth Management and Investment Management segments. Investors pay close attention to Wealth Management, in particular, because it provides a more durable, fee-based revenue stream and building that business has been a key focus in recent years. The weakness in Wealth Management is why Morgan Stanley shares initially fell on the release Tuesday morning. We…
Read More: We’re hiking our price target on Morgan Stanley despite a miss in a key