3 Reasons Morgan Stanley’s Stock Could Rise

Morgan Stanley is growing and improving in the right ways, and could benefit tremendously if the economy keeps improving.

Aug 18, 2014 at 4:09PM

Morgan Stanley (NYSE:MS) is one of the largest investment banks in the world, and has performed pretty well recently, with the stock price up more than 20% over the past year.

Morgan Stanley

However, there are some reasons to believe the growth has just begun for Morgan Stanley. While there is no way of knowing for sure if the company's profit growth will continue, the company is definitely on the right track in terms of growing its business, improving efficiency, and attracting new clients.

Tremendous investment banking growth
Morgan Stanley is doing an excellent job of growing its institutional securities division, which includes underwriting, advisory, and trading activities.

M&A activity has heated up lately, and this has helped Morgan Stanley grow its advisory revenues by more than 25% in the past year. Equity underwriting revenues experienced an even more dramatic jump of 50% to $489 million, reflecting the very strong IPO environment. Even fixed income underwriting increased by 26% on more investment-grade and high-yield issues.

More importantly, Morgan Stanley outpaced its peers in all three of these categories. In a hot IPO market, for instance, any investment bank should see more equity underwriting revenues. However, growing faster than the competition signals Morgan Stanley is doing something right.

For example, JPMorgan Chase only managed to grow its equity underwriting revenue by 4% and saw its fixed-income underwriting revenue fall by 6% from last year. Even industry leader Goldman Sachs didn't do as well, with its 47% jump in equity underwriting almost matching Morgan Stanley, but its 5% and 4% gains in fixed-income underwriting and advisory revenues fell short.

Improving efficiency
Morgan Stanley's wealth management business operated at a profit margin of above 20% for the first time since the acquisition from Citigroup, and also delivered record earnings.

Revenues from the division grew by 5%, and Morgan Stanley was able to cut expenses (other than compensation) by 9%. So, total expenses only grew by 3% year-over-year, and anytime expenses are growing slower than revenues, it'll result in better profit margins. The company has set a 22-25% target for its margins by the end of 2015, and the company is already very close to meeting its goal.

In other divisions, efficiency is improving as well. As a whole, the company grew revenues by 3% while keeping expenses constant, resulting in an overall expense ratio of 76%, which is a nice improvement from 79% a year ago. The wealth management business is also more efficient, producing 5% more revenue per employee as compared with last year.

And, as efficiency improves, it means more earnings for the company and more value for shareholders.

Client assets are growing in the right way
If you read the most recent quarterly report of virtually any U.S. financial institution, you are likely to find that assets under management have increased, and by an impressive amount.

However, with the S&P 500 up by about 15% in the past year, it's no wonder that assets are increasing. If a client has $1 million in their portfolio and it gains 15%, they now have $1.15 million with the firm. This doesn't necessarily mean the firm's business is doing well or growing.

The more important measurement of asset growth is to look at net inflows or outflows of money. By taking the amount of money that was deposited into accounts and subtracting the amount of money withdrawn from accounts, it lets us know if a firm's assets are growing independent of whatever the market is doing.

In a good year for the markets, it's entirely possible for a bank to end up with more assets in accounts than they started with, even though money is flowing out of accounts more quickly than it is flowing in. Conversely, during a down year for the markets, a bank's business could still be very healthy if clients are moving assets into their accounts.

In Morgan Stanley's case, the firm experienced $12.5 billion in net asset flows into fee-based accounts. Between this and the excellent market performance, client assets in fee-based accounts grew by 21%. So, the company is growing in the right ways, which should produce better growth than peers while the market is strong, and should also help Morgan Stanley outperform its peers in down years.

Will it go up from here?
Basically, Morgan Stanley seems to be firing on all cylinders right now, with excellent growth in revenues and efficiency. However, a lot of the company's good performance is dependent on a strong economy and stock market.

If the economic recovery continues to facilitate a strong IPO and M&A market and helps facilitate asset growth, Morgan Stanley stock could perform very well in the years to come.

Morgan Stanley + Apple? This device makes it possible.
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its destined to change everything from banking to health care. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers