Global Equities And Asia Strength Will Yield Future Value

Key Takeaways

• Strong market position and asset management enhance revenue growth and stability, even in unpredictable markets.
  
• Anticipated rebound in M&A and IPOs, and strategic investments, offer opportunities for future revenue expansion and increased shareholder returns.
  
• Geopolitical uncertainties and market volatility could disrupt client engagement, deal activity, and revenue stability, with risks from recession and inflationary pressures potentially impacting earnings.

Catalysts

A financial holding company, provides various financial products and services to governments, financial institutions, and individuals in the Americas, Asia, Europe, Middle East, and Africa.

• Morgan Stanley's strong position in global markets, particularly in equities and Asia, is expected to support continued growth, leading to potential increases in revenue and earnings from their durable market-share gains.
  
• Their wealth management business, with robust net new assets and fee-based flows, contributes to stability and growth in revenue and margins, reflecting client engagement even during volatile markets.
  
• The anticipation of a rebound in M&A and IPO markets, with a strong pipeline and no significant changes, suggests potential future revenue increases from advisory and underwriting services once uncertainties stabilize.
  
• Investments in self-directed and workplace channels alongside strong advisor recruitment in wealth management create opportunities to expand revenue and margins despite broader market conditions.
  
• Morgan Stanley’s balance sheet strength, with a CET1 ratio of 15.3%, indicates potential for strategic flexibility that can enhance shareholder returns and support earnings growth through capital deployment.

Morgan Stanley Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Morgan Stanley's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.4% today to 21.5% in 3 years time.
• Analysts expect earnings to reach $15.3 billion (and earnings per share of $9.99) by about April 2028, up from $13.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, up from 12.7x today. This future PE is lower than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 1.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

Morgan Stanley Future Earnings Per Share Growth

Risks

• Geopolitical uncertainties and trade policy shifts create unpredictability, potentially impacting Morgan Stanley's ability to advise clients and manage capital effectively, which could affect earnings and revenue stability.
  
• The risk of recession is increasing, and if it materializes, it could lead to lower client engagement and reduced fees from investment banking activities, impacting net margins and revenues.
  
• Inflationary pressures and uncertain price paths could unsettle the market environment, potentially curbing investor confidence and leading to a downturn in market-related earnings.
  
• The volatility in the stock, bond, and currency markets could disrupt deal activity, delay capital market cycles such as IPOs and M&A, thereby affecting revenue streams from these activities.
  
• Commercial real estate loan provisions indicate potential vulnerabilities in specific sectors, which could lead to unexpected loss provisions and impact net income.

Valuation

• The analysts have a consensus price target of $127.0 for Morgan Stanley based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $156.0, and the most bearish reporting a price target of just $101.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $71.1 billion, earnings will come to $15.3 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $107.86, the analyst price target of $127.0 is 15.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.