Investments In E*TRADE And Parametric Will Support Future Client Acquisition

Key Takeaways

• Heavy investments in technology and strategic integration aim to boost client acquisition, infrastructure, and durable earnings growth across segments.
  
• Focus on capital markets, M&A advisory, and shareholder returns to enhance revenue, net margins, and long-term shareholder value.
  
• Geopolitical uncertainties and rising interest rates challenge revenue stability and earnings potential due to impacts on margins, capital levels, and operational costs.

Catalysts

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

• Morgan Stanley's focus on investing heavily across the Firm, particularly in E*TRADE, Parametric, and its technology, is expected to support client acquisition and enhance infrastructure. This should drive future revenue growth as these investments translate into new opportunities and expanded client share.
  
• The strategic integration of Morgan Stanley's Wealth Management, Investment Management, and Institutional Securities to create an 'Integrated Firm' is expected to generate durable earnings growth. This could potentially enhance net margins as the firm leverages its comprehensive service model.
  
• Continued investment in Wealth and Investment Management has led to substantial growth in assets and fee-based revenues. Expanding these segments is likely to increase revenue and earnings over time through enhanced client relationships and asset under management (AUM) growth.
  
• Morgan Stanley's leadership in global institutional securities with a focus on M&A pipelines and advisory revenues positions it to capitalize on a rebound in capital markets activity. This should drive revenue growth and improve net margins through increased deal-making.
  
• The firm has committed to increase its dividends in alignment with the growth of its fee-based earnings. This commitment to capital return policies is expected to drive shareholder value and support future earnings per share (EPS) growth.

Morgan Stanley Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Morgan Stanley's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.8% today to 22.6% in 3 years time.
• Analysts expect earnings to reach $16.1 billion (and earnings per share of $10.28) by about January 2028, up from $12.8 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 16.6x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Morgan Stanley Future Earnings Per Share Growth

Risks

• The geopolitical uncertainties and resumption of inflation could disrupt investor and corporate confidence, potentially impacting revenues and net margins.
  
• High capital levels are crucial for long-term growth, but ongoing geopolitical tensions and shrinking markets could limit future earnings potential.
  
• The transition to a rising interest rate environment poses a challenge for the company’s ability to manage its fixed income and lending portfolios, which may affect revenue stability.
  
• Investments in systems and potential modernization costs to stay compliant can lead to higher operational expenses, putting pressure on net earnings.
  
• Stagflation and prolonged periods of economic uncertainty could limit market activity and M&A opportunities, adversely affecting revenue growth in capital markets and securities.

Valuation

• The analysts have a consensus price target of $135.17 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 $106.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $71.4 billion, earnings will come to $16.1 billion, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 8.1%.
• Given the current share price of $138.54, the analyst's price target of $135.17 is 2.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.