Summary
- Our recommendation to buy this stock in April generated solid returns, but banks have largely underperformed the market.
- It is our opinion that traditional banking weakness will continue for a few quarters and will not strongly rebound until rates rise in a few years.
- Investment banking has shined.
- A decent dividend to be paid to wait.
- Looking for a helping hand in the market? Members of BAD BEAT Investing get exclusive ideas and guidance to navigate any climate. Get started today »
- Prepared by Stephanie, analyst at BAD BEAT Investing
Morgan Stanley (NYSE:MS) is a bank stock that we like if you can acquire shares under $50. This comes after a solid Q3 earnings report. Make no mistake, our recommendation to buy this stock in April generated solid returns, but bank stocks have largely underperformed the market. It is just a tough sector to be in. While we expect choppy trading in the coming months, we think the stock moves higher beyond 2021. It is our opinion that traditional banking weakness will continue for a few quarters while the consumer economy is rebounding and interest rates are so low. Eventually, the COVID-19 crisis will be behind us. Some days, it does not feel that way, but rest assured that we will get there. While small businesses are feeling the pinch, Morgan Stanley is more of an investment bank, and investment banking has been excellent in the last few months with market volatility. Morgan Stanley's stock looks attractive here. It is especially attractive if the market pulls back overall, which we expect it will in the recent choppy trading we have seen. Let us discuss performance and the outlook for the name.
Headline numbers strong
We have to tell you that we were unsure of how bank earnings would look this quarter, but we expected investment banking would continue to perform well. That said, the type of banking (investment vs. traditional) had a big impact across the sector as we have seen in Quad 7 Capital's earnings coverage of the financials. Morgan Stanley reported net revenues of $11.7 billion in Q3. This was massive outperformance, which we simply had not expected (until seeing other bank reports). It was a 17% increase from last year's quarter.
While a slight increase was expected on our end and by analysts, we were looking for $11 billion, which we thought was a good target, though no one really knew how it would look, and we felt analysts were conservative in their expectations. Well, year over year, the increase crushed consensus analysts' consensus by $1.1 billion. The top-line beat was a driver which led to a bottom-line beat as well. On top of the solid revenue performance, we saw moderation in loan loss provisions which also gave the bank a boost.
Margins were up despite increased operational expenses in the quarter. Expenses rose for compensation mostly. Consolidated pre-tax margins were 30%, up from 27% a year ago, though down from 32% last quarter. The top line and improved margins from last year led to a noticeable surge in net income to $2,7 billion, or $1.66 per share compared with net income of $2.2 billion, or $1.27 per share, last year. The business segments shed some light on strengths and weaknesses to be aware of.
