Analysis: MS

Earlier today Action Alerts PLUS holding Morgan Stanley (MS) reported a miss for its June quarter. The bank posted earnings of $1.44 per share vs. the expected $1.61 while revenue fell 11%, year over year, to $13.13 billion, missing the expected $13.5 billion.

Declines were seen at each of the company's business segments, but it was the 55% drop in Investment Banking revenue that really drove the underperformance. As we indicated in a note to members Wednesday that was a likely risk given the tone of the stock market and the extremely quiet market for both IPOs and secondary offerings during the June quarter.

Revenue for the Wealth Management and Investment Management business fell 8% year over year in aggregate, reflecting mark-to-market losses and market declines even though the Wealth Management business added net new assets of $53 billion the quarter. That brings its net new asset total for the first half of 2022 to $195 billion, keeping it on path with its target objective despite conditions so far in 2022.

During the earnings conference call, management reiterated its targets to hunt for assets and grow its total assets under management. At the end of the quarter, total assets under management were $1.4 trillion, unchanged vs. the March quarter but we also have to factor in the market action during the second quarter and its net new asset growth mentioned above. To us this says Morgan Stanley continues to execute on this strategic direction even in a tough market environment.

During the quarter, Morgan Stanley finished its $12 billion buyback plan announced last year, buying $2.7 billion in stock during the June quarter. As expected, the company cited its new $20 billion share repurchase plan and its recent dividend hike to $0.775 per share per quarter. The first new dividend will be paid on August 15 to shareholders as of July 29.

As we look ahead over the next few months, the key to MS shares moving higher will be the resumption of asset growth and a turn in the investment banking business. Considering expected near-term prospects, we aren't likely to see both of those tailwinds emerge in the coming months, leaving Morgan Stanley to face tough year-over-year comparisons.

Still, we recognize the company's premier franchise, its more than 4% dividend yield and prospects for stock support given the refreshed buyback. We are inclined to be patient with this holding, especially with the dividend stream, but until we see the prospects for the Investment Banking business picking up, we do not see a clear-cut reason to chase the shares. As such, we are downgrading MS to a Two rating from One.