Morgan Stanley’s (NYSE: MS) Q4 results were mixed relative to the analysts' estimates but give no reason to fear a stock price correction. The stock price may move lower before it moves higher, and the move higher will not likely be a straight shot, but details within the report, the outlook for next year and analysts' sentiment suggest a new all-time is possible this year.
One of the drivers for Morgan Stanley is the capital return program. The stock trades at one of the highest valuations in the financial sector but pays an above-average yield that comes with an outlook for aggressive distribution growth. The company may not make increases yearly but has only increased the distribution since 2015, making nine increases in that time. The last few have been very aggressive, with the CAGR running in the 25% range. The most recent has slowed to about 10%, but a high-single to low-double-digit pace may be expected, given the metrics.
Capital return on shareholder value supports the outlook for share prices
Morgan Stanley paid about 65% of its 2023 earnings, which is on the high side, but a solid balance sheet and cash flow back the payment up, and the outlook for 2024 is favorable. Analysts forecast a return to growth that includes a mid-single-digit top-line improvement and margin expansion. Margin is expected to widen significantly and drive EPS to a 15% to 20% gain.
Morgan Stanley is also repurchasing shares, aiding improvement in the ROTCE or return on tangible common equity and book value. Share repurchases topped $1.3 billion in Q4 and $5.3 for the year and have the share count down 2.8%, helping to drive the ROTCE up 8% and book value by 1.7%.
Regarding the balance sheet, the firm made a small increase in the credit loss reserves to offset the commercial real estate market weakening but is otherwise in fine shape. The Tier One capital ratio runs above 17%, with leverage near 6.7%. Share repurchases were less in 2023 than in 2022 due to YOY margin compression and one-off costs but are expected to remain solid in 2024 if not accelerate as growth comes back into the picture.
Morgan Stanley's mixed results drive volatility
The price action in Morgan Stanley is volatile following the Q4 release—the report includes a solid top-line performance offset by weakness on the bottom line that sparked a mixed market reaction. Revenue grew 1.2% YOY to $12.9%, led by a 5.25% increase in Investment Banking, but GAAP earnings contracted due to more than $0.50 billion in one-off costs and charges. That equals $0.28 in EPS, more than enough to offset the $0.18 earnings miss. Charges and costs include severance, FDIC-related charges, and legal expenses.
Analysts have yet to issue revisions based on the Q4 results but are unlikely to make significant changes. As it is, the nineteen tracked by Marketbeat.com have the stock pegged at Moderate Buy, with the sentiment and price target improving.
The consensus target held flat in 2023 but suddenly increased in the first two weeks of 2024. Marketbeat’s tracking tools picked up five fresh reports, including four boosted price targets and one downgrade to Hold with an above-consensus $96 target. The analysts' consensus forecasts about a 5% upside for the stock - because the highest target was set in the first week of 2024, it is in play. That target is $116 and suggests a 30% upside, which is good for a new all-time high.
The technical outlook: Morgan Stanley is at a critical turning point
The price action in MS stock was up as much as 3% and down the same in premarket trading. That is a mixed signal for the market, with some support at the 30-day EMA and resistance overhead. Resistance is near $91.50 and a high set in fall 2000, a significant hurdle for this market that has caused volatility the last two years. If the market can get above it, a move up to the current high and a new all-time high is possible. If not, Morgan Stanley will remain range-bound in 2024 with a chance of testing support in the $70 to $75 range.
