Boosted Price Target for Morgan Stanley After $1 Billion Revenue Beat

Moving into afternoon trading, our shares of Morgan Stanley MS remain nicely higher following the company’s December quarter earnings report from Thursday morning, but Bank of America BAC shares have given up their gains from Thursday morning.

In our view, one of the differentiating factors is the exposure of their business mix to investment banking, which has a favorable outlook and should continue to be a driver of profit growth in the coming quarters. That means we will want to remain owners of MS shares, but also of BAC shares, which should benefit in other ways from the growing economy. While we are lifting our MS price target to $145 from $140, based on upcoming investment banking activity, we will review both price targets, making adjustments as needed.

Morgan Stanley

Morgan Stanley reported December quarter EPS of $2.22 well ahead of the $1.70 consensus forecast, on revenue that climbed almost 26% year over year to $16.23 billion, easily clearing the $15.03 billion consensus.

Looking at the company’s earnings press release we see revenue gains were booked across all three of its business lines — Institutional Securities (46% of revenue), Wealth Management (45%) and Investment Management (10%). That’s a noticeable shift compared to the year-ago quarter when Wealth Management accounted for roughly half of Morgan’s revenue. That shift and the ensuing jump in pre-tax income to $4.9 billion compared to $2.1 billion in the 4Q 2023 quarter shows the leverage in the investment banking and trading businesses, but also ongoing cost containment efforts.

Total client assets grew to $7.9 trillion across Wealth and Investment Management supported by markets and healthy net new assets. In our view, that offers a steady base and predictability for Morgan, but as we shared in today’s video, it was the M&A pipeline comment made by CFO Sharon Yeshaya that stood out to us:

"Looking ahead to 2025, our M&A pipelines are healthy and diversified, outpacing recent years. Financial sponsors are joining corporates to drive activity, evaluating exit opportunities for long-held assets. CEO and boardroom confidence continues to improve as valuations stabilize, and financing markets remain strong. Our business is well positioned for a strong continued rebound in deal-making activity."

That activity paired with an improving IPO market keeps us bullish on MS shares and gives us enough reason to lift our price target to $145 from $140. As Morgan’s pipeline of deals becomes announced transactions, we’ll look to revisit our price target as needed.

On the housekeeping front, Morgan continued to flex its share repurchase program, taking down $0.8 billion of common stock during the December quarter, roughly 6 million shares. The firm has ample firepower left under its new $20 billion share repurchase authorization and we suspect management will continue to shrink its outstanding share count, especially if the investment banking business is robust.

We would also ask that you mark your calendar for February 14, which is when Morgan will pay its $0.925 quarterly dividend to shareholders of record as of January 31.

Bank of America

Bank of America also reported better-than-expected December quarter results, but to be fair the magnitude of those beats was smaller compared to those posted by Goldman Sachs GS and Morgan Stanley. For the record, BofA’s EPS came in at $0.82 versus the $0.77 consensus while its revenue rose 15% year over year to $25.3 billion, edging out the $25.12 billion consensus. Net interest income for the quarter was up 3% versus year-ago levels, putting it at $14.4 billion.

Revenue gains were had across all BofA’s business lines — Consumer Banking (39% of revenue), Global Wealth & Investment Management (22%), Global Banking (22%) and Global Markets (18%). Despite the 44% increase in investment banking fees during the quarter and jump in trading revenue, the company’s overall mix of business that favors the slower-growing Consumer Banking business meant the earnings leverage from those faster-growing businesses was tempered.

It's not the issue that BofA’s results were bad, all things considered, they were quite good, but just not as good as those from banks whose bottom lines have greater exposure to investment banking and sales and trading. Measured against the recent move in BAC shares, one may argue the results were a little lackluster in comparison and that’s why BAC shares are trading off on Thursday.

However, the outlook for investment banking remains favorable, and expected net interest income growth of 6% to 7% this year reflecting a 2% to 3% GDP economy points to further upside ahead in the shares. To the extent management can create even more operating leverage in the coming quarters compared to the last two and investment banking activity surprises to the upside, there could be upside to our $53 target.

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At the time of publication, TheStreet Pro Portfolio was long MS and BAC.