Is Morgan Stanley Enticing Post-Earnings?

With shares of Morgan Stanley (NYSE:MS) trading around $32, is MS an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Morgan Stanley is a global financial services company that, through its subsidiaries and affiliates, provides its products and services to a range of clients and customers: corporations, governments, financial institutions, and individuals. The company operates in three segments: institutional securities, global wealth management group, and asset management. Morgan Stanley provides financial advisory and capital-raising services; equity, fixed income, and alternative investments; and merchant banking services. It participates in an industry that powers most other types of businesses around the world.

Morgan Stanley today reported net revenues of $8.6 billion for the second quarter ended June 30, 2014 compared with $8.5 billion a year ago. For the current quarter, income from continuing operations applicable to Morgan Stanley was $1.9 billion, or $0.94 per diluted share, compared with income of $1.0 billion, or $0.43 per diluted share, for the same period a year ago. Results for the quarter included a net discrete tax benefit of $609 million or $0.31 per diluted share, principally related to the remeasurement of reserves and related interest. The earnings per share calculation for the prior year second quarter included a negative adjustment of approximately $151 million, or $0.08 per diluted share, related to the purchase of the final remaining interest in the Morgan Stanley Smith Barney Joint Venture. James P. Gorman, Chairman and Chief Executive Officer, said, “Our quarterly results demonstrated solid performance, despite a muted operating environment. We are seeing momentum across our businesses, with particular strength in Investment Banking, Equity Sales & Trading and Wealth Management – where profit margins hit 21% for the first time since the founding of the JV and assets entrusted to us by clients reached $2 trillion. We also continued to be disciplined on expenses, while focusing on delivering higher returns.”

T = Technicals on the Stock Chart are Strong

Morgan Stanley stock has been moving higher over the last couple of months. The stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Morgan Stanley is trading above its rising key averages which signal neutral to bullish price action in the near-term.

MS

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Morgan Stanley options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Morgan Stanley options

20.38%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Morgan Stanley’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Morgan Stanley look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

145.95%

54.17%

-78.79%

78.57%

Revenue Growth (Y-O-Y)

1.09%

9.56%

11.43%

7.44%

Earnings Reaction

-0.62%*

2.91%

4.37%

2.62%

Morgan Stanley has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Morgan Stanley’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Morgan Stanley stock done relative to its peers, UBS (NYSE:UBS), TD Ameritrade (NYSE:AMTD), Charles Schwab (NYSE:SCHW), and sector?

Morgan Stanley

UBS

TD Ameritrade

Charles Schwab

Sector

Year-to-Date Return

3.64%

-2.75%

0.85%

6.00%

2.93%

Morgan Stanley has been a relative performance leader, year-to-date.

Conclusion

Morgan Stanley is a financial services company that provides service to consumers and companies across the globe. The company today reported second quarter earnings that left investors pleased. The stock has been moving higher and looks poised to continue. Over the last four quarters, earnings and revenues have been on the rise, which has left investors pleased about earnings announcements. Relative to its peers and sector, Morgan Stanley has been a relative year-to-date performance leader. Look for Morgan Stanley to OUTPERFORM.

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