Morningstar | Morgan Stanley Couldn't Fire On All Cylinders Throughout 2018
While narrow-moat Morgan Stanley had an overall good 2018, its fourth-quarter results were by far the worst quarter of the year. Net revenue of $8.5 billion in the fourth quarter was about 20% lower than the quarterly average for the earlier part of the year. Additionally, net income to common shareholders decreased to $1.4 billion from $2.6 billion in the first quarter. With all that said, return on tangible equity for the year was 13.5%, and the company hit the goals management had laid out. We don't anticipate making a material change to our $51 fair value estimate for Morgan Stanley and assess shares as modestly undervalued.The primary area that led to the revenue decline from the beginning of the year was the company's institutional securities business where fourth-quarter revenue was $3.8 billion compared with first-quarter revenue of $6.1 billion. Earlier in the year, we had remarked that the company was practically firing on all cylinders, especially the institutional securities business, and that results shouldn't be expected to be sustained. While fourth-quarter results were disappointing, business lines performed roughly in line with peers with fourth-quarter financial advisory revenue being strong, and weakness in underwriting and fixed income trading. This quarter's $564 million of fixed income trading revenue, which was the lowest level since 2015, probably served as a good reminder that Morgan Stanley's management has been aiming for $1 billion or more of fixed income trading revenue, on average, and that the $1.9 billion the company booked in the first quarter was unusually good performance.
Wealth and investment management revenue remained fairly stable. We continue to believe that expectations in these businesses should be restrained, as prior tailwinds like abnormally high growth in net interest income has abated. The fall off of Smith Barney compensation agreements in 2019 could provide a 1-percentage point pop in operating margins though.
Management expressed a greater interest in expanding its presence in Asia. Currently, Asia contributes about 12% of net revenue with a good portion coming from the company's partnership with Mitsubishi UFJ.
Morgan Stanley is a financial holding company. Through its subsidiaries and affiliates, the company advises, and originates, trades, manages and distributes capital for, governments, institutions and individuals. The company's segments are: Institutional Securities, which provides investment banking, sales and trading, lending and other services; Wealth Management, which provides brokerage and investment advisory services, financial and wealth planning services, stock plan administration services, annuity and insurance products, residential real estate loans and other lending products, banking, and retirement plan services; and Investment Management, which provides investment strategies and products.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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