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Zacks Industry Outlook Highlights Morgan Stanley, The Charles Schwab, Interactive Brokers Group and Evercore
Read MoreHide Full Article
For Immediate Release
Chicago, IL – February 8, 2022 – Today, Zacks Equity Research discusses Morgan Stanley (MS - Free Report) , The Charles Schwab Corp. (SCHW - Free Report) , Interactive Brokers Group, Inc. (IBKR - Free Report) and Evercore Inc. (EVR - Free Report) .
The Zacks Investment Bank industry is supported by market volatility-driven growth in the trading business, which might not continue for long as the pandemic-led volatility is gradually waning. Further, costs related to technological upgrades and business diversification efforts might impede bottom-line growth.
Nevertheless, the industry players will gain from robust underwriting and deal-making activities, which will keep supporting revenue growth. Consolidation initiatives will act as a catalyst too. Hence, the companies like Morgan Stanley, The Charles Schwab Corp., Interactive Brokers Group, Inc. and Evercore Inc. will benefit.
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions across the globe. These initially started as partnership firms focused on initial public offerings (IPOs), secondary market offerings, brokerage and mergers and acquisitions (M&As).
Gradually these companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (which comprises M&As, advisory services and securities underwriting), asset management and trading and principal investments (which consists of proprietary and brokerage trading).
4 Major Trends of Investment Bank Industry to Keep an Eye on
Investment Banking Business Looks Promising: M&A and restructuring activities have been witnessing healthy momentum since June 2020-end. The uptrend is likely to continue in the near term on the resumption of normal business, excess cash levels, companies’ appetite for bolstering scale and market share and solid economic growth.
Heightened IPO activities and follow-on equity issuances, driven by solid equity markets performance, along with decent debt markets performance (despite the Federal Reserve indicating hawkish stance), are likely to persist. Thus, solid underwriting and advisory businesses are expected to keep supporting investment banks’ financials.
Consolidation the Way Forward: The tough operating backdrop that the industry players faced in the pre-pandemic era seems to have made way for solid consolidation efforts. The need to strengthen product offerings in new markets (both domestic and international), along with technological advancement and revenue diversification, is keeping investment banks on their toes. Instead of starting from scratch, the companies are taking advantage of solid liquidity positions to partner/acquire providers of such products and services.
Trading Continues to ‘Normalize’: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. While the COVID-19 pandemic and subsequent mayhem had resulted in extreme market volatility, things have been normalizing since the second quarter of 2021.
So, the trading business, which grew exponentially amid the pandemic, is not likely to witness similar performance in the near term. Nonetheless, substantial cash in the hands of investors is expected to lead to decent growth in trading revenues, which will continue supporting investment banks’ top line.
Technological Upgrades: Innovative trading platforms, investments in technology and advertising are likely to support the overall operations of investment banks. The industry players are emphasizing on attracting and retaining the best talent for building a leadership team and spending on technology to support clients with the development of infrastructure and new platforms. Thus, given these efforts, investment banks are likely to face increasing technology-related costs, thereby hurting the bottom-line growth.
Zacks Industry Rank Indicates Rosy Prospects
The Zacks Investment Bank industry is a 17-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #9, which places it in the top 4% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a stellar earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually building up confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have moved 9.5% upward.
Before we present a few stocks that you may want to consider on the back of favorable industry trends, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Investment Bank industry has outperformed its sector and the S&P 500 over the past year. While the stocks in the industry have collectively gained 24.8%, the S&P 500 composite has rallied 15.2% and the Zacks Finance sector jumped 17%.
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.63X, above the median level of 2.44X, over the past five years. This compares with the highest level of 3.90X and the lowest level of 1.35X over this period. However, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 16.97X and the median level is 11.57X.
As finance stocks typically have a lower P/TBV ratio, comparing investment banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.58X and the median level of 3.69X for the same period are above the Zacks Investment Bank industry’s respective ratios.
4 Investment Banks Worth Betting On
Morgan Stanley: This Zacks Rank #2 (Buy) stock operates as an investment banking, securities and investment management company globally. Based in New York, the key reason for Morgan Stanley’s earnings stability is its business diversification.
MS has been undertaking several initiatives to restructure operations with a goal to increase reliable revenue sources. The company’s strategic expansion efforts, including the buyouts of Eaton Vance, E*Trade Financial and Shareworks, are steps in this direction.
Though steadily increasing expenses and relatively low rates make us apprehensive, a strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting growth. Also, the company’s robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.
With a market cap of $186.8 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have soared 40.3% over the past year. The Zacks Consensus Estimate for 2022 earnings has moved up 4.1% to $7.70 over the past 30 days.
Charles Schwab: Headquartered in San Francisco, CA, Charles Schwab provides wealth management, securities brokerage, banking, asset management, custody and financial advisory services. It remains focused on enhancing trading revenues. For this, SCHW continues to undertake several efforts, including lowering trading commission to zero and reducing trading fees on several other products. These initiatives, aimed at building a client base and acquiring TD Ameritrade, are likely to lead to further improvement in trading income.
The company’s net interest margin is expected to remain strained because of relatively lower rates. Yet, aggressive efforts to fortify its client base in advisory solutions and the acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC and Motif’s technology and intellectual property have bolstered Schwab's position and helped diversify revenues.
The Zacks Consensus Estimate for 2022 earnings has moved 3.4% north to $3.91 over the past month. The stock, presently carrying a Zacks Rank of 2, has surged 64.6% over the past year. It has a market cap of $166.5 billion.
Interactive Brokers: This Zacks Rank #1 company operates as an automated global electronic market maker and broker. The company, based in Greenwich, CT, specializes in routing orders, besides executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 135 electronic exchanges and market centers worldwide.
Since its inception, Interactive Brokers has been chiefly focusing on developing proprietary software to automate broker-dealer functions, which has resulted in steady top-line improvement. Also, innovative products and the acquisition of the retail unit of Folio Investments are expected to strengthen the company’s position in the online brokerage space.
Though rising expenses act as a deterrent, the company continues to explore opportunities in the emerging markets of Taiwan, Mexico and India to diversify its operations and gain revenue stability. Further, the company has received authorization from the Central Bank of Ireland to set up a new entity in the nation. In December 2020, Interactive Brokers said that given the rapid growth of its European business, it “expects to expand its staffing substantially over the next year.”
Shares of the company, which has a market cap of $30.5 billion, have rallied 1.4% over the past year. The Zacks Consensus Estimate for ongoing-year earnings has moved 4.9% north to $3.67 for 2022 in the past 30 days.
Evercore: This Zacks Rank #1 company is a premier global independent investment banking advisory firm. It also offers wealth management services. It operates from its offices and affiliates in North America, Europe, the Middle East and Asia.
Evercore generates the majority of revenues from its investment banking business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Stabilization of the macro-economic backdrop, resilient market conditions, relatively low-interest rates and widespread availability of financing are likely to keep the M&A momentum going in the upcoming quarters.
Though steadily rising operating expenses and negligible revenue generation from wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Moreover, the company has consistently enhanced shareholders’ value with steady capital deployment activities.
EVR has a market cap of $5 billion. Over the past year, shares of the company have rallied 10.4%. The Zacks Consensus Estimate for ongoing-year earnings has moved 6.2% north to $13.94 over the past 30 days.
Just Released: Zacks Top 10 Stocks for 2022
In addition to the investment ideas discussed above, would you like to know about our 10 top buy-and-hold tickers for the entirety of 2022?
Last year's 2021Zacks Top 10 Stocks portfolio returned gains as high as +147.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Morgan Stanley, The Charles Schwab, Interactive Brokers Group and Evercore
For Immediate Release
Chicago, IL – February 8, 2022 – Today, Zacks Equity Research discusses Morgan Stanley (MS - Free Report) , The Charles Schwab Corp. (SCHW - Free Report) , Interactive Brokers Group, Inc. (IBKR - Free Report) and Evercore Inc. (EVR - Free Report) .
Industry: Investment Banking
Link: https://www.zacks.com/commentary/1863272/4-top-investment-bank-stocks-to-buy-from-the-prospering-industry
The Zacks Investment Bank industry is supported by market volatility-driven growth in the trading business, which might not continue for long as the pandemic-led volatility is gradually waning. Further, costs related to technological upgrades and business diversification efforts might impede bottom-line growth.
Nevertheless, the industry players will gain from robust underwriting and deal-making activities, which will keep supporting revenue growth. Consolidation initiatives will act as a catalyst too. Hence, the companies like Morgan Stanley, The Charles Schwab Corp., Interactive Brokers Group, Inc. and Evercore Inc. will benefit.
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments and financial institutions across the globe. These initially started as partnership firms focused on initial public offerings (IPOs), secondary market offerings, brokerage and mergers and acquisitions (M&As).
Gradually these companies have evolved into providers of various other services, including securities research, proprietary trading and investment management. Therefore, the industry players work mainly through three product segments — investment banking (which comprises M&As, advisory services and securities underwriting), asset management and trading and principal investments (which consists of proprietary and brokerage trading).
4 Major Trends of Investment Bank Industry to Keep an Eye on
Investment Banking Business Looks Promising: M&A and restructuring activities have been witnessing healthy momentum since June 2020-end. The uptrend is likely to continue in the near term on the resumption of normal business, excess cash levels, companies’ appetite for bolstering scale and market share and solid economic growth.
Heightened IPO activities and follow-on equity issuances, driven by solid equity markets performance, along with decent debt markets performance (despite the Federal Reserve indicating hawkish stance), are likely to persist. Thus, solid underwriting and advisory businesses are expected to keep supporting investment banks’ financials.
Consolidation the Way Forward: The tough operating backdrop that the industry players faced in the pre-pandemic era seems to have made way for solid consolidation efforts. The need to strengthen product offerings in new markets (both domestic and international), along with technological advancement and revenue diversification, is keeping investment banks on their toes. Instead of starting from scratch, the companies are taking advantage of solid liquidity positions to partner/acquire providers of such products and services.
Trading Continues to ‘Normalize’: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. While the COVID-19 pandemic and subsequent mayhem had resulted in extreme market volatility, things have been normalizing since the second quarter of 2021.
So, the trading business, which grew exponentially amid the pandemic, is not likely to witness similar performance in the near term. Nonetheless, substantial cash in the hands of investors is expected to lead to decent growth in trading revenues, which will continue supporting investment banks’ top line.
Technological Upgrades: Innovative trading platforms, investments in technology and advertising are likely to support the overall operations of investment banks. The industry players are emphasizing on attracting and retaining the best talent for building a leadership team and spending on technology to support clients with the development of infrastructure and new platforms. Thus, given these efforts, investment banks are likely to face increasing technology-related costs, thereby hurting the bottom-line growth.
Zacks Industry Rank Indicates Rosy Prospects
The Zacks Investment Bank industry is a 17-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #9, which places it in the top 4% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a stellar earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually building up confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have moved 9.5% upward.
Before we present a few stocks that you may want to consider on the back of favorable industry trends, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Investment Bank industry has outperformed its sector and the S&P 500 over the past year. While the stocks in the industry have collectively gained 24.8%, the S&P 500 composite has rallied 15.2% and the Zacks Finance sector jumped 17%.
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.63X, above the median level of 2.44X, over the past five years. This compares with the highest level of 3.90X and the lowest level of 1.35X over this period. However, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 16.97X and the median level is 11.57X.
As finance stocks typically have a lower P/TBV ratio, comparing investment banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.58X and the median level of 3.69X for the same period are above the Zacks Investment Bank industry’s respective ratios.
4 Investment Banks Worth Betting On
Morgan Stanley: This Zacks Rank #2 (Buy) stock operates as an investment banking, securities and investment management company globally. Based in New York, the key reason for Morgan Stanley’s earnings stability is its business diversification.
MS has been undertaking several initiatives to restructure operations with a goal to increase reliable revenue sources. The company’s strategic expansion efforts, including the buyouts of Eaton Vance, E*Trade Financial and Shareworks, are steps in this direction.
Though steadily increasing expenses and relatively low rates make us apprehensive, a strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting growth. Also, the company’s robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.
With a market cap of $186.8 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have soared 40.3% over the past year. The Zacks Consensus Estimate for 2022 earnings has moved up 4.1% to $7.70 over the past 30 days.
Charles Schwab: Headquartered in San Francisco, CA, Charles Schwab provides wealth management, securities brokerage, banking, asset management, custody and financial advisory services. It remains focused on enhancing trading revenues. For this, SCHW continues to undertake several efforts, including lowering trading commission to zero and reducing trading fees on several other products. These initiatives, aimed at building a client base and acquiring TD Ameritrade, are likely to lead to further improvement in trading income.
The company’s net interest margin is expected to remain strained because of relatively lower rates. Yet, aggressive efforts to fortify its client base in advisory solutions and the acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC and Motif’s technology and intellectual property have bolstered Schwab's position and helped diversify revenues.
The Zacks Consensus Estimate for 2022 earnings has moved 3.4% north to $3.91 over the past month. The stock, presently carrying a Zacks Rank of 2, has surged 64.6% over the past year. It has a market cap of $166.5 billion.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Interactive Brokers: This Zacks Rank #1 company operates as an automated global electronic market maker and broker. The company, based in Greenwich, CT, specializes in routing orders, besides executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 135 electronic exchanges and market centers worldwide.
Since its inception, Interactive Brokers has been chiefly focusing on developing proprietary software to automate broker-dealer functions, which has resulted in steady top-line improvement. Also, innovative products and the acquisition of the retail unit of Folio Investments are expected to strengthen the company’s position in the online brokerage space.
Though rising expenses act as a deterrent, the company continues to explore opportunities in the emerging markets of Taiwan, Mexico and India to diversify its operations and gain revenue stability. Further, the company has received authorization from the Central Bank of Ireland to set up a new entity in the nation. In December 2020, Interactive Brokers said that given the rapid growth of its European business, it “expects to expand its staffing substantially over the next year.”
Shares of the company, which has a market cap of $30.5 billion, have rallied 1.4% over the past year. The Zacks Consensus Estimate for ongoing-year earnings has moved 4.9% north to $3.67 for 2022 in the past 30 days.
Evercore: This Zacks Rank #1 company is a premier global independent investment banking advisory firm. It also offers wealth management services. It operates from its offices and affiliates in North America, Europe, the Middle East and Asia.
Evercore generates the majority of revenues from its investment banking business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Stabilization of the macro-economic backdrop, resilient market conditions, relatively low-interest rates and widespread availability of financing are likely to keep the M&A momentum going in the upcoming quarters.
Though steadily rising operating expenses and negligible revenue generation from wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Moreover, the company has consistently enhanced shareholders’ value with steady capital deployment activities.
EVR has a market cap of $5 billion. Over the past year, shares of the company have rallied 10.4%. The Zacks Consensus Estimate for ongoing-year earnings has moved 6.2% north to $13.94 over the past 30 days.
Just Released: Zacks Top 10 Stocks for 2022
In addition to the investment ideas discussed above, would you like to know about our 10 top buy-and-hold tickers for the entirety of 2022?
Last year's 2021Zacks Top 10 Stocks portfolio returned gains as high as +147.7%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys
Access Zacks Top 10 Stocks for 2022 today >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.