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3 Investment Bank Stocks on the Radar Despite Industry Woes
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A challenging operating backdrop will keep hurting the Zacks Investment Bank industry amid soft industry-wide corporate debt and equity issuances and deal-making activities. Hence, these are expected to adversely impact top-line growth.
Nonetheless, heightened client activity in the trading business is expected to continue as uncertainty-induced volatility is likely to persist in the near term. While technology-related expense might impede bottom-line growth to some extent, it will eventually lead to improved operating efficiency. These factors will likely support industry players like Morgan Stanley (MS - Free Report) , The Goldman Sachs Group, Inc. (GS - Free Report) and Evercore Inc. (EVR - Free Report) .
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 worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually the 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 (comprising M&As, advisory services and securities underwriting), asset management and trading and principal investments (consisting of proprietary and brokerage trading).
3 Key Themes Shaping the Future of the Investment Bank Industry
Slowdown in Underwriting and Advisory Business: After a blockbuster performance in 2021, IPO, underwriting and deal-making activities have almost come to a grinding halt since the start of 2022. A host of factors, including geopolitical tensions, significant monetary policy tightening worldwide to control raging inflation and the expectations of a slowdown/recession continue to act as headwinds for M&As across the globe.
These challenging conditions are also leading to a plunge in stock prices and slowing global economic growth, thereby hampering debt and equity issuance volumes. Though the deal-making pipeline looks healthy, there has been a substantial decline in M&A activity and volumes. Thus, subdued underwriting and advisory businesses are expected to keep weighing on industry players’ revenue growth in 2023.
Trading Business to Offer Support: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since the beginning of 2022, market volatility has significantly increased on several geopolitical and macroeconomic concerns. Before that, the investment banking industry had witnessed a similar level of volatility from March 2020 up to the first couple of months of 2021 due to the pandemic-induced uncertainty.
The current prevalent situation is likely to persist this year as markets are still grappling with looming recession expectations, the Federal Reserve’s aggressive monetary policy and other geopolitical matters. Hence, trading volumes will remain decent, driven by solid client activities in equity and fixed-income businesses, thereby boosting trading income.
Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising are likely to support the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to support clients with infrastructure development and new platforms. While investment banks are likely to face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.
Zacks Industry Rank Indicates a Gloomy Picture
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #193, which places it in the bottom 23% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dismal 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 bottom 50% of the Zacks-ranked industries is a result of a discouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised lower by 22.4%.
Before we present a few stocks that you may keep a watch on despite industry-wide headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Investment Bank industry has underperformed its sector and the S&P 500 over the past two years. While stocks in the industry have collectively declined 18.3%, the S&P 500 composite has gained 1.3% and the Zacks Finance sector has fallen 9.4%.
Two-Year Price Performance
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 investment 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 4.05X, above the median level of 2.66X, over the past five years. This compares with the highest level of 4.23X and the lowest level of 1.37X over this period. The industry is trading at a huge discount when compared with the market at large as the trailing 12-month P/TBV ratio for the S&P 500 is 10.32X and the median level is 9.95X.
Price-to-Tangible Book Ratio (TTM)
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. However, 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 4.26X and the median level of 3.93X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
3 Investment Banks Worth Keeping an Eye on
Morgan Stanley: This Zacks Rank #3 (Hold) stock operates as an investment banking, securities and investment management company globally. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification.
Morgan Stanley has been undertaking several initiatives to restructure operations with the goal of increasing reliable revenue sources. The company’s strategic expansion efforts, including the buyouts of Eaton Vance, E*Trade Financial and Shareworks, are in sync with its efforts to focus less on a capital markets-driven revenue mix.
Though steadily increasing expenses and muted IB performance are headwinds, a strong balance sheet, higher rates and investment-grade long-term ratings from leading credit rating agencies are likely to continue supporting growth. The company’s robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.
With a market cap of $146 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have gained 3.8% so far this year. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $6.50 over the past week.
Price and Consensus: MS
Goldman: This Zacks Rank #3 company is a leading global provider of investment banking, securities, investment management and consumer banking services. Based in New York, Goldman has offices in London, Frankfurt, Tokyo, Hong Kong, and other major financial centers globally.
Similar to Morgan Stanley, the key to the company’s financial stability is its business diversification efforts. GS has been undertaking efforts to boost asset management and wealth management business (both in the United States and globally) while expanding its digital consumer banking platform. Last year, it acquired robo-advisor NextCapital and Dutch asset manager NN Investment Partners. Through these, the company has positioned itself as one of the top five active asset managers globally.
Goldman acquired GreenSky in March 2022 to augment its retail lending capabilities. But the challenging operating backdrop is weighing on its consumer business and now the company is in the middle of a major business restructuring initiative. Hence, it is seeking buyers for GreenSky and reducing its consumer loan portfolio.
Though weakness in IB business and rising expenses are major near-term concerns, a solid position in announced and completed M&As globally is likely to aid Goldman's IB revenues marginally. Backed by a solid capital position, the company has consistently enhanced shareholders’ value with steady capital deployment activities.
Goldman has a market cap of $112.9 billion. In the year-to-date period, the company’s shares have declined 0.3%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $31.57 in the past seven days.
Price and Consensus: GS
Evercore: This Zacks Rank #3 company is a premier global independent investment banking advisory firm. The company, based in New York, operates from its offices and affiliates in the Americas, Europe, the Middle East and Asia.
EVR generates the majority of revenues from the IB business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Though total adjusted net revenues declined in 2019 due to lower advisory fees, the same witnessed a CAGR of 7.6% over the last four years (ended 2022). Despite several near-term headwinds, the company’s strong backlog and business investments will drive the IB business in the upcoming quarters.
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Also, the company consistently enhances shareholders’ value with steady capital deployment activities.
EVR has a market cap of $4.6 billion. So far this year, shares of the company have rallied 13.8%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $9.01 over the past week.
Price and Consensus: EVR
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3 Investment Bank Stocks on the Radar Despite Industry Woes
A challenging operating backdrop will keep hurting the Zacks Investment Bank industry amid soft industry-wide corporate debt and equity issuances and deal-making activities. Hence, these are expected to adversely impact top-line growth.
Nonetheless, heightened client activity in the trading business is expected to continue as uncertainty-induced volatility is likely to persist in the near term. While technology-related expense might impede bottom-line growth to some extent, it will eventually lead to improved operating efficiency. These factors will likely support industry players like Morgan Stanley (MS - Free Report) , The Goldman Sachs Group, Inc. (GS - Free Report) and Evercore Inc. (EVR - Free Report) .
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 worldwide. These started as partnership firms focused on initial public offerings (IPOs), secondary equity offerings, brokerage and mergers and acquisitions (M&As). Gradually the 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 (comprising M&As, advisory services and securities underwriting), asset management and trading and principal investments (consisting of proprietary and brokerage trading).
3 Key Themes Shaping the Future of the Investment Bank Industry
Slowdown in Underwriting and Advisory Business: After a blockbuster performance in 2021, IPO, underwriting and deal-making activities have almost come to a grinding halt since the start of 2022. A host of factors, including geopolitical tensions, significant monetary policy tightening worldwide to control raging inflation and the expectations of a slowdown/recession continue to act as headwinds for M&As across the globe.
These challenging conditions are also leading to a plunge in stock prices and slowing global economic growth, thereby hampering debt and equity issuance volumes. Though the deal-making pipeline looks healthy, there has been a substantial decline in M&A activity and volumes. Thus, subdued underwriting and advisory businesses are expected to keep weighing on industry players’ revenue growth in 2023.
Trading Business to Offer Support: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. Since the beginning of 2022, market volatility has significantly increased on several geopolitical and macroeconomic concerns. Before that, the investment banking industry had witnessed a similar level of volatility from March 2020 up to the first couple of months of 2021 due to the pandemic-induced uncertainty.
The current prevalent situation is likely to persist this year as markets are still grappling with looming recession expectations, the Federal Reserve’s aggressive monetary policy and other geopolitical matters. Hence, trading volumes will remain decent, driven by solid client activities in equity and fixed-income businesses, thereby boosting trading income.
Technology to Improve Operating Efficiency: Innovative trading platforms, the use of artificial intelligence (AI) and investments in technology and advertising are likely to support the operations of investment banks. The industry players are attracting and retaining the best talent for building a leadership team and spending heavily on technology to support clients with infrastructure development and new platforms. While investment banks are likely to face increasing technology-related expenses in the near term, these initiatives are expected to improve operating efficiency over time.
Zacks Industry Rank Indicates a Gloomy Picture
The Zacks Investment Bank industry is a 14-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #193, which places it in the bottom 23% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dismal 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 bottom 50% of the Zacks-ranked industries is a result of a discouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised lower by 22.4%.
Before we present a few stocks that you may keep a watch on despite industry-wide headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Investment Bank industry has underperformed its sector and the S&P 500 over the past two years. While stocks in the industry have collectively declined 18.3%, the S&P 500 composite has gained 1.3% and the Zacks Finance sector has fallen 9.4%.
Two-Year Price Performance
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 investment 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 4.05X, above the median level of 2.66X, over the past five years. This compares with the highest level of 4.23X and the lowest level of 1.37X over this period. The industry is trading at a huge discount when compared with the market at large as the trailing 12-month P/TBV ratio for the S&P 500 is 10.32X and the median level is 9.95X.
Price-to-Tangible Book Ratio (TTM)
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. However, 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 4.26X and the median level of 3.93X for the same period are above the Zacks Investment Bank industry’s respective ratios.
Price-to-Tangible Book Ratio (TTM)
3 Investment Banks Worth Keeping an Eye on
Morgan Stanley: This Zacks Rank #3 (Hold) stock operates as an investment banking, securities and investment management company globally. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Morgan Stanley has been undertaking several initiatives to restructure operations with the goal of increasing reliable revenue sources. The company’s strategic expansion efforts, including the buyouts of Eaton Vance, E*Trade Financial and Shareworks, are in sync with its efforts to focus less on a capital markets-driven revenue mix.
Though steadily increasing expenses and muted IB performance are headwinds, a strong balance sheet, higher rates and investment-grade long-term ratings from leading credit rating agencies are likely to continue supporting growth. The company’s robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.
With a market cap of $146 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have gained 3.8% so far this year. The Zacks Consensus Estimate for 2023 earnings has remained unchanged at $6.50 over the past week.
Price and Consensus: MS
Goldman: This Zacks Rank #3 company is a leading global provider of investment banking, securities, investment management and consumer banking services. Based in New York, Goldman has offices in London, Frankfurt, Tokyo, Hong Kong, and other major financial centers globally.
Similar to Morgan Stanley, the key to the company’s financial stability is its business diversification efforts. GS has been undertaking efforts to boost asset management and wealth management business (both in the United States and globally) while expanding its digital consumer banking platform. Last year, it acquired robo-advisor NextCapital and Dutch asset manager NN Investment Partners. Through these, the company has positioned itself as one of the top five active asset managers globally.
Goldman acquired GreenSky in March 2022 to augment its retail lending capabilities. But the challenging operating backdrop is weighing on its consumer business and now the company is in the middle of a major business restructuring initiative. Hence, it is seeking buyers for GreenSky and reducing its consumer loan portfolio.
Though weakness in IB business and rising expenses are major near-term concerns, a solid position in announced and completed M&As globally is likely to aid Goldman's IB revenues marginally. Backed by a solid capital position, the company has consistently enhanced shareholders’ value with steady capital deployment activities.
Goldman has a market cap of $112.9 billion. In the year-to-date period, the company’s shares have declined 0.3%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $31.57 in the past seven days.
Evercore: This Zacks Rank #3 company is a premier global independent investment banking advisory firm. The company, based in New York, operates from its offices and affiliates in the Americas, Europe, the Middle East and Asia.
EVR generates the majority of revenues from the IB business. Efforts to boost its client base in advisory solutions and geographical expansion initiatives continue to support revenue growth. Though total adjusted net revenues declined in 2019 due to lower advisory fees, the same witnessed a CAGR of 7.6% over the last four years (ended 2022). Despite several near-term headwinds, the company’s strong backlog and business investments will drive the IB business in the upcoming quarters.
Though steadily rising operating expenses and negligible revenue generation from the wealth management business are concerns, Evercore maintains a solid balance sheet and liquidity position. Also, the company consistently enhances shareholders’ value with steady capital deployment activities.
EVR has a market cap of $4.6 billion. So far this year, shares of the company have rallied 13.8%. The Zacks Consensus Estimate for ongoing-year earnings has remained unchanged at $9.01 over the past week.
Price and Consensus: EVR