Armed with cost-reduction initiatives and balance-sheet strengthening, Morgan Stanley (MS - Free Report) appears a promising pick right now. Moreover, it is well positioned to capitalize on the rising rate environment.
A positive trend in estimate revisions reflect optimism over the company’s earnings growth prospects. The Zacks Consensus Estimate for Morgan Stanley’s current-quarter earnings has moved up 2.4% over the last 60 days. Also, the current year’s earnings estimates have climbed 3%. As a result, the stock currently carries a Zacks Rank #2 (Buy).
The stock has surged 36.5% over the past 12 months, widely outperforming the industry’s gain of 23.1%.
Here’s What Might Drive the Stock Higher
Earnings Strength: Morgan Stanley recorded an earnings growth rate of 17.1% over the last three to five years compared with 11.7% for the industry it belongs to. The earnings growth rate for the current and the next year is anticipated to be 18.6% and 15%, respectively.
Further, the company has an impressive earnings surprise history, having outpaced the Zacks Consensus Estimate consistently in each of the trailing four quarters. The average beat was 18.8%.
Revenue Growth: Organic growth remains strong at Morgan Stanley. Revenues witnessed a compound annual growth rate of 7.2% over the last five years (2012-2016). Further, the top line is expected to increase 8.2% in 2017 compared with no growth for the industry.
Impressive Capital Deployment: Morgan Stanley’s capital deployment plan is commendable. Its 2017 capital plan includes a 25% dividend hike and a $5-billion share repurchase authorization. Given its solid liquidity position and earnings strength, the company should be able to sustain this level of capital deployments.
Favorable ROE: Morgan Stanley’s return on equity (ROE) supports its growth potential. Its ROE of 9.83% compares favorably with the industry’s 9.18% average, implying that it is efficient in using its shareholders’ funds.
Prudent Expense Management: Morgan Stanley launched a company-wide cost savings plan — Project Streamline — to discover and implement considerable infrastructure expense reductions by 2017. Though the company witnessed rising expenses for the last several years, a number of recent strategies and the above-mentioned plan have reversed the trend. Expenses declined in 2015 and 2016. Despite a rise in expenses in the first half of 2017, the company is headed in the right direction to achieve its expense-savings target of $1 billion by 2017.
Stock Looks Undervalued: The stock currently has a Value Score of B. Also, it looks undervalued with respect to its price-to-earnings, price-to-book and PEG ratios. The company’s trailing 12-month P/E, P/B and PEG ratios of 12.73, 1.13 and 1.03, respectively, are below the industry averages of 17.32, 1.50 and 1.44. Our research shows that stocks with a Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 offer the best upside potential.
Other Stocks to Consider
Some other top-ranked stocks from the finance space are E*TRADE Financial Corporation (ETFC - Free Report) , Moelis & Company (MC - Free Report) and Raymond James Financial (RJF - Free Report) each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
E*TRADE Financial witnessed an upward earnings estimate revision of 14.2% for the current year, in the last 60 days. Its share price increased 45.8% in the last 12 months.
Moelis & Company’s Zacks Consensus Estimate was revised 5.7% upward for the current year, in the last 60 days. The company’s share price increased 46.8% in the last 12 months.
Raymond James Financial witnessed upward earnings estimate revision of one cent per share for the current year, in the last 60 days. Its share price increased 29.5% in the last 12 months.
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