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Is Morgan Stanley a Better Q4 Earnings Pick Than Goldman?

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Investors usually attach a greater degree of importance to investment banks compared to their plain vanilla counterparts. Yet, as earnings season heats up, it would not be out of place to point out that their troubles seem to mimic those of the wider banking sector.

Goldman Sachs’ fourth-quarter 2017 results are likely to reflect a $5 billion negative impact triggered by the new tax reform, which levied taxes on overseas income. Also, deferred tax assets (DTAs) will lose value due to tax cut. (Read: Goldman Expects Tax Reform to Have a One-Time $5B Impact)
 
Meanwhile, Morgan Stanley said on Jan 5 that its upcoming earnings numbers are likely to reflect a $1.25 billion negative impact, also due to the Tax Cuts and Jobs Act of 2017. On the positive side, both stocks hold promise in 2018. A bullish global economy, higher inflation and rising market volatility are likely to provide a major boost to these stocks in the year ahead.

The Goldman Sachs Group, Inc. (GS - Free Report) and Morgan Stanley (MS - Free Report) are scheduled to report fourth quarter earnings numbers on Jan 17 and Jan 18, respectively. While Goldman Sachs has a Zacks Rank #3 (Hold), Morgan Stanley has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other banking stocks reporting earnings over these two days include Bank of America Corporation (BAC - Free Report) and U.S. Bancorp (USB - Free Report) .

Return on Assets (ROA)

Examining earnings per share alone would not generate any significant insights when determining the level of profitability of a bank. Return on Assets is a ratio which reveals how efficiently a bank is utilizing its assets to generate profits.



Currently, Morgan Stanley holds total assets of $99.7 billion while Goldman Sachs has total assets of around $97 billion. Our research shows that the average one year trailing 12-month ROA for Goldman Sachs stands at 0.95%, marginally higher than 0.85% for Morgan Stanley.

Price Performance

In terms of price performance, Morgan Stanley is a clear winner. Morgan Stanley has gained 30.8% over the last one year, outperforming the broader industry which has gained 25.4% over the same period. In comparison, Goldman Sachs has gained only 9% over the same period and is well behind both Morgan Stanley and the broader industry.



Valuation

Compared with the S&P 500, the broader industry is undervalued. This implies that the industry has the potential to gain in the near future. The industry has an average one year trailing 12-month P/B ratio – which is the best multiple for valuing banks because of large variations in their earnings results from one quarter to the next – of 2.75, which is below the S&P 500 average of 3.93. Hence, it might be a good idea not to stay away from stocks belonging to this industry.



Coming to the two stocks under consideration, with a P/B ratio of 1.29 Goldman Sachs is undervalued compared to the S&P 500 and the industry. However, though Morgan Stanley is also undervalued compared to the industry and the S&P 500, with a P/B ratio of 1.39, it is marginally pricier than Goldman Sachs.   



Dividend Yield

Morgan Stanley’s dividend yield over the last one year period is 1.81%. With a dividend yield of 1.24%, Goldman Sachs’ shareholders earn a lower dividend yield than those of Morgan Stanley.



Earnings History, ESP and Estimate Revisions

Considering a more comprehensive earnings history, Goldman Sachs has delivered earnings surprises in three of the four preceding quarters. On the other hand, Morgan Stanley has delivered earnings surprises in all of the four preceding quarters. While Goldman Sachs has an average earnings surprise of 9.1%, Morgan Stanley stands out with an average earnings surprise of 16.3%.

When considering Earnings ESP values, there is nothing to choose from between the two stocks since both their ESP values stand at zero. At the same time, Morgan Stanley’s earnings estimate for the current year has increased by 5.2% over the last 30 days, higher than Goldman Sachs’ level of 2.8%.  

Conclusion

Our comparative analysis shows that both stocks are nearly neck to neck when considering valuation and return on assets. Also, both stocks have an ESP reading of zero, so there is little to choose between the two on this count.

However, Morgan Stanley is superior when considering price performance, dividend yield, estimate revisions and a more detailed earnings history. With a Zacks Rank #2 and a higher projected EPS growth for the year at 18.2% compared to Goldman Sachs’ value of 11.2%, Morgan Stanley is clearly the better of the two investment bank stocks.

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