Benefits from a stabilizing economy and improving interest-rate scenario have well positioned the banking industry. Moreover, tax overhaul and an expected ease in regulation could bring in more benefits.
The March-end quarter witnessed investors’ anxiety on uncertainty over the number of rate hikes on upbeat economic numbers and rising inflation, which pulled the benchmark 10-year Treasury bond yields down. This reversed the rally experienced by bank stocks since last September, to some extent. Moreover, Trump’s trade-tariff announcements on Chinese imports affected the stock market rally in the quarter.
After three straight quarters of muted activities, it appeared that volatility was back in the markets, with extremities in February and March. This resulted in higher trading activities and increased fixed income and equity revenues, primarily for investment banks.
Therefore, we are focusing on two major investment banks, Goldman Sachs (GS - Free Report) and Morgan Stanley (MS - Free Report) .
Goldman, with a market cap of $89.3 billion, operates as investment banking, securities and investment management company, globally. On the other hand, Morgan Stanley provides various financial products and services to corporations, governments, financial institutions, and individuals in the Americas, Europe, the Middle East, Africa, and Asia, and has a market cap of $92.1 billion.
Goldman sports a Zacks Rank #1 (Strong Buy), while Morgan Stanley carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Though both banks have similar business trends, deeper research into the financials will help decide which investment option is better.
Both banks have underperformed the industry (up 26.3%) over the past year, however, gained decently. While shares of Goldman have rallied 5.4%, Morgan Stanley has recorded growth of 21.8%. So, Morgan Stanley performed better than Goldman.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12-month period is 12.6% for Goldman and 11.1% for Morgan Stanley as compared with the industry’s level of 11.1%. Therefore, Goldman reinvests its earnings more efficiently.
Earnings Estimate Revisions & Growth Projections
The Zacks Consensus Estimate for 2018 earnings of Goldman has increased 6.6% over the last 30 days. On the other hand, the same for Morgan Stanley appreciated nearly 4.4% for this year, during the same time frame.
Moreover, the current-year earnings for Goldman are projected to jump 17.8% year over year. For Morgan Stanley, the Zacks Consensus Estimate is pegged at $4.72 for 2018, reflecting a year-over-year increase of 31.1%.
Hence, Morgan Stanley reflects better earnings growth prospects.
Sales for Goldman for the current year are projected to move up 11.3% year over year to $8.8 billion. For Morgan Stanley, the Zacks Consensus Estimate is pegged at $10.1 billion for 2018, reflecting year-over-year growth of 5.8%.
Therefore, Goldman has an edge here.
Both companies have been deploying capital in terms of dividend payments to enhance shareholder value. Goldman has a current dividend yield of 1.27%, while Morgan Stanley has a dividend yield of 1.91%.
Although both the stocks’ dividend yield is higher than the industry’s average of 0.62%, shareholders of Morgan Stanley gain more.
Both Goldman and Morgan Stanley have higher debt-to-equity ratio compared with the industry average of 0.22. However, Goldman, with a ratio of 2.69, has an edge over Morgan Stanley, with a ratio of 2.75.
Our comparative analysis shows that Goldman is better positioned than Morgan Stanley when considering sales growth expectations, leverage ratio and ROE. Meanwhile, Morgan Stanley wins on price performance, dividend yield and earnings growth potential.
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