Benefits from a stabilizing economy and improving interest-rate scenario have well positioned the banking industry. Moreover, tax overhaul and an anticipated ease in regulation has brought in more benefits.
The June-end quarter witnessed uncertainty, mainly related to the U.S.-China trade war and some other geo-political tensions, which was insufficient for a substantial rise in client activity. Client activity seems to have returned to normalized levels, following the significant volatility recorded in the first quarter.
Surprisingly, both equity trading and fixed income, currency and commodities income witnessed significant improvement during the recently-reported quarter. Increasing M&As aided banks’ advisory fees too. Further, results highlighted higher underwriting revenues, supported by elevated debt and equity underwriting 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 $89.1 billion, operates as an 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 $87.2 billion.
Both Goldman and Morgan Stanley carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) 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 11.2%) over the past year, however, gained decently. While shares of Goldman have rallied around 3%, Morgan Stanley recorded growth of 5.2%. 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 13.58% for Goldman and 12.04% for Morgan Stanley as compared with the industry’s level of 9.27%. Thus, Goldman reinvests its earnings more efficiently.
Earnings Estimate Revisions & Growth Projections
The Zacks Consensus Estimate for 2018 earnings of Goldman moved up 7.1% over the last 30 days. On the other hand, the same for Morgan Stanley climbed nearly 3.8% for this year, during the same time frame.
In addition, the current-year earnings for Goldman are projected to jump 26.4% year over year. For Morgan Stanley, the Zacks Consensus Estimate is pinned at $4.87 for 2018, reflecting a year-over-year increase of 35.3%.
Hence, Morgan Stanley reflects better earnings growth prospects.
Sales for Goldman for the current year are estimated to move up 13.6% year over year to $36.4 billion. For Morgan Stanley, the Zacks Consensus Estimate is pegged at $41.1 billion for 2018, reflecting year-over-year growth of 8.2%.
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 1.35%, while Morgan Stanley has a dividend yield of 2.39%.
Although both stocks’ dividend yield is higher than the industry’s average of 0.64%, shareholders of Morgan Stanley gain more.
Both Goldman and Morgan Stanley have higher debt-to-equity ratio compared with the industry average of 0.29. However, Morgan Stanley, with a ratio of 2.67, has an edge over Goldman, with a ratio of 3.02.
Our comparative analysis shows that Goldman is better positioned than Morgan Stanley, when considering sales growth expectations and ROE. Meanwhile, Morgan Stanley wins on price performance, dividend yield, leverage ratio and earnings growth potential.
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