Improving domestic economy, rise in demand for loans and decent capital markets performance are likely to continue driving the U.S. investment banking stocks. These companies are also undertaking several initiatives to diversify revenues and reduce earnings volatility. These efforts will support their financials in the long run.
Backed by promising developments across the sector, we are today discussing two of the biggest global investment banks — Morgan Stanley (MS - Free Report) and Goldman Sachs (GS - Free Report) — with market capitalization of $71.5 billion and $69.5 billion, respectively.
As both the stocks carry a Zacks Rank #3 (Hold), we are using certain other parameters to give investors a better insight. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Both the companies have outperformed the industry (up 6.7%) so far this year. While shares of Morgan Stanley have gained 7%, Goldman has rallied 12.8%.
So, Goldman has performed better than Morgan Stanley.
Year-to-Date Price Performance
Both the investment banks have been meaningfully deploying capital in terms of dividend payments and share repurchases to enhance shareholder value.
Notably, Morgan Stanley received the Fed’s approval for its 2018 capital plan that includes 20% dividend hike and $4.7 billion share repurchase authorization. It has a dividend yield of 2.83%.
Dividend Yield: MS
Following the Fed’s approval for its 2018 capital plan, Goldman announced a 6.3% dividend hike. Also, it has a dividend yield of 1.80%.
Dividend Yield: GS
Therefore, Morgan Stanley has an edge over Goldman here (in terms of dividend yield).
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12 months for Morgan Stanley and Goldman is 11.45% and 12.79%, respectively. Further, with industry’s average of 12.21%, Goldman is more efficient in using shareholders’ funds.
Hence Goldman holds an edge here.
Earnings Estimate Revisions & Growth Projections
Analysts seem to be bullish on Morgan Stanley’s financial performance. Thus, the Zacks Consensus Estimate for 2019 earnings of $4.92 has moved 4% upward over the past 60 days. Also, it indicates growth of 6.7% from the year-ago reported figure. The stock has a long-term expected earnings growth rate of 9%.
On the other hand, Goldman’s consensus estimate for 2019 earnings of $23.18 has marginally moved upward over the past 60 days. However, it implies a fall of 8.3%. The stock has a long-term expected earnings growth rate of 6.7%.
Therefore, this round is biased toward Morgan Stanley too.
Morgan Stanley seems undervalued when compared with the broader industry. Its current price-to-book and price-to-earnings (F1) ratios are below than the respective industry average.
Also, Morgan Stanley has a Value Score of A. The Value Score condenses all valuation metrics into one actionable score that helps investors steer clear of “value traps” and identify stocks that are truly trading at a discount. Our research shows that stocks with a Style Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best upside potential.
Goldmanalso seems undervalued when compared with the broader industry. Its current price-to-book and price-to-earnings (F1) ratios are lower than the respective industry average. However, the stock has a Value Score of D.
Hence, Morgan Stanley holds the edge over Goldman here as well.
Our comparative analysis indicates that Morgan Stanley is poised better than Goldman when considering dividend yield, earnings estimate revisions, earnings growth expectations and undervaluation. Goldman wins on price performance and superior ROE.
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