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It seems to be a wise idea to invest in the major global investment bank Morgan Stanley MS now. Despite a tough operating backdrop and low interest rates, the company is well poised for growth, mainly on the back of inorganic expansion strategy.
Morgan Stanley has been taking several business restructuring initiatives, with the goal to increase reliable revenue sources. The company’s strategic expansion efforts, including acquisitions of Eaton Vance (closed on Mar 1), E*Trade Financial (October 2020) and Shareworks (2019) are steps in these directions.
The deals are not only expected to be accretive to earnings but also to increase Morgan Stanley’s focus on its Wealth Management and Investment Management segments as these are less dependent on capital markets. Driven by these efforts, both the segments’ aggregate contribution to net revenues jumped from 26% in 2010 to 46% in 2020.
The transactions are expected to help Morgan Stanley generate solid financial returns through increased scale, improved distribution, cost savings and revenue growth opportunities.
Other Fundamental Factors That Make Morgan Stanley a Solid Pick
Revenue Growth: Morgan Stanley’s organic growth remains impressive. Net revenues witnessed a compound annual growth rate of 9.6% over the last three years (2018-2020). Normalized levels of trading activities, strategic buyouts, focus on wealth management operations and improving corporate lending business are likely to continue boosting revenues.
Further, revenues are expected to grow at the rate of nearly 1% for 2021 and 5.2% for 2022.
Earnings Strength: Morgan Stanley’s earnings have grown at a rate of 22% over the past three to five years, higher than the industry average of 16.6%. While its earnings are projected to decline 12.8% this year, the trend will likely reverse after that. For 2022, earnings are expected to grow 11.1%.
In addition, the company’s long-term projected earnings growth rate of 10% promises rewards for shareholders.
Moreover, Morgan Stanley has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three of the trailing four quarters, the positive surprise being 35.48%, on average.
Strong Balance Sheet: As of Dec 31, 2020, Morgan Stanley had total borrowings of $217.1 billion, higher than the cash and cash equivalents worth $105.7 billion. Yet, borrowings worth approximately $28 billion are likely to mature over the next 12 months (since 2020-end). Hence, the company is expected to be able to meet near-term debt obligations, even if the economic situation worsens, owing to its sufficient liquidity position.
Sustainable Capital Deployments: Amid the coronavirus-induced economic slowdown, the Federal Reserve had last year restricted dividends and share repurchases by major banks like Morgan Stanley, JPMorgan JPM, Bank of America BAC and Goldman Sachs GS in order to conserve liquidity. Thus, Morgan Stanley paid dividend of 35 cents per share in the fourth quarter and did not repurchase shares last year.
Nevertheless, following the Fed's approval, the company will resume repurchases in first-quarter 2021, while maintaining dividend at 35 cents per share. For 2021, the company has authorized to repurchase shares worth up to $10 billion. Considering last day’s closing price of $81.11, the company’s dividend yield stands at 1.73%, above the S&P 500’s 1.43%.
Given a solid liquidity position and earnings strength, Morgan Stanley is expected to continue enhancing shareholder value through efficient capital deployment activities in the future.
Favorable Valuation: Morgan Stanley seems to be trading at a discount with respect to its price/book (P/B) ratio. Currently, it has a P/B ratio of 1.58, which is below the industry average of 2.42. Also, the stock has a Value Score of B. Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer the best upside potential.
Other these fundamental factors, Morgan Stanley has a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Further, analysts are bullish on the stock’s prospects. Over the past 30 days, the Zacks Consensus Estimate for earnings has been revised 1.6% and 1% upward for 2021 and 2022, respectively.
Also, over the past year, shares of Morgan Stanley have surged 93.9%. It outperformed both the industry and the S&P 500 Index gains of 82.6% and 30.9%, respectively over the same time period.
One-Year Price Performance
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