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Zacks Industry Outlook Highlights: Morgan Stanley, Charles Schwab, Goldman Sachs, Evercore and LPL

Zacks Equity Research

For Immediate Release

Chicago, IL – August 19, 2019 – Today, Zacks Equity Research discusses Investment Banks, including Morgan Stanley MS, Charles Schwab SCHW, Goldman Sachs GS, Evercore EVR and LPL Financial Holdings Inc. LPLA.

Industry: Investment Banks

Link: https://www.zacks.com/commentary/473265/near-term-prospects-for-investment-bank-industry-appear-gloomy   

The Zacks Investment Bank industry consists of U.S. firms that provide various financial products and services, including advisory-based financial transactions to corporations, governments and financial institutions worldwide. These institutions began as partnership firms focused on initial public offerings (IPOs), and secondary market offerings, brokerage, and mergers and acquisitions. The firms have evolved into providers of various services, including securities research, proprietary trading, and investment management.

These firms work mainly through three product segments — investment banking (which includes mergers and acquisitions, advisory services and securities underwriting), asset management, and trading and principal investments (which covers proprietary and brokerage trading).

An advisor providing investment banking services in the United States must carry a broker-dealer license, and abide by the U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) regulations.

The passage of the Dodd-Frank Act of 2010 post the 2008 financial crisis put restrictions on certain investment banking activities, such as proprietary trading. However, considering the need for better business flexibility in the current economic scenario, these restrictions are being eased.

Some of the prominent stocks in this industry are Morgan Stanley and Charles Schwab.

Here are the three major themes in the industry:

  • Client activity in the trading business depends on the prevalent macroeconomic and geopolitical conditions. Despite strong equity markets and a rise in Treasury bonds, low volumes and reduced client activity were witnessed over the past few months, partly on the U.S. government shutdown and other economic uncertainties. However, an expected rebound in activities and resilient investor sentiment might keep the trading business momentum alive in the period ahead.
  • M&A activities (an important part of investment banking business), along with IPOs, are anticipated to improve, backed by economic growth, sturdy equity markets and increasing corporate earnings. Nevertheless, the Fed’s accommodative monetary policy, ongoing political and economic issues related to Brexit, concerns related to unsolved U.S.-China trade deal negotiations, the U.S. government shutdown and expectation of global economic slowdown hampered investment banking activities in the first half of 2019, which might escalate on improving conditions.
  • Innovative trading platforms, investments in technology and advertising are projected to support the overall backdrop for investment banks. Firms are emphasizing on attracting and retaining the best talent for building a leadership team and spending on technology in order to support clients with the development of infrastructure and new platforms.

Zacks Industry Rank Indicates Cloudy Prospects

The group’s Zacks Industry Rank, which is basically average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects.

The Zacks Investment Bank industry currently carries a Zacks Industry Rank #219, which places it in the bottom 14% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of bleak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since August 2018, the industry’s earnings estimates for the current year have slumped 43.5%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms Sector & S&P 500

The Zacks Investment Bank industry, a 21-stock group within the broader Zacks Finance Sector, has underperformed both the S&P 500 and its own sector over the past two years.

While the stocks in this industry have collectively declined around 12.7%, the Zacks S&P 500 composite has gained 16.6% and the Zacks Finance sector have lost around 1.9%.

Industry’s Valuation

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is the most appropriate multiple for valuing finance companies because of large variations in their earnings results from one quarter to the next. 
The industry currently has a trailing 12-month P/TBV of 2.10X, below the median level of 2.39X, over the past five years. This compares with the highest level of 3.27X and lowest level of 1.58X over this period.

However, the industry is trading at a discount when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 10.15X and the median level is 8.81X.

The Zacks Finance sector’s trailing 12-month P/TBV ratio of 3.55X and the median level of 3.45X for the same period are above the Zacks Investment Bank industry’s respective ratios.

Bottom Line

The investment banking business is likely to prosper on increased IPO and M&A activities. Nonetheless, market-volatility driven growth in trading business may not continue for long, as volatility will likely wane once global and domestic economy issues stabilize. Also, expenses on technology and business diversification might curb top-line growth in the coming period.

One should particularly consider betting on investment bank and broker stocks that depict an upbeat earnings outlook. We are presenting three stocks with a Zacks Rank #3 (Hold).

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here)

Goldman Sachs: Shares of this New York-based bank have rallied 17.4%, year to date. The Zacks Consensus Estimate for the ongoing year EPS moved 1.7% north in 30 days’ time.

Evercore: Shares of this New York-based bank has appreciated 7.6%, year to date. The Zacks Consensus Estimate for the current-year EPS has been revised 6.3% upward in the last 30 days.

LPL Financial Holdings Inc.: The consensus EPS estimate for this Boston, MA-based bank moved up 2% for 2019, over the last 30 days. This stock has gained 15.7% year to date.

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Evercore Inc (EVR) : Free Stock Analysis Report
LPL Financial Holdings Inc. (LPLA) : Free Stock Analysis Report
Morgan Stanley (MS) : Free Stock Analysis Report
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
The Charles Schwab Corporation (SCHW) : Free Stock Analysis Report
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