Investment Bank Stock Showdown: Morgan Stanley or Goldman Sachs? - Stocks in the News

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Two rivals in the investment banking industry have long been competing to set themselves apart from the rest of the competition, and may also be intriguing investments at this time. On the one hand we have Goldman Sachs ( GS ) who represents an emphasis on capital markets and on the other hand we have Morgan Stanley ( MS ) who is emphasizing wealth management.

In the long run, the winner will be the company that can show consistently high return on capital invested, and attract new clients to their business, but which is the best for your portfolio now? Let's take a look at some of the stats for both to get a clearer picture of their investment appeal:

2Q Financial Results

In the second quarter, both of the banks reported better than expected top line and bottom line numbers. Goldman Sachs reported net revenue of $9.13 billion and diluted EPS of $4.10 beating analyst expectations of $7.98 billion and $3.07 respectively.

Morgan Stanley reported net revenue of $8.6 billion and diluted EPS of $0.91 also beating analyst expectations of about $8.2 billion for revenues and $0.55 in EPS. In comparison, Goldman Sachs topped revenue expectations by a greater margin than Morgan Stanley (9.53% difference), though MS had a bigger margin of beating on earnings, with the margin of difference between the two coming in at 31.91% for this metric.

Important Points for Investors:

For investors considering either of these companies, it may be worthwhile to note how they have been performing, and some of the key ratios of each:

  • Goldman Sachs is currently priced at $174.02 offering a dividend of $2.20 yielding 1.30%.
  • Goldman Sachs stock YTD has yielded a net loss of 1.32%
  • Morgan Stanley is currently priced at $32.62 offering a dividend of $.40 yielding 1.20%
  • Morgan Stanley stock YTD has yielded a net gain of 5.09%

Comparative Analysis

Trailing P/E ratio (ttm, intraday)

  • Goldman Sachs: 11.45 Morgan Stanley: 20.15

Forward P/E ratio (fye Dec 31, 2015)

  • Goldman Sachs: 10.14 Morgan Stanley: 11.28

PEG ratio (5 yr expected)

  • Goldman Sachs: 1.30 Morgan Stanley: .52

Price/Sales ratio (ttm)

  • Goldman Sachs:2.35 Morgan Stanley: 1.93

Price/Book Ratio

  • Goldman Sachs: 1.10 Morgan Stanley: .97

If we look at the P/E ratio we can see that Goldman Sachs offers investors a better price given their EPS of 15.18 compared to the 1.62 EPS of Morgan Stanley. Although, Goldman Sachs relatively costs more when looking at the P/S and P/B ratio which is very significant given that both firms only have a difference of Revenue (ttm) of about $771 million, Goldman Sachs being the higher.

On the other hand, given each company's earnings history, Morgan Stanley is more promising when considering the PEG ratio and is priced under fair value allowing more room for growth compared to Goldman Sachs.


Profit Margin (ttm)

  • Goldman Sachs: 23.32% Morgan Stanley: 13.23%

Return on Assets

  • Goldman Sachs: 0.88% Morgan Stanley: 0.57%

Return on Equity

  • Goldman Sachs: 9.89% Morgan Stanley: 6.72%

Quarterly Earnings Growth (YoY)

  • Goldman Sachs: 5.5% Morgan Stanley: 93.80%

Looking at the profitability data, Goldman Sachs seems to justify its 'overpriced' notion that the company represents when looking at the comparative analysis key ratios. We can see that Goldman Sachs is a more profitable company and has better control over its costs compared to Morgan Stanley. Goldman Sachs also has a greater return on assets and equity indicating better investments giving the edge to Goldman Sachs.

On the contrary, the quarterly earnings growth is very one-sided in favor of Morgan Stanley at 93.80% quarterly earnings growth indicating steady growth for the past year. We have to also consider that Morgan Stanley only has a net income (ttm) of $4.14 billion compared to Goldman Sachs net income (ttm) $7.56 billion. Investors then have to question why was net income low enough to even allow a 93.8% growth rate when net income is still over $3 billion lower than Goldman Sachs.


Goldman Sachs

  • The outlook for Goldman Sachs is promising with earnings estimates doubling each quarter to about $17.36/share for the following full year. In the last 60 days, 80% of estimates have been positively revised for the next year. Looking in the past, Goldman Sachs has been very consistent in beating earnings estimates with an average positive surprise of 19.50% for the past year.
  • We give Goldman Sachs a Zacks Rank #2(buy) given the positive earnings estimate revisions that have occurred recently. We rank Goldman Sachs near the top within the Finance/Investment Bank industry , but do rank the industry in the bottom 42% of all industries, suggesting GS is near the top of its class.

Morgan Stanley

  • The outlook for Morgan Stanley is a similarly promising story, but with a little less potential on the upside. Earnings estimates have been increasing modestly each quarter to $2.93 per share at the end of next year. In the past 60 days, the consensus is about 50/50 among analysts in either increasing or decreasing their earnings outlook for the company.
  • Although in the past year, Morgan Stanley has had a positive average earnings surprise of 13.78% also showing stable earnings, and an ability to beat expectations. We currently rank Morgan Stanley with a Zacks Rank #3(hold) given the divided consensus on earnings estimate revisions. We rank Morgan Stanley in the middle of the pack in the Finance/Investment Bank industry though, since it is in the same industry as GS, is also in a poor industry from the rank perspective.

Bottom Line

These two behemoths within the investment bank industry both offer good prospects that could lure investors. We think both of these companies are good investments, but lean on the side of Morgan Stanley in the short run due to a better bargain of its stock price given its financials.

Although the stock is a little overpriced for my taste, in the long run, we might invest in Goldman Sachs given its long term history of outperforming the other banks and solid financial foundation that it is built on. The company also has better earnings estimate revisions so it could be poised for gains in the medium term, something that may be more difficult for MS to do in the future.

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MORGAN STANLEY (MS): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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