Morgan Stanley or Goldman? Down 35%, Now MS Stock Will Win

Banking and financial services stocks have been particularly badly impacted by the ongoing crisis, as their lending and investment banking operations are expected to suffer due to lower consumer activity levels and potential loan defaults due to anticipated losses driven by the global slowdown. Further, this would make it expensive for the banks to secure funds. Morgan Stanley (NYSE: MS) has declined by close to 34.9% since early February after the WHO declared the Coronavirus a global health emergency, compared to a similar 34.6% decline for Goldman Sachs stock. Further, both the MS and GS stocks have underperformed the broader S&P 500, which has declined around 20% since early February. While Morgan Stanley has seen higher average revenue growth of 3.2% compared to 1.1% for Goldman Sachs between 2014 and 2019, its average annualized adjusted EPS growth was also much higher at 23.9% compared to 3.8% for Goldman Sachs. However, Goldman’s relative valuation was higher than Morgan Stanley with their P/E multiples being 10.8x and 9.7x, respectively, in 2019.

View our complete dashboard analysis, ‘Is Morgan Stanley Expensive Or Cheap After A -34.9% Move vs 34.6% for Goldman Sachs?’ for more details on how Morgan Stanley and Goldman’s stock fared through the Coronavirus crisis, their relative valuations, as well as their financial performance over the last few years. Parts of this analysis are summarized below.

Why Has Goldman Sachs Performed Similar to Morgan Stanley Over Recent Weeks?

Morgan Stanley derives around 50% of its revenues from asset and wealth management businesses (vs 17% for Goldman), which could see revenue decline in the event of a global recession. This would be due to lower asset valuations leading to lower fees, potential loan defaults, and overall less focus on investment. Goldman Sachs, on the other hand, derives roughly 40% of its revenues from sales & trading (vs 33% for Morgan Stanley), which could see demand hold up better compared to other segments. Overall, both banks have similar revenue segments and face similar risks from the economic slowdown.

Goldman’s P/E based on 2019 earnings has declined from 10.8x in 2019 to 6.5x currently, while Morgan Stanley’s multiple has declined from 9.7x to about 5.6x. However, Goldman’s multiple (based on 2019 EPS) still appears to be slightly high, considering that both the company’s revenues/margins face the same risk and MS’s P/E multiple has contracted in line with the expected drop in revenues/margins.  Moreover, Morgan Stanley’s P/E is about 73% lower than the 20.9x multiple it traded at in 2014.

Overall, it’s likely that Morgan Stanley stock will outperform Goldman Sachs, as the latter could see some more decrease in its P/E multiple through the current crisis. It’s likely that the ground reality for Morgan Stanley will be confirmed during its Q2 results when weak results coupled with tough guidance for 2020, especially if there is no virus containment, at the time of earnings.

HISTORICAL PERFORMANCE:

From 2009-2019 Morgan Stanley stock has grown at 1.8x the rate of Goldman Sachs.

• Morgan Stanley stock went from $25.13 at the end of 2009 to $50.79 at the end of 2019, representing a change of 102.1%.
• During the same time period, Goldman Sachs went from $146.08 to $228.53 representing a change of 56.4%.
• This implies that Morgan Stanley stock grew at 1.8x the rate of Goldman Sachs.
• Further, Morgan Stanley stock had a higher annualized rate of return as compared to Goldman Sachs, over 2009-14 (6.6% vs 4.1%) and 2014-19 (8.0% vs 5.0%).

ANALYSIS: Is Morgan Stanley stock expensive based on a review of the fundamentals?

P/E Ratio: Based on trailing 2019 P/E ratios, MS stock looks attractive compared to prior years and attractive compared to Goldman Sachs. Its 2019 trailing P/E ratio of 9.7 is 0.9x that of the 2019 Goldman Sachs P/E ratio of 10.8.

Historical Revenue Growth: Morgan Stanley stock looks attractive compared to Goldman Sachs.

• Morgan Stanley 2014-19 annualized revenue growth of 3.2% is 1.0x that of the 2014-19 S&P 500 figure of 3.9%.
• Further, MS 2014-19 annualized Revenue growth of 3.2% is 2.9x that of the 2014-19 GS’ figure of 1.1%.

Historical EPS Growth: Morgan Stanley stock looks attractive compared to Goldman Sachs.

• Morgan Stanley 2014-19 annualized EPS growth of 23.9% is 4.6x that of the 2014-19 S&P 500 growth rate of 5.7%.
• MS 2014-19 annualized EPS growth of 23.9% is 6.3x that of the 2014-19 GS figure of 3.8%.

CONCLUSION

Based on historical performance, Morgan Stanley appears to be more attractive compared to Goldman Sachs in the current crisis.  Although both the bank’s stocks have underperformed the broader markets through the crisis, Morgan Stanley could see a larger upside post the coronavirus crisis, considering its revenue and EPS growth has been higher than Goldman Sachs. Moreover, Morgan Stanley’s P/E ratio is lower compared to its own historical P/E ratio, as well as that of GS.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact.

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