Can Morgan Stanley Stock Continue To Outperform The S&P 500?

After a 60% rally from the lows seen in late March, Morgan Stanley’s stock (NYSE: MS) seems to still have some room to grow based on its historic PE multiples. Morgan Stanley’s stock has rallied from $28 to $45 off the recent bottom compared to the S&P which moved about 45%. The bank has outperformed the overall markets as investors are optimistic about the strength of its Sales & Trading operations. However, the stock remains more than 10% below the levels seen in late 2019

While the company has seen steady revenue and earnings growth over recent years, its PE multiple has actually decreased.  We believe the stock is likely to see some upside despite potential weakness from a recession that will be driven by the Covid outbreak. Our dashboard Why Morgan Stanley Stock moved 29.7% between 2016 and 2019 has the underlying numbers.

Some of this rise of the last 3 years is justified by the roughly 20% growth seen in Morgan Stanley’s revenues over 2016 to 2019, which translated into a 55% increase in Net Income. The higher growth in net income was mainly due to the drop in total expenses (compensation cost, occupancy & equipment expense, professional services cost, etc.) as a % of revenues over the same period.

Morgan Stanley’s PE multiple changed from 13x in 2016 to 9.5x in 2019. While the company’s PE is down to 8.5x now, there is some upside potential when the current PE is compared to levels seen in the past years – PE of 9.5x at the end of 2019 and 13x in late 2016.

So what’s the likely trigger and timing for further upside?

Morgan Stanley has a big portfolio of wealth management loans which could lead to sizable losses if consumer activity levels fall and the economy heads towards a recession. Not to forget, it would make it expensive for the bank to secure funding, impacting its overall operations. On similar lines, the economic slowdown is likely to hurt its investment banking and asset management businesses, due to lower consumer activity levels and market volatility.

However, there is a silver lining, as the bank could profit from its significant presence in the sales & trading business. The company generated around 33% of its revenues from its sales & trading business in 2019. Given the extreme level of volatility in equity & debt markets over recent months, the bank is well-positioned to report strong results for its securities trading arm, which should partially mitigate the negative impact of weak economic conditions on its other operating segments.

That said, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations over the coming weeks. Following the Fed stimulus – which set a floor on fear – the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs. historic valuations become important in finding value (although market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again). 

While Morgan Stanley’s stock has some growth potential, there might be an even bigger opportunity in Citigroup’s stock.

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