Morgan Stanley (NYSE:MS) is one of the largest investment and asset management companies in the United States, but is actually the smallest of my “big three,” the others being Goldman Sachs Group Inc (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM). With the recent pullback in the sector, Morgan Stanley (NYSE:MS) is now about 10% below its 2-week high reached just a few weeks ago, and is trading for a particularly attractive valuation.However, what I want to know is how Morgan Stanley (NYSE:MS) stacks up to the others, and if it is the best option for our portfolios.
About Morgan Stanley (NYSE:MS)
Morgan Stanley (NYSE:MS) is one of the largest financial services firms, with about $800 billion in total assets. The company operates through three main segments: Institutional Securities, Global Wealth Management, and Asset Management.
The Institutional Securities Group makes up 40% of the company’s revenues and provides a wide range of services. In addition to investment banking services, the segment also provides market-making services, risk management analysis, and financial advisory services. Morgan Stanley (NYSE:MS)’s investment bank is one of the biggest in the world, and actually ranks second in the world in M&A activity and third in IPO’s.
Global Wealth Management is the company’s most lucrative, producing over half of their revenues last year. This segment provides brokerage, investment advisory, wealth planning, and banking services, in addition to offering annuities, insurance products, and more. The segment provides these services through Morgan Stanley Wealth Management, formerly Morgan Stanley Smith Barney (MSSB), of which it owns a majority stake (65%) with Citigroup Inc (NYSE:C) owning the rest. Morgan Stanley has expressed its intention to acquire the rest before the end of 2015, which I think will add stability to the company, shifting more of its revenues toward wealth management and away from trading activities.
Finally, the company’s smallest segment is Asset Management, which accounts for 8% of revenues and provides services to institutional clients in regards to equities, fixed income investments, and other types of investments.
Growth and Numbers
With the terms for purchasing the rest of the wealth management business completed, there is a lot of potential for the company to grow this side of its business, the revenue from which tends to be much more stable than revenues from investment banking. Just from a quick calculation based on the revenue makeup of last year and the amount of MSSB the company owned last year (they owned 51% until late September), once the company finalizes the acquisition of the remaining 35%, the Global Wealth Management Group will account for about 67% of the company’s revenue, making it even more important to Morgan Stanley’s bottom line than it already is.
Considering the long-term potential, Morgan Stanley trades at a very cheap valuation of 11.8 times 2013’s expected earnings, and at a 20% discount to book value. The company is expected to earn $2.08 for the current year, and the consensus calls for this to rise to $2.55 and $2.91 in 2014 and 2015, respectively, for annual earnings growth of 22.6% and 14.1%. This looks incredibly attractive from a long-term perspective, but before we go jumping in let’s take a quick look at the other major players.
Goldman Sachs Group Inc (NYSE:GS): A Bet on Brains
Every time I hear the name Goldman Sachs Group Inc (NYSE:GS), I remember reading an interview with Warren Buffett shortly after making a huge investment in the company during the financial crisis. The interviewer essentially asked him why in the world he would touch the financial sector, to which he replied that Goldman Sachs Group Inc (NYSE:GS) was “a bet on brains.”
The majority of Goldman Sachs Group Inc (NYSE:GS)’s revenues come from its Institutional Client Services (ICS) segment, and is made up of the revenue that Goldman Sachs Group Inc (NYSE:GS) makes from its market making and execution operations. The company also has investment banking, investment management, and investing and lending segments, each of which contributes about 15% of the company’s revenues. While Goldman trades at just 10.6 times earnings with 11% forward growth projected, investors must take into account that Goldman’s higher leverage ratio as well as its reliance on more risky revenue streams than Morgan Stanley.
JPMorgan Chase & Co. (NYSE:JPM): Is Bigger Better?
JPMorgan Chase & Co. (NYSE:JPM) is one of the largest financial companies in the world with assets of $2.4 trillion. The company operates one of the world’s largest investment banks, as well as an extensive consumer & business banking business. JPMorgan Chase & Co. (NYSE:JPM)’s global footprint grew tremendously as a result of the acquisitions of Bear Stearns (on the investment banking side) and Washington Mutual (on the consumer/business side), both of which were acquired for a fraction of their former value.
At just 9.5 times earnings, JPMorgan Chase & Co. (NYSE:JPM) is the most cheaply valued company here. They also have the most stable operations and most diverse line of products and services offered. Unfortunately, that also means that the company’s projected growth potential is somewhat limited when compared to the other two. Nonetheless, JPMorgan Chase & Co. (NYSE:JPM) is an excellent company and one of the strongest financials in the market.The current valuation makes it very appealing indeed.
Conclusions
None of the three companies discussed here would make a “bad investment” by any definition. While JPMorgan may offer more stability and Goldman may offer the greatest potential for gains, I think that Morgan Stanley is a good combination of risk and stability, and a very attractively valued one.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of JPMorgan Chase & Co (NYSE:JPM). Matthew is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Investment Banks Are Cheap Right Now…Here’s How to Play It originally appeared on Fool.com is written by Matthew Frankel.
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