Morgan Stanley Hung Tough During the Pandemic. There Are Better Bank Stocks to Play Now, Analyst Says
Morgan Stanley’s wealth- and asset-management businesses make its earnings less variable.
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Morgan Stanley has consistently wowed Wall Street over the past year, but while analysts are still impressed with the bank, they see little room for more gains in light of its recent run.
Shares of Morgan Stanley (ticker: MS) have nearly doubled over the past year while the SPDR S&P Bank ETF (KBE) has popped 56%. Other banks had to contend with setting aside billions of dollars in reserves in anticipation of a wave of pandemic-related defaults. Morgan Stanley, however, was in growth mode, acquiring E*Trade Financial and Eaton Vance—moves that make earnings less variable.
“While we believe MS’s transformation has created an impressive “flow machine” in [wealth management/asset management] that should drive improved and consistent organic growth, we simply believe the risk/reward from here is more balanced,” Jim Mitchell, senior analyst at Seaport Research Partners, wrote in a note Friday. He downgraded the stock to Neutral from Buy.
Morgan Stanley stock currently trades at 14.5 times the consensus forecast for 2022 per-share earnings, 38% above its 10-year average, he said. Peers such as Raymond James Financial (RJF) and Stifel Financial (SF) trade at 14 times and 11.1 times projected earnings, respectively.
Being more diversified certainly helped Morgan Stanley at the start of the pandemic, given that lending became less profitable as the Federal Reserve pushed interest rates to near zero to prop up the economy. But in the recovery, other banks—those with larger loan books—are expected to fare better.
Morgan Stanley has said that it expects that a 1 percentage-point boost to interest rates would lead to an additional $1.5 billion of net interest income for the bank, translating to a 2.6% increase in estimated 2022 revenue and a jump of 8.3% to earnings per share. But those gains fall well below what other banks that Seaport follows would experience.
“For those investors looking for exposure to the eventual rise in interest rates, there are better ways to play it than MS,” Mitchell wrote.
Morgan Stanley stock was down 1.5% in Friday’s trading, while the SPDR S&P Bank ETF(KBE) was off by 0.5%. The S&P 500 was flat.
Write to Carleton English at [email protected]
