John Buckingham has updated his buy ratings on two leading Wall Street investment banks, following their recent earnings reports. Here's the latest from the value-oriented money manager and editor of The Prudent Speculator.
Perhaps it was the analysts that missed this go around. Per share profits for Goldman Sachs (GS) were some 7% below the Street consensus figure, which was attributed to higher wages.
But given the flurry of investment banking activity last year from a significant increase in completed mergers and acquisitions volumes, one might have expected an above-average bonus season was around the corner. Indeed, the Wall Street powerhouse produced $14.9 billion of banking fees in 2021, 58% higher than the 2020 figure (which was 22% higher than 2019).
The market rebound from the pandemic lows also supported strong asset management revenue as Goldman produced a 24% return on tangible equity. Book value per share now stands at $284.39 as of quarter end, a cumulative 30% improvement over the past two years.
All said, we continue to find the stock attractively valued, trading at less than 9 times a very achievable Street EPS projection of more than $40.00 for 2022.
We continue to like the healthy balance sheet and ongoing sound strategic repositioning. The build-out of its traditional banking and investment management businesses should serve shareholders well in the long run, as almost two-thirds of Goldman’s revenue still comes from its investment banking and global markets trading business segments.
We continue to like that the ultimate goal of Goldman’s evolution is to change the trading and deal making titan into a more well-rounded financial firm with more stable consumer and commercial businesses. The dividend yield is 2.3% and our Target Price remains $477.
Shares of Morgan Stanley (MS) managed to tread water in an otherwise awful weak for financial stocks thanks to the posting of better-than expected EPS of $2.08 for Q4, bringing the full-year figure to $8.22 (a 25% improvement year-over-year).
With variability between segments from quarter to quarter, 2021 was a record year for the 86-year-old Wall Street titan and would have been even without contributions from recently acquired Eaton Vance & E-Trade. Strong market performance and asset flows pushed Wealth Management assets to $1 trillion in the past year, bringing total client assets to $6.5 trillion including investment management.
Investment banking revenue increased 43% from a year ago, led by higher completed M&A transactions, strong IPO volumes and non-investment grade loan issuance. After posting a 27% pre-tax margin and 19.8% return on tangible equity in 2021, management upped its goals (from the previous range of 26% to 30%, to more than 30% for the former and from a range of 14% to 16%, to 20% for the latter).
MS bought back $2.8 billion of its outstanding common stock during the quarter. Despite strong price gains in the past year, the dividend yield is still an attractive 2.8%. And, while another increase the size of the monster (50%) jump in the payout last April is not in the cards, we would expect a dividend increase around the corner.
We continue to like the long-term prospects of MS as the near-decade-long transformation toward advisor-led relationships has improved the stability of its business model. We continue to see MS benefiting from strong capital market activities and room for expanding operating leverage in wealth management. Our Target Price has been lifted to $120.
