Morgan Stanley: On All Cylinders
07/29/2015 7:00 am EST
Our latest recommendation—a New York-based investment bank and brokerage firm—is working on all cylinders, asserts Mark Skousen, editor of Private Equity Trader.
Morgan Stanley (MS) has come out of the 2008 financial crisis in good shape. After cutting its dividend to 5 cents per share, it since then has increased it to 10 cents and most recently to 15 cents (1.6% yield).
As the Street notes, “Morgan Stanley has emerged as somewhat of a quiet hero among the big banks since the financial crisis, dialing back many of its riskier activities to focus on wealth management, a less volatile, if also less lucrative, business than trading.”
CEO James Gorman is upbeat. “The stability of our fee-based businesses gives us comfort that a large portion of business offers us a more predictable outlook," he said in a conference call.
Banks have been scaling back trading businesses generally in preparation for the Volcker Rule, which is a provision of the Dodd-Frank reform law passed after the financial crisis. The Volcker Rule places strict limits on banks' trading on their own accounts.
Morgan Stanley recently beat market expectations by a large margin. MS’ second-quarter earnings of 79 cents per share were substantially above the 75 cent consensus.
BMO Capital Markets raised its price target to $46, emphasizing its outperform rating...and with good reason. Morgan Stanley has outpaced its rivals Goldman Sachs and JPMorgan Chase, especially in its trading and fixed income activity.
Revenues rose 11.5% to $35 billion and earnings jumped 59% to $4 billion. Profit margins increased to 12.3%. The bank has more than $560 billion in cash, substantially more than its $285 billion in long-term debt.
Even then, Morgan Stanley is selling at a reasonable price, less than 12 times forward earnings and only 18% above its book value. It has a price/earnings to growth (PEG) ratio of 0.82 (anything less than 1 is considered excellent).
Continued strong earnings growth will drive this stock higher. Let’s buy Morgan Stanley at market today and set a protective stop of $32 a share.
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