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Morgan Stanley (NYSE:NYSE:MS) is a leading financials company with some of the best talent the world has to offer. They have around $3.3 trillion in assets under management and are managing their various revenue streams with efficiency in order to avoid past mistakes of being more susceptible to specific economic changes like interest rates, market / trading activities, and more.
As a result, they are expected to grow revenues and profits at a slightly higher rate than their direct and indirect competitors over the next few years, which leads to my bullish stance and observation that they are likely to outperform the broader market over that time period.
Interest Rate-Related Segments Set To Grow
As with most financial companies, as interest rates in the United States, the company’s primary source of business, continue to increase in order to stem inflation and other pandemic-related economic headwinds, Morgan Stanley is already seeing an increase to its interest income.
When the COVID-19 pandemic hit, the company saw a significant drop in revenues as interest rates dropped back down to zero and the company lost out on all that extra cash, as well as overall slowdown in economic activity. After interest and dividend revenues dropped from $18.6 billion to $11.1 billion in 2020, they are rising quite sharply in the past few quarters.
In the last quarter of 2019, the company saw a record high $4.7 billion in interest and dividend revenues, which then slumped to $2.6 billon the following year as interest rates went back to zero. However, in the most recent quarter, the company reported $3.7 billion in interest and dividend revenues, which was up more than 40% from the same quarter last year, at $2.6 billion.
Given that interest rates are already substantially higher than they were back then and we expect there to be another rate hike or two – I believe that Morgan Stanley can be generating well over $20 billion annually in interest and dividend revenues.
Other Business Segments Are Flourishing
Even though some of the company’s other business segments like trading revenues and others have seen their somewhat cyclical bumps in revenues, the company’s main growth is set to come from asset management fees.
This segment is now the company’s largest revenue-generating segment, with over $20 billion expected in the upcoming year. The company is continuing to see an inflow of assets as financial management has become a more notable part of everyday life versus just leaving it in a checking account. As we become a more and more specialized economy, the income and wealth divides are also aiding this, with the creation of more millionaires and billionaires than ever before – creating a larger need for asset managers.
Other than brokerage fees, which are seeing declines as dozens of other high-profile brokerage accounts are competing for new and existing clients, the company has seen a rise in most other revenue streams, a good sign as we expect interest rates rising and trading revenues to eventually cool down.
Highly Likely To Outperform Peers
As a result of these factors, Morgan Stanley is expected to outperform its direct competitors like Goldman Sachs (GS), JPMorgan Chase (JPM), BlackRock (BLK), and others on both top and bottom line growth. Here are those figures.
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| Sales | $54.8B | $57.8B | $60.3B | $65.3B | $68.3B |
| Growth | -8.34% | +5.56% | +4.22% | +8.29% | +4.65% |
After the initial expected decline in this year’s revenues (and profits) due to bad comparisons with higher trading revenues due to the volatility, the financial behemoth is expected to report a solid growth environment for the next 4-5 years, backed by interest rate and asset management increases.
But that’s not the only plus as these figures outperform expectations for rivals like Goldman Sachs, the company is also expected to report better earnings growth as it streamlines efficiencies in the system and relies more heavily on automated processes to eliminate the human component in many systems.
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| EPS | $6.67 | $7.75 | $8.71 | $9.48 | $10.45 |
| Growth | -18.9% | +16.2% | +12.5% | +8.82% | +10.2% |
(Source: Seeking Alpha Earnings Projections Aggregator – Morgan Stanley)
Even Now – I Believe They Are Undervalued
Even without the projection that they will outperform peers and provide for a better return on investment – I believe that they are currently undervalued when compared to close peers like Goldman Sachs.
Goldman Sachs is expected to grow EPS at a slower rate and even report a slowdown and a decline in 3 years from now – fiscal 2025. Even so, the company is trading at around 8.9x those forward earnings while Morgan Stanley is trading at just 9.5x those same-year earnings while expected to grow at a high-single digit rate.
This means, I believe, that the company should be trading at around 10x those forward earnings, which places their current price at a potential 5.3% discount to where they should be trading. While we’ve seen a lot of market volatility in recent days and weeks, I believe that when things settle down, this fair value should restore itself relative to peers. Traders who may want to do an arbitrage trade here may consider shorting Goldman Sachs while buying Morgan Stanley but I’ll leave that to the traders.
Best Of Breed Means I’m Bullish – And Adding
Morgan Stanley has been part of my investment portfolio for the better part of a decade, along with Bank of America (BAC) and other smaller companies. But given how diversified their business is, without needing to rely too much on the consumer side of the economy like JPMorgan does with Chase or Merrill Lynch does with Bank of America, Morgan Stanley is a standalone entity (for the most part) and that’s why I believe they will do so well.
It’s an unfortunate happenstance in the world we live in but given how income inequality is only increasing around the world, the company will always have a base of operations and business around wealthy individuals who rarely lose too much of their livelihood no matter the circumstance. That’s why, even with the talk of a recession looming, I’d much rather own a company like Morgan Stanley which has a limited amount of exposure to the broader economy of the masses and will likely keep far more assets than others in the event of a recession or market downturn.
This isn’t to say they won’t lose quite a bit of value and earnings potential, but it’s all relative to the best place to park your money, and when it comes to financials, I am confident that Morgan Stanley is likely to outperform peers over the next 3-5 years and will continue to add to my position over the coming weeks.
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