Which Is The Better Investment: Morgan Stanley Or MetLife?

Aug.12.13 | About: MetLife, Inc. (MET)

On the face of it, Morgan Stanley (NYSE:MS) and MetLife (NYSE:MET) may not seem to have a lot in common; one is a premier investment that was hit hard by the financial crisis and is still bouncing back, while the other is perhaps the best known life insurance company in the country. Yet under the surface the two firms share the same basic mechanism for earning profits; asset management.

Let me explain. MetLife's business is all about taking in money from consumers and in return, providing those consumers with a "return" in the form of insurance (the firm is probably best known for life insurance, but it sells many other forms of insurance also). Thus MetLife's goal is to manage these insurance premiums so as to earn the maximum possible risk adjusted return, and the higher the rate of return the firm earns, the bigger its profits are.

Historically, Morgan Stanley has mainly been an investment bank; a firm wants to float a new bond issue, it comes to Morgan. It wants to issue more equity or do an IPO, talk to Morgan. Want to do an M&A transaction, Morgan can help. Leading up to the financial crisis MS got away from its roots as a pure investment bank and started doing a lot more trading with firm money (as did Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM), etc). However in the wake of the financial crisis and MS' near death experience there as well as the new regulations promulgated under Dodd Frank, Morgan moved heavily into wealth management. The firm bought a major stake in brokerage and wealth management operations in a deal with Citi (NYSE:C), and since that time wealth management has been becoming a bigger and bigger part of the firm's core operations. For shareholders in MS, this is probably a good thing; wealth management is a lot more stable business than trading or even investment banking.

Under the wealth management business, Morgan Stanley takes in assets from wealthy individual investors and chooses how to invest the money for them. The goal of the firm is to maximize the return for these investors, because Morgan's fees (and their ability to attract still more assets) are tied to how well they perform this fiduciary obligation. As a result, while it may not seem like Morgan Stanley and MetLife have much in common at first blush, digging a little deeper under the surface shows that the critical driver for both firms' profits is how well they do at investing OPM (other people's money). Given this, it is fair to compare the two stocks and ask which one is a better buy. This comparison is even more appropriate given that both firms are large cap, blue chip companies, at similar stages in their life cycle.

Let's start by looking at the valuation on each firm.

Both Morgan Stanley and MetLife have performed well over the last few years. Morgan has been bouncing back from the financial crisis and while the stock still get's hammered by periodic European Union spasms (largely due to concerns over how much exposure the firm has to national bonds in the EU), these spasm have been buying opportunities from which the stock has quickly bounced back (see chart below). Morgan's P/E ratio is a fairly steep ~38x largely because the firm has been recognizing unrealized losses on some investments. These losses should be one-time events which is why the market isn't particularly worried about them.

By other metrics, Morgan is doing much better as the table below reveals. In particular, the stock trades at forward P/E of 12 reflecting the fact that the stock, while not cheap, is also not likely overvalued. The firm's tangible book value is also notable in that the stock is trading only slightly above this level suggesting that investors are valuing MS at about the same level as the assets the firm has on its balance sheet. While historically out of the ordinary compared to the pre-Crisis Morgan Stanley, since the crisis, this trading at or near TBV has been about par for the course for both MS as well as other investment banks like Goldman, etc. This is due in part to investors concerns over the valuation ascribed to these assets as well as the unknown legal liabilities that all major banks face currently. Over time, probably several years, these issues should be fixed and Morgan Stanley will likely trade at significant TBV premiums once more.

 

 

Morgan Stanley FYE:

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Tangible Book Value

25.42

25.79

24.05

18.38

27.24

25.75

34.89

25.23

23.93

21.52

EPS

-0.04

1.26

2.44

-0.93

1.54

2.37

7.09

4.81

4.08

3.45

Dividends/Share

0.20

0.20

0.20

0.20

1.08

1.08

1.08

1.08

1.00

0.92

P/E High

NM

25

14

NM

8

38

12

13

15

17

P/E Low

NM

9

9

NM

1

20

8

10

11

9

Click to enlarge

In contrast, while MetLife and Morgan Stanley have a surprising commonality between their businesses today, MetLife maintains one important advantage over Morgan Stanley; it has not earned the wrath of Washington DC as MS and all of the other banks have. Despite the lack of serious legal issues, MetLife's stock also trades very near its TBV as the table below shows. This seems unjustified given that MET has considerably more stable EPS (though clearly not as stable as most industrials), and unlike Morgan Stanley, MetLife was not forced to cut its dividend during the recession.

 

 

MetLife FYE:

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Tangible Book Value

48.39

43.38

35.65

52.73

19.54

34.79

35.64

32.06

31.16

27.94

EPS

1.09

6.27

2.99

-2.94

4.55

5.44

3.85

4.16

3.59

2.57

Dividends/Share

0.74

0.74

0.74

0.74

0.74

0.74

0.59

0.52

0.46

0.23

P/E High

36

8

16

NM

14

13

16

13

11

13

P/E Low

25

4

11

NM

3

11

12

9

9

9

Click to enlarge

While both MetLife and Morgan Stanley are being hurt by the current low interest rate environment which is pressuring their net interest income margins (difference between what they can borrow at and what they can lend/invest at) and hence their stock price, MET also has the ability to offset this effect by increasing the premiums on its insurance policies. The insurance business, while competitive generally, is much less competitive in the life and health insurance space, than in other insurance sectors such as the car insurance space. Life insurance is one of those things that gets harder to get was one gets older and as such people are frequently loathe to switch life insurers, whereas customer tenure with car insurance companies is frequently only a few years.

Given these advantages for MetLife, it is very surprising that the market is essentially valuing Morgan Stanley and MET at the same TBV ratio. Nonetheless, MET is a much less risky play, and one that has just as much appreciation potential as MS. The chart below shows that over the last three years while the stocks have performed similarly, MET has generally been the better choice. Here MetLife is in blue, while Morgan Stanley is in yellow.

Click to enlarge

On the whole MS is coming back nicely and has a lot of promise, but is perhaps a bit expensive at these levels. Basically the stock is reflecting investor expectations of a very bright future, and even a minor misstep could easily take the shine off the apple as it were. As a result, investors in Morgan may want to consider MetLife as an alternative. While the companies operate in different industries, their primary profit driver is the same - how well do they do as asset managers. Both companies are very competent at this task, but MetLife likely faces less regulatory scrutiny and it appears to have lower investor expectations right now. This suggests investors should consider MET over Morgan Stanley if they are looking to invest in the sector in the near future.

Disclosure: I am long MET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.