Over the last five years, earnings per share [EPS] at Morgan Stanley barely budged, substantially lagging the growth of its Wall St. peers and the broader investment services industry. More recently, though, Morgan has taken the lead. In the most recent quarter [MRQ], its revenue and EPS improved considerably faster than the average for the investment services industry and some of its peers, such as Goldman Sachs Group Inc. (GS), Lehman Brothers Holdings Inc. (LEH), and Merrill Lynch & Co. Inc. (MER), as indicated below.
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In the fiscal quarters ended August, Morgan Stanley, along with Goldman Sachs and Lehman Brothers continued the trend of beating analyst estimates in recent quarters.
Merrill Lynch has yet to release earnings for the quarter ended September, but it also has a history of favorable earnings surprises, trouncing analyst estimates in each of the previous five quarters by a range of 5.4 percent to 26.9 percent. Better-than-expected performances have helped shares of these firms outpace the S&P 500 index over the last three months: The S&P 500 has advanced about 5 percent, while these investment banks have climbed about 10-20 percent.
On the basis of key valuation metrics, such as price to earnings (P/E), Morgan, as with its peers in the top bracket of U.S. investment banking, is priced at a considerable discount to the average for the investment services industry, which also includes both Internet and more-traditional brokerages. As indicated below, Morgan's P/Sales ratio also places it at a discount to the industry and investment houses Goldman Sachs and Merrill Lynch, but effectively on par with Lehman.
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When looking at P/Sales, remember that sales at these Wall St. firms means revenue derived from various banking services, including investment banking, trading, and asset management, among others.
To consider expectations for future performance, instead of examining P/E ratios, based on trailing 12-month [TTM] earnings per share [EPS], as we did above, we turn our attention to P/E ratios incorporating analyst estimates for future earnings. As with the historical P/Sales figures above, the forward P/E ratios price Morgan about on par with Lehman and at a substantial discount to Merrill.
While the forward P/E ratios can be useful for some quick comparisons, they provide more insight when we compare them to estimates for long-term EPS growth. Analysts believe that Morgan can grow its EPS at an average long-term rate of nearly 13 percent, just a notch below Merrill and the slowest for these four Wall St. houses.
Discounting the forward P/E by the estimate for long-term earnings growth yields the PEG ratio. When looking at the PEG ratio, we do not need to compare a firm's result to the industry average to eyeball a stock's valuation. Typically, more-conservative investors prefer PEG ratios less than 1.00, but numbers even slightly above this are reasonable. As indicated above, Morgan's PEG ratios based on EPS estimates for this fiscal year and fiscal 2007 are south of parity. Yet, we see that the story is the same with Goldman and Lehman, while Merrill is straddling this threshold.
At the time of publication, Erik Dellith owned shares of GS and MER. He may be an owner, albeit indirectly, of the other firms as an investor in a mutual fund or an Exchange Traded Fund.
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