Like Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) faces the same depressing reality over the next few years. The new delevered world will lead to returns on capital much lower than investment banks are used to during the pre-credit crisis days. The market knows this and has punished the stock accordingly. From 2003 through 2007, the stock spent most of its time above $40 a share.
Since then, the stock has spent most of its time below $30 a share. The valuation metrics don't suggest much upside here as the most bullish one of the metric gets is the forward P/E valuation metric and it suggests that the stock is slightly undervalued. I agree with the metrics and the market and suggest that you look elsewhere for exposure to the financial sector. Below is an in depth look at the valuation metrics and stock chart.
Valuation: Morgan Stanley's trailing 5 year valuation metrics suggest that the stock is fairly valued as there is a mixed message about the valuation metrics compared to their 5 year averages. Morgan Stanley's current P/B ratio is 0.6 and it has averaged 0.9 over the past 5 years with a high of 2.3 and low of 0.4. Morgan Stanley's current P/S ratio is 1.2 and it has averaged 0.8 over the past 5 years with a high of 1.5 and low of 0.3. Morgan Stanley's current P/E ratio is 15.1 and it has averaged 14 over the past 5 years with a high of 37.1 and low of 2.2.
Price Target: The consensus price target for the analysts who follow Morgan Stanley is $23. That is upside of 22% from today's stock price of $18.6 and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
Forward Valuation: Morgan Stanley is currently trading at about $19 a share with analysts expecting EPS of $2.36 next year, an earnings increase of 24% y/y, for a forward P/E ratio of 7.9. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. Goldman Sachs is currently trading at about $120 a share with analysts expecting EPS of $13.19 next year, an earnings increase of 15% y/y, for a forward P/E ratio of 9.1.
Piper Jaffray (NYSE:PJC) is currently trading at about $26 a share with analysts expecting EPS of $2.28 next year, an earnings increase of 19% y/y, for a forward P/E ratio of 11.5. Cowen Group (NASDAQ:COWN) is currently trading at about $3 a share with analysts expecting EPS of $0.37 next year for a forward P/E ratio of 7.4. The mean forward P/E of Morgan Stanley's competitors is 9.3 which suggests that Morgan Stanley is slightly undervalued relative to its publically traded competitors.
Earnings Estimates: Morgan Stanley has beat EPS estimates every time in the past 4 quarters. The company's EPS figures have come in between 16 cents and 84 cents from consensus estimates or about 40.6% to 280% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.
Price Action: Morgan Stanley is down 32.2% over the past year, underperforming the S&P 500, which is up 11.1%. Looking at the technicals, the stock is currently below its 50 day moving average, which sits at $18.35 and above its 200 day moving average, which sits at $17.88.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.