The transition news over at Goldman Sachs Group Inc (NYSE:GS) has the media’s eye at the moment, but once that dies down, investors will be back wondering if Goldman Sachs stock is a better buy than Morgan Stanley (NYSE:MS).
MS and GS traded within $1 billion of each other in terms of market cap. So I’ll take a look at the reasons you might want to consider each stock. At the end, I’ll tell you which stock I think is the better buy.
The Pros of Owning Goldman Sachs Stock
Now that Lloyd Blankfein is expected to hand over the keys to the Goldman Sachs kingdom sometime in the next 12-18 months, investors are wondering what direction heir apparent David Solomon will take the long-time investment bank.
Speculation is Solomon will continue to move the company away from its traditional businesses into more growth-oriented areas.
“He’s a respected manager there — he’s certainly a capable leader,” said Brian Kleinhanzl, a managing director and lead bank analyst of Keefe, Bruyette, and Woods. “It lines up with the direction that they’re moving in that a lot of their growth areas tend to be away from the trading business.” (Note: Source is behind a pay wall.)
If you take a look at Goldman Sachs’ 2017 annual report, you’ll see that its Investing & Lending segment is where all the growth lies. Two years ago the segment accounted for 16% of the company’s overall revenue; today, that’s up to 21%.
Meanwhile, over the same two-year period, pre-tax earnings increased by 24.8% to $3.8 billion.
A key component in that growth is Marcus by Goldman Sachs, the company’s online lending platform, that just continues to grow.
At the end of 2016, Marcus had $208 million loans outstanding. By the end of 2017, the loans outstanding had increased to $1.9 billion with plenty of capital available to push that significantly higher.
In 2016, GS acquired the online deposit platform of General Electric Company (NYSE:GE) which brought with it $16 billion in deposits. Since April 2016 to the end of 2017, Marcus’s deposits almost doubled from $9 billion to over $17 billion.
As it continues to grow its consumer loans business with a low-cost source of capital, Marcus will move into other areas such as small business loans, auto loans, etc.
I see this as Goldman Sachs’ best growth vehicle in the years ahead. If it can just stop the bleeding in its fixed income, currency and commodities business, which is part of the company’s Institutional Client Services segment, Goldman should do fine.
The Pros of Owning Morgan Stanley Stock
Two things stand out for me at Morgan Stanley.
First, MS continues to grow its wealth management business as trading revenues decline. In 2017, Morgan Stanley grew the top line by 10.5% to $4.4 billion while increasing pre-tax profits by 29.0% to $1.2 billion. The segment now accounts for 47% of the company’s overall pre-tax profits.
It’s a winner.
The second reason I like Morgan Stanley is its commitment to reducing expenses. In 2013, expenses accounted for 84% of revenue. Today, that’s down to 73%, which has led to pre-tax margins widening by 750 basis points to 25.5%.
It might not have the cache of Goldman Sachs. But in the last two years, Morgan Stanley has managed to grow pre-tax earnings by close to $2 billion. This shouldn’t be ignored.
Which is the Better Buy?
Morgan Stanley continues to make progress but it doesn’t offer anything that’s quite as exciting as Marcus. With fintech being the future of financial services, Goldman Sachs is ideally positioned to benefit.
Add to that the fact Goldman Sachs’ pre-tax margins are 700 basis points higher than Morgan Stanley’s and you shouldn’t pass up Goldman Sachs stock no matter who’s running the company.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
