Buy Morgan Stanley Stock on Valuation, Not External Factors

MS looks like a buy regardless of tariffs or interest rates

Morgan Stanley (NYSE:MS) beat earnings and revenue estimates. This helped to continue the march higher in Morgan Stanley stock that began in the middle of March.

Buy Morgan Stanley Stock on Valuation, Not External Factors
Source: Shutterstock

Over the last year, fear of tariffs and worries about the economy have influenced bank stocks. This seems remarkable, as higher interest rates generally boost profits for banks. However, one factor has emerged that could change that dynamic. With the price-to-earnings (PE) ratio flirting with single-digit levels, MS stock may become a buy regardless of the economy.

MS Sees Brighter Outlook After Earnings, Revenue Beats

The New York-based investment bank reported first-quarter earnings at $1.33 per share. This came in 17 cents ahead of estimates, but well short of the $1.45 per share reported in the same quarter last year. Revenues of $10.29 billion beat consensus estimates of $9.93 billion. However, year-ago revenues came in at $11.08 billion.

Without question, earnings have slumped this year. Morgan Stanley stock, along with peers such as Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), and JPMorgan Chase (NYSE:JPM), saw their stock prices drop through most of 2018. They also stagnated between mid-January and the middle of March, as tariff-related concerns continued to weigh on these stocks.

Moreover, fears of a recession led to a more dovish tone from the Fed. Higher interest rates tend to boost earnings potential for bank stocks. However, Morgan Stanley stock and other bank stocks have seemingly traded on prospects for the economy in recent months.

Optimism about the economy rebounded as the Fed’s more dovish tone and the optimism about a U.S.-China trade agreement helped to boost bank stocks. Indeed, the outlook now appears brighter. Analysts forecast earnings growth of 10.9% next year. Wall Street also forecasts average earnings increases of 10.82% per year for the next five years.

Morgan Stanley Stock Becoming a Valuation Play

Still, investors may have a bigger reason to buy than profit projections. Traders should also recognize that valuation could again become a key driver for Morgan Stanley stock. Due to falling multiples, MS may have also become a buy regardless of the economy. Investors who purchase now will pay only about 10.2 times earnings, much lower than its 14.5 average PE in recent years.

Multiples on Morgan Stanley stock have rarely fallen into the single digits historically. Moreover, when this low valuation comes with double-digit earnings growth, it becomes hard to see MS as anything but a buy. Unless earnings drop significantly, I see little else to change a bullish investment thesis on Morgan Stanley stock.

Moreover, even if a recovery in MS stock takes time, investors can still benefit. Thanks to the economic recovery, bank stocks have again begun to increase dividends annually. The annual dividend increases in Morgan Stanley stock resumed in 2014. Today, MS pays $1.20 per share in yearly dividends, a 2.5% yield. Over the last few years, these payout hikes have come when the company reports its second-quarter earnings. Hence, the yield will likely move higher in July.

Final Thoughts on Morgan Stanley Stock

Following earnings, investors should consider buying Morgan Stanley stock regardless of the recent influence of economic forces. MS beat reduced earnings and revenue estimates. However, this has held little sway over the equity as it has fallen over the last year. During that time, investors sold off bank stocks in general, as economic worries became more significant.

This worry has taken Morgan Stanley stock to a PE ratio of just over 10. The stock fell to that valuation despite projections of double-digit earnings growth and an increased payout. With the low PE ratio and the potential earnings growth, MS’s downside appears limited. Add in the rising dividend, and it becomes hard to call MS stock anything but a buy.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/04/buy-morgan-stanley-stock-valuation/.

©2019 InvestorPlace Media, LLC