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Better Buy for 2022: Goldman Sachs vs. Morgan Stanley

In this article I will analyze and compare Goldman Sachs Group (GS) and Morgan Stanley (MS) to determine which stock is currently a better investment.

Interest rates are climbing worldwide as central banks attempt to cool off their post-pandemic economies. Recently, the Federal Reserve hiked the interest rate by 25 basis points, responding to an inflation spike to the highest level in the past 40 years

This is good news for the financial companies, as they thrive in the high-interest environment. Consequently, these industry-specific tailwinds should boost the revenue from interest-related parts of their businesses. Furthermore, the global financial services industry is estimated to grow at a CAGR of 6% between 2021 and 2025, reaching $28.53 trillion in the terminal year. 

In today’s article, I will be analyzing and comparing two financial stocks: Goldman Sachs Group (GS) and Morgan Stanley (MS), to determine which is a better investment for the rest of the year. 

Founded in 1869, GS is a well-known financial institution that provides various financial services for corporations, financial institutions, governments, and individuals across the globe. It operates through four segments: Investment Banking, Global Markets, Asset Management, and Consumer & Wealth Management. Morgan Stanley is a financial holding company that operates across Institutional Securities, Wealth Management, and Investment Management business segments.

Year-To-Date (YTD), shares of GS lost about 13.7%, and MS is down 11.4% over the same period.  

Recent Developments 

On March 29th, Goldman Sachs' asset management division announced that it had agreed to acquire NextCapital Group, aiming to speed up the expansion of its corporate retirement services. The company said, "The transaction will accelerate the expansion of Goldman Sachs' services to the growing defined contribution market through personalized managed accounts and digital advice." Under the terms of the deal, NextCapital’s platform will enhance the Multi-Asset Solutions business of Goldman Sachs Asset Management. The transaction should close in the second half of 2022. 

Financial Overview & Analysts' Estimates 

Goldman Sachs last issued its earnings results on Tuesday, January 18th. In Q4, total revenue rose 7.7% year-over-year to $12.64 billion, driven by significantly higher net revenues in Investment Banking and higher net revenues in Consumer & Wealth Management segments. Besides, the company managed to beat consensus revenue estimates by $510 million. However, the company reported GAAP earnings per share of $10.81, missing Wall Street expectations by $1.00.

Moreover, provision for credit losses increased 17.4% YoY to $344 million, reflecting growth in credit card balances. GS' annualized return on average common shareholders’ equity (ROE) and return on average tangible common shareholders’ equity (ROTE) stood at 15.6% and 16.4% in Q4, respectively. Also, the bank will pay its shareholders an annual dividend of $8.00, leading to a forward yield of 2.42%.  

For the first quarter of 2022, analysts expect GS' EPS to stand at $9.36, implying a 49.67% year-over-year decrease. Following the same trend, an $12.34 billion first-quarter average revenue estimate shows a 30.32% YoY deterioration.

On January 19th, Morgan Stanley reported earnings for the fourth quarter of 2021. The bank's revenue was up 6.8% on a year-over-year basis to $14.52 billion due to revenue increase in Investment Banking and Equity business segments. However, MS missed Wall Street revenue estimates by $70 million. Also, the company reported GAAP EPS of $2.01, beating Wall Street expectations by $0.09. 

The company’s fourth-quarter ROTCE has been reported at 19.8%, compared to its year-ago value of 17.7%. MS also plans to reward its shareholders with a forward annual dividend payout of $2.80, translating to a 3.22% dividend yield.

A $1.88 consensus EPS estimate for the first fiscal quarter of 2022 represents a 15.39% decrease year-over-year. Also, its revenue for the current quarter is expected to drop 6.14% YoY to $14.75 billion.

Comparing Valuations & Profitability 

In terms of Forward Non-GAAP P/E, MS is currently trading at 11.51x, which is about 36% higher than GS, whose multiple is presently at 8.47x. In addition, Goldman Sachs' Forward P/E multiple looks undervalued compared to the sector's median of 11.26x. 

When it comes to the Forward GAAP PEG multiple, MS’ multiple of 0.45x is significantly higher than GS’ 0.04x. GS’ multiple is also discounted by 79.92% to the sector median. 

Finally, Goldman Sachs has better profitability with gross profit margin, net income margin, and return on common equity of 89.35%, 36.68%, and 22.96%, respectively. These numbers exceed the MS respective figures of 89.19%, 25.16%, and 15.31%. 


While both GS and MS are expected to capitalize on the industry tailwinds caused by the higher interest rate environment, I believe Goldman Sachs is a better pick at current levels because of its relatively better financials, lower valuations, and superior profitability. 

GS shares were trading at $331.27 per share on Monday morning, up $1.05 (+0.32%). Year-to-date, GS has declined -12.89%, versus a -3.96% rise in the benchmark S&P 500 index during the same period.

About the Author: Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.


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