Morgan Stanleysay (NYSE: MS) equities struggled for the better part of 2020, along with many of its peers in the financial sector. But that has been a different story over the past few months, with the share rising 56% since the end of October.
This excellent performance is due to a few factors. Significant acquisitions, the Fed’s restriction on share buybacks and a broader market shift from growth stocks and into value stocks all played a role in lifting Morgan Stanley’s share.
The sudden rise could make investors wonder: Will the good times in 2021 continue for Morgan Stanley?
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What drives share prices higher?
While financial industries outperformed the market for most of 2020, it has been much stronger in recent months, as seen by the Financial Select Sector SPDR ETF, which has risen by almost 29% since the end of October. During this time, a major interaction between growth stocks and value stocks helped sectors such as finance and energy. This rotation was a setback for Morgan Stanley, which was significantly discounted last year, to the point where CEO James Gorman questioned the company’s valuation.
Morgan Stanley sees its share price rise from less than $ 48 to nearly $ 75 on October 28 from Friday’s close, up 56% in that period. This made it one of the best stocks in the financial sector during that time, up there with competitors Goldman Sachs and Charles Schwab, which scored 52% and 53% respectively.
Investors are optimistic about the company as it continues to integrate E * trading and Eaton Vance in the coming years. The company spent $ 20 billion on these acquisitions in 2020 in an effort to fill gaps and provide additional services to its customers through its e-commerce platform. The merger with E * Trade was completed in October, and the merger with Eaton Vance is expected to be completed in the second quarter of 2021.
As the company integrates these acquisitions, investors can expect a boost in the top and bottom line in the coming months and years. Management predicted that the acquisitions would help the company generate 58% of its pre-tax profits on wealth and asset management on a pro forma basis. This will help to continue its expansion of the segments, which accounted for only 26% of its profits ten years ago.
In addition, the board approved a $ 10 billion repurchase program in December after the Federal Reserve eased restrictions imposed on banks during the coronavirus pandemic. The lifting of this moratorium on share buybacks will be another headwind to support the company’s share price.
Another stellar earnings period
Morgan Stanley announced its earnings in the fourth quarter on January 20, and they blew the analysts’ calculations out of the water. While earnings per share (EPS) were expected to be $ 1.29 and revenue to be $ 11.3 billion, the investment bank easily achieved both a profit of $ 1.81 on revenue of $ 13 , 6 billion placed. It represents a growth of 26% for EPS and 39% for revenue in the same quarter last year, and was driven by growth in various segments, including investment banking, fixed income trading and wealth management.
Wealth management revenue rose 24% to $ 5.68 billion, a good sign for a bank that is actively trying to expand in this segment. Year after year, the investment bank rose by 16%, while profits grew by 24%, despite the challenges posed by the global pandemic.
What’s next?
The financial sector is expected to benefit as economic activity increases in 2021 and 2022. According to a report by Credit Suissethe improvement of credit conditions and higher interest rates positive for the sector as a whole. For this reason, Credit Suisse’s research team believes that financial stocks play good value.
With a cheap valuation, Morgan Stanley is well positioned. Although the stock was not very good in November, the company still has a price-to-earnings ratio (P / E) of 11.5, which is below Schwab at 27.6 and a hair below Goldman Sachs, at 11 , 7.
Positive developments in the economy, improvement in credit conditions and an overall return to normalcy will contribute to the promotion of financial equities. Morgan Stanley will benefit from these backwinds as it expands its offering and expands the bottom end, which will make this one stock in your portfolio.