The bank's stronger-than-expected second quarter earnings still pale in comparison to Goldman's. However, signs of improvement in Morgan Stanley's less-heralded brokerage and wealth management businesses are convincing investors to pay up for its shares.
Currently, Morgan Stanley commands about a $54.5 billion market capitalization: roughly 70% of Goldman's $78 billion market cap. But the bank led by Australian-born James Gorman is forecast by analysts to be only about half as profitable as Goldman Sachs. Also, Morgan Stanley is only expected to earn 13% the earnings per share (EPS) of its larger rival, according to estimates compiled by Bloomberg.
Analysts currently project Morgan Stanley will earn $2 in EPS in 2013, versus over $15 in EPS for Goldman Sachs, the data show.So why are investors attaching a seemingly high premium to the earnings of Morgan Stanley and discounting those versus Goldman Sachs? Ironically, much of the premium may be explained by the declining influence of Morgan Stanley on Wall Street, although it remains the second largest standalone investment bank in the world. Morgan Stanley's management ranks were roiled in the credit-fueled bull market run of the 2000s, as it lost Wall Street market share to competitors such as Bear Stearns, Merrill Lynch, Lehman Brothers and, most notably, Goldman. Still, in the ensuing Wall Street collapse, the bank found itself illiquid, overleveraged, holding toxic mortgage debts and on the precipice of failure. To survive, Morgan Stanley sold a 22.4% stake in the bank to Japan's Mitsubishi UFJ. Goldman, while also on the brink of collapse, was able to use stock issuance and a preferred share investment made by Warren Buffett to make it through the crisis.
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