NEW YORK (TheStreet) -- Shares of Morgan Stanley (MS - Get Report) are up nearly 8% so far this year, lifted on the powerful tailwinds of tax-advantaged diluted earnings and its climbing operating margin. Yet the stock still looks inexpensive, with a price-to-book ratio of slightly more than 1.
The company faces some headwinds in the coming quarters. Its fixed-income trading business, which has been scaled back by management, has hurt returns. Morgan Stanley also shoulders some legal expenses related to past trading snafus and the magnitude of these expenses is difficult to foretell.
That said, investors are quickly waking up to the fact that Morgan Stanley is in a league of its own and shouldn't be compared to other banks like JPMorgan Chase (JPM), which are still reeling from the financial fiasco of 2008. CEO James Gorman guided the company to pass the Fed's "stress test" with a healthy balance sheet.
Morgan Stanley is a venerable investment banking name that has undergone a potent makeover. Though once seen as a financial holding company, since Gorman completed his "Morgan Stanley Strategy," it has evolved into a unique financial-services powerhouse.
Gorman divided his firm in two. Half still operates as a retail brokerage firm and the other half trades and manages large amounts of money for institutions. The brokerage side, referred to as "wealth management," offers a steady flow of fee-based income while generating referrals and attracting successful clients.
In fact, Morgan Stanley has $2 trillion in assets under management, of which 38% are in fee-based accounts. This has boosted its wealth-management revenue, which was reflected in its net revenue of $8.6 billion for the second quarter ended June 30, compared with $8.5 billion a year ago.
Thanks to Morgan Stanley's successful makeover, the company is in the process of becoming a lucrative peer leader that will set the standard in the months ahead. I'm one of the bullish analysts that give the stock a 12-month price target of $40, and if it keeps raising its dividend, that may be too conservative.
MS data by YCharts
Morgan Stanley has a lot going for it.
After completing its purchase of the Morgan Stanley Smith Barney joint venture, the company's profit margin shot up to 21% for the first time since the founding of the joint venture, which now goes by the shortened name Morgan Stanley. Trailing 12-month operating margin grew as well, to nearly 29%.
Its stock price has soared to 52-week highs, partly due to the company's success on the investment banking side. During this record year of mergers & acquisitions, Morgan Stanley ranks second behind Goldman Sachs (GS) in advisory fees for M&A deals.
The company scored big points when it won the right to be the exclusive adviser on Facebook's (FB) acquisition of WhatsApp for $19 billion. All tolled so far this year, Morgan Stanley has advised on deals worth close to $440 billion, which partly explains why it's year-over-year quarterly earnings growth exceeded 97%.
The chart for MS looks impressive and I'm joining other analysts who believe the stock is in the process of breaking out to new levels. The 1-year price chart above including two key financial metrics paints a clear picture of the shares' powerful momentum.
At the time of publication, the author was long FB, although positions may change at any time.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates MORGAN STANLEY as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate MORGAN STANLEY (MS) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we find that the company's revenue growth has not been good."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Looking ahead, our view is that this company's fundamentals will not have much impact in either direction, allowing the stock to generally move up or down based on the push and pull of the broad market.
- MORGAN STANLEY reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, MORGAN STANLEY increased its bottom line by earning $1.38 versus $0.01 in the prior year. This year, the market expects an improvement in earnings ($2.40 versus $1.38).
- MS, with its decline in revenue, slightly underperformed the industry average of 0.2%. Since the same quarter one year prior, revenues slightly dropped by 1.3%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Capital Markets industry and the overall market, MORGAN STANLEY's return on equity is below that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: MS Ratings Report