NEW YORK (TheStreet) -- Shares of Morgan Stanley (MS) 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%.