Morgan Stanley's 5 Financial Stocks To Buy for the Long Term

NEW YORK (TheStreet) -- Fluctuations in oil prices, currency swings, Fed policy shifts, geopolitics and other factors weigh heavily on stocks of large financial firms. Figuring which to buy and sell -- and when -- can be tricky. Despite the uncertainty, there are plenty of large U.S. banks suitable for long-term investment, according to a new report from Morgan Stanley (MS).

The company's analysts identified "high-quality companies likely to strengthen and extend a sustainable competitive advantage," for its a "30 for 2018" list, identifying stocks for long-term investment.

The analysts put forth their best investment ideas "in their sectors at times of market dislocations or uncertainty." The stocks are considered suitable for holding for a three-year time period, according to the report, issued Thursday.

"Our driving principle was to create a list of companies whose business models and market positions would be increasingly differentiated by 2016," the report said.

Morgan Stanley's top investment ideas for financial services industry are names that, for the most part, investors have heard before. But they're worth checking out anyway.

"The main criterion is sustainability -- of competitive advantage, business model, pricing power, cost efficiency, and growth. We selected the companies that scored best on these criteria," the report said. The analysts also took into account capital structure, shareholder remuneration, as well as environmental, social and governance principles, which can "shed light on a management team's approach to sustainable and responsible governance over the very long term."

When you're done be sure to check out the investment bank's consumer sector investment ideas. We paired Morgan Stanley's views with ratings from TheStreet Ratings for comparison.

TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.

Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.

Note: Year-to-date returns are based on May 18, 2015 closing prices.

BAC Chart BAC data by YCharts

1. Bank of America (BAC)
Market Cap: $173.4 billion
Year-to-date return: -7.7%
Morgan Stanley Rating/Price Target: Overweight/$20 PT

Morgan Stanley said: We believe Bank of America will outperform peers over the next 3 years as expense management, rising rates, and higher capital return together drive a 15% EPS CAGR 2015-18e. Expense declines are the primary reason to own BAC, we believe. We expect Legacy Asset Servicing (LAS) costs to decline from the current $1 billion quarterly run-rate to $0.6B by 4Q16 en route to below $0.5B in 2017 as BAC works out pre-crisis delinquent loans. Outside of LAS, we expect BAC to improve efficiency through lower comp ratios, increased automation, and more branch consolidation. BAC's comp / revenue ratio of 40% in 2014 was highest among both money centers and super-regionals (median 34% at peers), and we see room for BAC to bring this down, particularly in the investment bank. To be clear, management has not said they are planning to lower comp ratios, only that they will manage expenses to grow slower than revenues. Our view is that BAC will hold the core expense CAGR at 3% over the next 3 years while driving a 5% core revenue CAGR by paying out less on incremental revenues, as their investment banking peers have been doing.

Among the biggest beneficiaries of rising rates. BAC sources 52% of its deposits from consumers, above the peer median of 35%; has 47% of its loans tied to front-end floating rates (peers 41%); and has been marking its bond portfolio through its Net Interest Income line due to FAS 91, setting up for a sharp rise in NII as short and long term rates rise.

TheStreet Ratings: Buy, B+
TheStreet Ratings said:
"We rate BANK OF AMERICA CORP (BAC) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its increase in net income, expanding profit margins, increase in stock price during the past year and growth in earnings per share. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Commercial Banks industry. The net income increased by 1316.3% when compared to the same quarter one year prior, rising from -$276.00 million to $3,357.00 million.
  • The gross profit margin for BANK OF AMERICA CORP is currently very high, coming in at 86.18%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, BAC's net profit margin of 14.15% significantly trails the industry average.
  • 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, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
  • BANK OF AMERICA CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, BANK OF AMERICA CORP reported lower earnings of $0.35 versus $0.91 in the prior year. This year, the market expects an improvement in earnings ($1.33 versus $0.35).
  • BAC, with its decline in revenue, slightly underperformed the industry average of 0.8%. Since the same quarter one year prior, revenues slightly dropped by 6.7%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.

 

 

 

BKU Chart BKU data by YCharts

2. BankUnited (BKU)
Market Cap: $3.5 billion
Year-to-date return: 17.9%
Morgan Stanley Rating/Price Target: Overweight/$30 PT

Morgan Stanley said: BankUnited is a best-in-class growth story in the Midcap Banks, in our view. We expect its strong loan growth (24% CAGR from 2015-18e) to drive above-peer net interest income growth, more than offsetting a decline in earnings from its covered portfolio. This should lead to better earnings visibility and sharply higher long-term profitability.

TheStreet Ratings: Hold, C+
TheStreet Ratings said:
"We rate BANKUNITED INC (BKU) 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 revenue growth, good cash flow from operations and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including feeble growth in the company's earnings per share, deteriorating net income and premium valuation."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • BKU's revenue growth has slightly outpaced the industry average of 0.8%. Since the same quarter one year prior, revenues slightly increased by 0.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has significantly increased by 250.91% to $28.13 million when compared to the same quarter last year. In addition, BANKUNITED INC has also vastly surpassed the industry average cash flow growth rate of -30.59%.
  • The gross profit margin for BANKUNITED INC is currently very high, coming in at 83.24%. Regardless of BKU's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 20.86% trails the industry average.
  • BANKUNITED INC's earnings per share declined by 17.0% in the most recent quarter compared to the same quarter a year ago. Earnings per share have declined over the last two years. We anticipate that this should continue in the coming year. During the past fiscal year, BANKUNITED INC reported lower earnings of $1.95 versus $2.01 in the prior year. For the next year, the market is expecting a contraction of 2.8% in earnings ($1.90 versus $1.95).
  • The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and greatly underperformed compared to the Commercial Banks industry average. The net income has decreased by 15.9% when compared to the same quarter one year ago, dropping from $55.27 million to $46.46 million.

 

BLK Chart BLK data by YCharts

3. BlackRock (BLK)
Market Cap: $62 billion
Year-to-date return: 3.7%
Morgan Stanley Rating/Price Target: Overweight/$429 PT

Morgan Stanley said: BlackRock is well positioned, in our view, given its industry-leading ETF platform, multi-asset/retirement footprint (the largest defined contribution investment only player), and presence in alternatives. We expect BlackRock's fixed income ETFs to drive accelerating flows as bond investors look to add liquidity to funds without giving up performance in a rising-rate environment. We model total net flows as a percent of assets under management (AuM) at 5.3% over 2015-2018, double the peer group median of 2.4%. We expect these factors to continue to drive organic growth, margin expansion, and a 10% EPS CAGR from 2015-18. With flows sustainably higher than peers, we expect BLK's premium to peers to gradually expand.

We view the Aladdin risk management platform as an underappreciated business line contributing to EPS growth. Buried within BlackRock Solutions revenue, Aladdin appears to have become the go-to risk management platform for investment managers around the globe, with over $14 trillion in assets already on board. We conservatively model Aladdin revenues grow at an 11% CAGR from 2015-18 vs 10% over the past 2 years. Highly scalable, we expect growth in Aladdin will drive 5% of EPS growth over next 3 years. BLK's premium to peers should gradually expand as organic growth outpaces peers and operating margin expands. This outperformance, coupled with BlackRock successfully navigating regulatory uncertainty, should lead to investors focusing on BlackRock's above industry organic growth.

TheStreet Ratings: Buy, A+
TheStreet Ratings said:
"We rate BLACKROCK INC (BLK) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, revenue growth, notable return on equity, solid stock price performance and expanding profit margins. We feel its strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Despite its growing revenue, the company underperformed as compared with the industry average of 5.2%. Since the same quarter one year prior, revenues slightly increased by 2.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • BLACKROCK INC has improved earnings per share by 10.0% 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. During the past fiscal year, BLACKROCK INC increased its bottom line by earning $19.26 versus $16.88 in the prior year. This year, the market expects an improvement in earnings ($20.35 versus $19.26).
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
  • 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. Compared to other companies in the Capital Markets industry and the overall market on the basis of return on equity, BLACKROCK INC has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • 41.50% is the gross profit margin for BLACKROCK INC which we consider to be strong. Regardless of BLK's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, BLK's net profit margin of 30.18% compares favorably to the industry average.

 

 

 

JPM Chart JPM data by YCharts

4. J.P. Morgan Chase (JPM)
Market Cap: $246.5 billion
Year-to-date return: 6.1%
Morgan Stanley Rating/Price Target: Overweight/$71 PT

Morgan Stanley said: We believe JPM will outperform peers over the next 3 years as share gains, expense management, and higher capital return together drive a strong 10% EPS CAGR over 2015-18.

Client wallet share to rise in target businesses: We expect JPM to drive a 6% revenue CAGR (2015-18) as it reallocates resources to select businesses. Growth driven by the Consumer Bank (6% CAGR), accelerating from 2% as more confident US consumers increase borrowing (JPM is the largest US credit card issuer). Asset Management should deliver an 8% revenue CAGR with solid market appreciation and higher flows from international and retail following investments in distribution.

TheStreet Ratings: Buy, B+
TheStreet Ratings said:
"We rate JPMORGAN CHASE & CO (JPM) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, growth in earnings per share, increase in net income and good cash flow from operations. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • JPM's revenue growth has slightly outpaced the industry average of 0.8%. Since the same quarter one year prior, revenues slightly increased by 3.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • JPMORGAN CHASE & CO has improved earnings per share by 13.3% 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 year. We feel that this trend should continue. During the past fiscal year, JPMORGAN CHASE & CO increased its bottom line by earning $5.29 versus $4.32 in the prior year. This year, the market expects an improvement in earnings ($5.85 versus $5.29).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Commercial Banks industry average. The net income increased by 12.1% when compared to the same quarter one year prior, going from $5,274.00 million to $5,914.00 million.
  • Net operating cash flow has slightly increased to $14,879.00 million or 1.44% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -30.59%.

 

 

V Chart V data by YCharts

5. Visa (V)
Market Cap: $171.3 billion
Year-to-date return: 4.8% (as of stock split on March 19, 2015)
Morgan Stanley Rating/Price Target: Overweight/$77 PT

Morgan Stanley said: Visa is a prime beneficiary of the ongoing secular shift from cash to electronic forms of payment, globally, and with several tailwinds over the coming five years we have high conviction that it can sustain high single/low double-digit revenue growth and mid-teens EPS growth over the foreseeable future.

TheStreet Ratings: Buy, A
TheStreet Ratings said:
"We rate VISA INC (V) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company shows weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth greatly exceeded the industry average of 22.5%. Since the same quarter one year prior, revenues slightly increased by 7.8%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
  • V has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. To add to this, V has a quick ratio of 1.55, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for VISA INC is currently very high, coming in at 70.67%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 45.46% significantly outperformed against the industry average.
  • VISA INC reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, VISA INC increased its bottom line by earning $2.15 versus $1.90 in the prior year. This year, the market expects an improvement in earnings ($2.58 versus $2.15).
  • Compared to its closing price of one year ago, V's share price has jumped by 33.40%, exceeding the performance of the broader market during that same time frame. We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.

 

 

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