Question & Answer: Doing a Comparative analysis over the past three years, Goldman Sachs versus Morgan Stanley, Please show all work, Which company has s…..

We take into account qualitative factors like reputations, brand strength and employee morale, as well as quantifiable data such as sales figures, profitability and return on investment. Both qualitative analysis and quantitative methods can be used to make decisions. The decisions that most often result in the desired outcomes use one method to check whether the predictions of the other method are reasonable.

The first comparison should concentrate on the fundamentals of both companies. One can be more keen in their revenue and EPS growth, dividend growth and their buybacks, which are another form of returning money to shareholders.

The revenue is completely diversified. Goldman is suffering compares to Morgan, it is clearly seen from Income statement and cash slows for three years. GS actually suffered from declining revenues. Morgan has been more consistent over the past three years, and managed to grow its revenue significantly with average rate. Goldman is having more trouble in turning sales into earnings.

EPS might seem like in favour of Morgan as it managed to grow earnings at a much faster rate. However, consider the outlook of both companies. While Morgan is forecast to increase its EPS at around 7% annually these years, Goldman suffered this year from EPS decline, though it is to increase from $1.04 in 2014 to around $1.34 in 2015. Such tremendous growth had put Goldman in a much better position, but again it had faced fall in EPS in 2016 to $1.12. However, as the market is volatile, forecasts should be taken with a grain of salt, and Goldman will have to prove that it can deliver higher quality EPS even when the markets are not constantly climbing.

Both MS and GS have been raising dividends very quickly over the past several years. Both companies enjoy a very low payout ratio, and have a lot of room to boost distributions. Both companies are in a great position to raise dividends, given their low payout ratios, and boost yields to their highest levels over the past three years.

When one look at the fundamentals, I think that Morgan has the edge here. They manage to constantly increase EPS, revenue and dividends. Goldman also manages to boost its dividend and buy back shares, but its superb growth in EPS is still a forecast, not a fact.

The first metric we look at when I want to see the valuation of banks is the P/B ratio. Over the past three years MS finished 2014 to 2016 with ROE from 9% – 16% less than anticipated. The gap today is larger than it used to be since 2014, and it is due to a massive sell-off in MS, the lower ROE and weak trading results in 2015 justify the gap.

The PE ratio of both companies for 2016 outlook is almost the same. It doesn’t reflect the edge GS has in terms of its ability to turn revenue into profit. When I take into consideration the fundamentals and profitability of both companies, Morgan is better than Goldman.

When we try to find the difference between opportunities for Morgan and Goldman, we can clearly look that MS has an advantage over GS with its huge wealth management sector. As the American population is getting older and the baby boomers are retiring, they will need more financial services and wealth management. Baby boomers lived through periods of very high economic growth just after World War Two, and many of them managed to save a lot of money.