Morgan Stanley (MS)

[DewDiligence]

It’s a Good Time Not To Be Goldman

http://online.wsj.com/article/SB20001424052748703465204575208451223092816.html

›Morgan Stanley Finally Creeping Up on Rival Goldman

APRIL 27, 2010
By DAVID REILLY

It's good not to be Goldman Sachs Group. That should be the new refrain of Morgan Stanley shareholders.

Fraud allegations levied by the Securities and Exchange Commission and the prospect of tougher financial-overhaul legislation have knocked more than $30 off Goldman's share price, or about 17%, in less than two weeks. During that same period, which saw strong earnings reports from both firms, Morgan's stock has gained about 3%.

Things aren't likely to get better for Goldman on Tuesday: Chief Executive Lloyd Blankfein and other executives are due to be raked over the coals at a congressional hearing that will look into the trade at the heart of the SEC's claims.

By dragging down the share price, Goldman's travails have led Morgan's stock to trade close to, or at a premium to, Goldman's, based on some measures such as price to tangible book value.

That is quite the reversal of fortune. Over the past five years, Goldman's stock has risen 50%, while Morgan's has fallen about 40%. And Goldman typically has traded at a valuation comfortably above Morgan's due to its consistent delivery of knockout earnings growth and superior returns on equity.

There is an element of vindication for Morgan shareholders. In the immediate wake of the crisis, Goldman's return to business as usual meant profits sizzled, while Morgan's fizzled. The latter, after its near-death experience, decided to reduce its reliance on trading and beef up more stable areas such as wealth management.

Even now, with Morgan's trading engine firing on more cylinders, the firm still lags behind Goldman. Morgan's first-quarter return on equity of about 13%, excluding some items, compared with a 20% return posted by Goldman.

The hope: That Morgan ends up with a more-balanced business than Goldman if financial-overhaul legislation proves tougher than once expected, especially in regard to trading. Morgan's also-ran status makes life more comfortable from a regulatory and political standpoint as Goldman remains in the spotlight.

To really keep pace, though, Morgan will have to show that its retooled trading operations can go toe to toe with Goldman and that it can deliver on plans to widen margins in its expanded wealth-management business.

That leaves Morgan with significant execution risk as it pursues its new strategy. Goldman, while still running the risks inherent in huge trading operations, is more at the mercy of regulators. Both firms may feel the sting of any changes to the over-the-counter derivatives markets, given that they are among the top five players.

It is still too early to say if the Morgan tortoise can beat the Goldman hare, but with Washington in the front row, the race has at least gotten more interesting.‹