Morgan Stanley’s Preferred Shares: A Compelling Investment Alternative

In 2020, amidst the IPO frenzy, I advocated for Morgan Stanley’s common stock (NYSE: MS) as a smart play on the surging market. While many IPOs during that period seemed overpriced, Morgan Stanley’s exposure to underwriting and advisory fees provided a more attractive investment avenue. The subsequent performance validated this thesis, with Morgan Stanley outperforming most 2020 IPO stocks, despite a decline in investment banking fees in 2022 and 2023.

Fast forward to today, where Morgan Stanley’s revenue trajectory reflects the broader industry decline in investment banking fees. However, optimism surrounds the anticipated increase in investment bank earnings in 2024, driven by AI-related deals, renewable energy, and blockchain. Analysts project a robust 22.77% growth in EPS for Morgan Stanley next year, reflecting investor expectations for increased earnings.

Fundamentals and Growth:

• Revenue: $53.6B, up 0.42%.
• Operating income: $16.3B, down 8%.
• Net income: $9.08B, down 17.6%.
• Diluted EPS: $5.18, down 15.8%.

Valuation:

• Adjusted P/E: 15.2.
• GAAP P/E: 16.7.
• Forward P/E: 13.7.
• Price/sales: $2.63.
• Price/book: $1.57.

While Morgan Stanley’s forward P/E might seem reasonable, it’s worth noting that the stock appears overvalued relative to its sector peers, despite the expected earnings growth.

The AI Catalyst:

Morgan Stanley’s expertise in tech underwriting and advisory positions it well to capitalize on the expected increase in AI-related deals. With a strong track record, including underwriting or advising on IPOs like Facebook (META), Google (GOOG), and Salesforce (CRM), Morgan Stanley stands to benefit significantly from the projected rise in AI-related M&A activity.

Preferred Shares – A Cheaper Alternative:

Consideration of Morgan Stanley’s fixed-pay preferred shares (NYSE: MS.PR.L) presents an intriguing investment opportunity. With a yield of 5.36% and a liquidation preference of 4.875%, these shares offer a compelling alternative to common stock. Additionally, their payment priority over common shares and the safety of their dividends make them an attractive option for risk-conscious investors.

The Bottom Line:

In summary, Morgan Stanley’s preferred stock presents a compelling investment alternative compared to its common stock. With higher yields and greater safety, preferred shares offer an attractive proposition amidst uncertain market conditions. Considering a mix of both fixed-rate and floating-rate preferreds may provide an optimal investment strategy for those seeking exposure to Morgan Stanley’s potential upside while mitigating risk.