Earnings

Comparing Morgan Stanley (MS) and International Business Machines Corporation (IBM)

Morgan Stanley (NYSE:MS) shares are up more than 4.92% this year and recently increased 3.11% or $1.66 to settle at $55.05. International Business Machines Corporation (NYSE:IBM), on the other hand, is up 0.87% year to date as of 02/14/2018. It currently trades at $154.76 and has returned 0.59% during the past week.

Morgan Stanley (NYSE:MS) and International Business Machines Corporation (NYSE:IBM) are the two most active stocks in the market based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect MS to grow earnings at a 20.62% annual rate over the next 5 years. Comparatively, IBM is expected to grow at a 2.92% annual rate. All else equal, MS’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 21.75% for International Business Machines Corporation (IBM). MS’s ROI is 1.30% while IBM has a ROI of 19.70%. The interpretation is that IBM’s business generates a higher return on investment than MS’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. On a percent-of-sales basis, MS’s free cash flow was 0% while IBM converted 4.19% of its revenues into cash flow. This means that, for a given level of sales, IBM is able to generate more free cash flow for investors.

Liquidity and Financial Risk

MS’s debt-to-equity ratio is 5.90 versus a D/E of 2.32 for IBM. MS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MS trades at a forward P/E of 10.86, a P/B of 1.39, and a P/S of 2.27, compared to a forward P/E of 10.91, a P/B of 7.33, and a P/S of 1.82 for IBM. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. MS is currently priced at a -8.49% to its one-year price target of 60.16. Comparatively, IBM is -9.36% relative to its price target of 170.75. This suggests that IBM is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for MS and 2.50 for IBM, which implies that analysts are more bullish on the outlook for IBM.

Risk and Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. MS has a beta of 1.45 and IBM’s beta is 0.94. IBM’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.MS has a short ratio of 1.35 compared to a short interest of 3.40 for IBM. This implies that the market is currently less bearish on the outlook for MS.

Summary

International Business Machines Corporation (NYSE:IBM) beats Morgan Stanley (NYSE:MS) on a total of 8 of the 14 factors compared between the two stocks. IBM is growing fastly, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. IBM is more undervalued relative to its price target. Finally, SYF has better sentiment signals based on short interest.

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