Finance

Critical Comparison: Morgan Stanley (MS) vs. Delek US Holdings, Inc. (DK)

Morgan Stanley (NYSE:MS) shares are down more than -5.11% this year and recently decreased -0.20% or -$0.1 to settle at $49.79. Delek US Holdings, Inc. (NYSE:DK), on the other hand, is up 47.80% year to date as of 06/21/2018. It currently trades at $51.64 and has returned -0.54% during the past week.

Morgan Stanley (NYSE:MS) and Delek US Holdings, Inc. (NYSE:DK) are the two most active stocks in the Investment Brokerage – National industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect MS to grow earnings at a 17.74% annual rate over the next 5 years. Comparatively, DK is expected to grow at a 77.61% annual rate. All else equal, DK’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Morgan Stanley (MS) has an EBITDA margin of 48.66%. This suggests that MS underlying business is more profitable MS’s ROI is 1.50% while DK has a ROI of 1.60%. The interpretation is that DK’s business generates a higher return on investment than MS’s.

Cash Flow



If there’s one thing investors care more about than earnings, it’s cash flow. On a percent-of-sales basis, MS’s free cash flow was 0% while DK converted -3.91% of its revenues into cash flow. This means that, for a given level of sales, MS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

MS’s debt-to-equity ratio is 5.85 versus a D/E of 1.21 for DK. MS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MS trades at a forward P/E of 9.75, a P/B of 1.25, and a P/S of 1.93, compared to a forward P/E of 7.36, a P/B of 2.63, and a P/S of 0.51 for DK. MS is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. MS is currently priced at a -18.97% to its one-year price target of 61.45. Comparatively, DK is -16.94% relative to its price target of 62.17. This suggests that MS is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. MS has a beta of 1.47 and DK’s beta is 1.37. DK’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 1.04 compared to a short interest of 2.71 for DK. This implies that the market is currently less bearish on the outlook for MS.

Summary




Delek US Holdings, Inc. (NYSE:DK) beats Morgan Stanley (NYSE:MS) on a total of 8 of the 14 factors compared between the two stocks. DK is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, DK is the cheaper of the two stocks on an earnings and sales basis, Finally, CVX has better sentiment signals based on short interest.

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