Morgan Stanley (NYSE:MS) shares are down more than -9.05% this year and recently increased 0.51% or $0.24 to settle at $47.72. FirstEnergy Corp. (NYSE:FE), on the other hand, is up 23.42% year to date as of 09/13/2018. It currently trades at $37.79 and has returned -0.45% during the past week.
Morgan Stanley (NYSE:MS) and FirstEnergy Corp. (NYSE:FE) are the two most active stocks in the Investment Brokerage – National industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.Growth
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect MS to grow earnings at a 16.90% annual rate over the next 5 years. Comparatively, FE is expected to grow at a -6.92% annual rate. All else equal, MS’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., compared to an EBITDA margin of 16.13% for FirstEnergy Corp. (FE). MS’s ROI is 1.50% while FE has a ROI of -2.90%. The interpretation is that MS’s business generates a higher return on investment than FE’s.Cash Flow
Earnings don’t always accurately reflect the amount of cash that a company brings in. MS’s free cash flow (“FCF”) per share for the trailing twelve months was +7.92. Comparatively, FE’s free cash flow per share was -0.63. On a percent-of-sales basis, MS’s free cash flow was 36.41% while FE converted -2.18% 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 5.89 versus a D/E of 2.55 for FE. MS is therefore the more solvent of the two companies, and has lower financial risk.
MS trades at a forward P/E of 9.22, a P/B of 1.16, and a P/S of 1.73, compared to a forward P/E of 15.21, a P/B of 2.39, and a P/S of 1.45 for FE. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. MS is currently priced at a -20.28% to its one-year price target of 59.86. Comparatively, FE is -2.68% relative to its price target of 38.83. This suggests that MS is the better investment over the next year.
Risk and Volatility
Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. MS has a beta of 1.41 and FE’s beta is 0.26. FE’s shares are therefore the less volatile of the two stocks.Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. MS has a short ratio of 1.30 compared to a short interest of 8.19 for FE. This implies that the market is currently less bearish on the outlook for MS.Summary
Morgan Stanley (NYSE:MS) beats FirstEnergy Corp. (NYSE:FE) on a total of 9 of the 14 factors compared between the two stocks. MS is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, MS is the cheaper of the two stocks on an earnings and book value, MS is more undervalued relative to its price target. Finally, MS has better sentiment signals based on short interest.