Is Morgan Stanley A Better Q4 Earnings Pick Than Goldman?

Investors usually attach a greater degree of importance to investment banks compared to their plain vanilla counterparts. Yet, as earnings season heats up, it would not be out of place to point out that their troubles seem to mimic those of the wider banking sector.

Goldman Sachs’ fourth-quarter 2017 results are likely to reflect a $5 billion negative impact triggered by the new tax reform, which levied taxes on overseas income. Also, deferred tax assets (DTAs) will lose value due to tax cut. 

Meanwhile, Morgan Stanley said on Jan 5 that its upcoming earnings numbers are likely to reflect a $1.25 billion negative impact, also due to the Tax Cuts and Jobs Act of 2017. On the positive side, both stocks hold promise in 2018. A bullish global economy, higher inflation and rising market volatility are likely to provide a major boost to these stocks in the year ahead.

The Goldman Sachs Group, Inc. (GS - Free Report) and Morgan Stanley (MS - Free Report) are scheduled to report fourth quarter earnings numbers on Jan 17 and Jan 18, respectively. While Goldman Sachs has a Zacks Rank #3 (Hold), Morgan Stanley has a Zacks Rank #2 (Buy). 

Other banking stocks reporting earnings over these two days include Bank of America Corporation (BAC - Free Report) and U.S. Bancorp (USB - Free Report) .

Return on Assets (ROA)

Examining earnings per share alone would not generate any significant insights when determining the level of profitability of a bank. Return on Assets is a ratio which reveals how efficiently a bank is utilizing its assets to generate profits.

Currently, Morgan Stanley holds total assets of $99.7 billion while Goldman Sachs has total assets of around $97 billion. Our research shows that the average one year trailing 12-month ROA for Goldman Sachs stands at 0.95%, marginally higher than 0.85% for Morgan Stanley.

Price Performance

In terms of price performance, Morgan Stanley is a clear winner. Morgan Stanley has gained 30.8% over the last one year, outperforming the broader industry which has gained 25.4% over the same period. In comparison, Goldman Sachs has gained only 9% over the same period and is well behind both Morgan Stanley and the broader industry.