Are These Investment Banks Suitable for Your Portfolio? – Goldman Sachs Group, Inc. (GS), Morgan Stanley (MS)

After several years marked by losses and layoffs, America’s biggest financial institutions may finally be coming back.  The market was encouraged by a flurry of investment banking activity, from Warren Buffett’s $23 billion takeover of Heinz to the $11 billion merger between US Airways Group, Inc. (NYSE:LCC) and AMR Corporation (PINK:AAMRQ) and many in the financial media wonder whether a new golden age for M&A has begun.  Stocks of America’s bulge bracket investment banks are sitting at multi-year highs.  In a recent segment on CNBC, Jim Cramer claimed that we are now in a state of “merger mania,” and that the corporate confidence needed to revitalize the M&A market is back.  If he’s right, these banks may prove be worthwhile investments for your portfolio.

On the road to recovery

Diversified financial institutions including Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), and JPMorgan Chase (NYSE:JPM) provide a wide range of financial services.  These include corporate finance activities such as mergers and acquisitions, as well as accessing the debt and equity markets on behalf of their clients.  Services such as these give corporations necessary financing.  When the global economy entered the throes of the Great Recession, corporations held their purse strings tightly and institutional finance activity ground to a halt.

Now that the global economic recovery finally appears to be on solid footing, corporate finance has resumed (albeit at a slow pace).  Share prices and valuations of Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley, and JPMorgan are expanding and each of these stocks now enjoys reasonable market multiples.  Goldman Sachs and JPMorgan trade near or above book value.

Goldman Sachs reported full-year 2012 net revenues of $34 billion and net income of $7.48 billion.  Diluted earnings were $14.13 per share.  JPMorgan reported solid fourth quarter results: revenues rose 10% on the strength of a 33% increase in mortgage originations. In addition, earnings per share of $1.40 handily beat estimates of $1.16 per share.  Full-year 2012 earnings were a record $5.20 per share.  Meanwhile, Morgan Stanley (NYSE:MS)’s full-year net revenues were slightly more than $26 billion, with income from continuing operations clocking in at $1.59 per diluted share.

At current prices, Goldman Sachs, JPMorgan, and Morgan Stanley exchange hands for 10, 9, and 14 times their 2012 earnings.  As a result, these stocks aren’t carrying excessive valuations and might be considered value plays within the financial services sector.