The 2019 Playbook As Inflation Data Cools | Our Take On Bank Stocks & High-Quality SaaS

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Blue Line Capital president Bill Baruch and analyst Jannis Meindl break down the latest fallout from Silicon Valley Bank and regional banks writ large. While most investors were focused on banking stress, we also share the latest on the inflation front.

This week, we cover Morgan Stanley with a juggernaut wealth management asset, United Health, as revenue keeps expanding. We close it out with Adobe among the highest-quality SaaS businesses.

Morgan Stanley - Wealth Management With A Markets Juggernaut

As a systemically important bank, Morgan Stanley MS has none of the regional banking issues that have shaken the banking space. At less than $11bn of unmarked treasury and MBS losses, liquidity concerns are barely present as the company’s Tier1 Capital ratio of 17.2% exceeds the regulatory minimum under Basel III standards of 14.8%. A concern for banks as a whole is the potential tick-up in delinquencies going forward and the associated economic slowdown that could come with it. Unlike BofA or Wells Fargo, Morgan Stanley’s presence in loans is much lower, which lends itself to more resilience against an economic downturn. Given the company’s wealth management business comprises more than 50% of revenue, deposits shifting into money market funds and other fixed-income products benefits the firm. Heightened activity on the company’s fixed income desk is also encouraging, given that the macro picture remains volatile, lending itself to high trading volumes.

United Health - Insurance Trends With An Aging Population

Growing revenue at an annual rate of 12% in 2022, United Health UEEC has proven resilient against trends of an aging population and the insurance premium payout expected to come with it. United Healthcare, the company’s insurance arm, is complemented by the Optum platform, which breaks down into three segments: 1.) OptumHealth, 2.)OptumRx, 3.) OptumInsight. OptumHealth helps insurance patients to find the specialist or medical provider they need, while OptumRx deals with prescription drugs. OptumInsight aids hospitals and doctors, all integrated into the UnitedHealth Platform. Steady Medical Care and Administrative Ratios suggest customer premiums remain in check despite concerns about delayed procedures in and around Covid. The company trades above peers at an 18.5x NTM P/E but has a significant network effect with 54.99 million insurance members.

Adobe - Investing In High-Quality SaaS

Adobe ADBE is the foundational layer of the digital economy, providing digital media and analytics solutions for all customer tiers, from small businesses to large enterprises. At a 21.8 NTM P/E, we don’t tout the multiple as expensive given the high cash flow visibility and a strong recurring revenue base as a SaaS business. Providing a ~95% gross profit margin in digital media, the incremental cost of providing more services to customers is close to zero while the global digital economy keeps expanding. With a high and expanding free cash flow margin of 42% over the last twelve months, investors are buying a quality business that is facing uncertainty around the Figma acquisition, which could lead to a $1bn break-up fee paid by the company if the DoJ decides to block the merger.

Blue Line Capital maintains a long position in Morgan Stanley, United Health, and Adobe.