Wednesday, September 30, 2009

Morgan Stanley Report- 09/30/2009 - Basic Valuations

September 30, 2009

Morgan Stanley
Equity Research New York, NY


Recommendation- Buy
Name of Company: Morgan Stanley
Previous Closing Price: $30.88
52 week range: $6.71 - 33.33
Market Cap: $41.97B
P/E: 21.31x
Dividend Yield: 0.60%
Shares Outstanding: 1,359 (mil)
Price Target: $ 33-35/share

Over the last six months capital markets have been turbulent, especially financial equities. Morgan Stanley has rallied 25.61% over the last 3 months.

EPS (earnings per share):
For Morgan Stanley’s fiscal 2nd quarter of 2009, the company reported a loss on basic EPS of $(1.10)/share. That is 182.7% decrease from one year prior. Additionally, forward EPS for the 3rd quarter is expected to grow by 146.4% to $0.51/share. The jump in forward earnings can be attributed to greater than expected profit margins in the investment banking division. Specifically, the robust growth in margins will stem from trading and advisory work. Additionally, the new joint venture of Morgan Stanley Smith Barney will contribute to profits in the company’s flagging Investment Management Division. All three of their prime revenue generating activities has slumped by a total x% from the year prior period due to the global economy. Hence, the ratio will be the best of the year, but compared with its peers Morgan Stanley looks weak.

P/E ratio:
Currently Morgan Stanley is trading at 21.31x earnings (trailing). This is large premium to pay considering the industry is trading at 22.38x earnings and the S&P 500 is trading at approximately 19.81x earnings. Additionally, when examining GS (41.20x trailing), JPM (48.91x), WFC (30.90x), and BAC (28.34x), Morgan Stanley looks cheap from a valuation standpoint.

Growth Estimates:
MS is projected to grow 784.8% next year, compared to the sector growth of 83.2%, and industry growth estimate of 57.1%. Specifically the company expects to see growth in revenues of 36.23% this quarter and growth of 41.7% in 2010. The growth in revenues will come from a pick-up in Mergers & Acquisitions advisory work and Trading. Additional growth in 2010 will stem from these areas as well as the Morgan Stanley Smith Barney LLC joint venture. Also, expect the company to get the most out of its existing businesses via new leadership (James P. Gorman, CEO).

Six Month Chart

Overall Morgan Stanley receives a buy rating from Analyze Capital LLC (from a pure valuations perspective). The firm’s equity price has suffered over the past two years from economic, financial, and political crises. However, the company has managed to tide the waters and stay relatively competitive with its peers. Some may argue that they are lagging compared to their peers, though MS has lost many assets and its Cash flow shrunk by almost half, the firm continues to look for new business developments as well as maximizing current businesses.

Author: Pat Ambrus
Contributors: Alexander LĂȘ

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