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Morgan Stanley. December 7 th , 2004 By Adam Freda. Introduction. We currently own 400 shares of Morgan Stanley and purchased shares on 4/11/01 for just under 57.19 Total cost of position (adjusted for dividends) - $22,876 - PowerPoint PPT Presentation
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Morgan Stanley
December 7th, 2004
By Adam Freda
Introduction
We currently own 400 shares of Morgan Stanley and purchased shares on 4/11/01 for just under 57.19
Total cost of position (adjusted for dividends) - $22,876
Market value of position - $21,308 for a loss of $1,568 as of the 12/6/04 market close of $53.27
Recommendation is to hold
Relevant Financial Statistics
52 Week Range: $46.54 - $62.83 Market Cap: 58.51B P/E: 13.62 EPS (ttm): $3.91 Dividend: $1.00 Dividend Yield: 1.88%
Brief Background
Morgan Stanley is a global financial services firm that operates in four business segments – Institutional Securities– Individual Investor Group– Investment Management– Credit Services
Brief Background (cont’d)
Institutional Securities– Provides worldwide financial advisory and capital-
raising services to a diverse group of corporate and other institutional clients
Individual Investor Group– Provides financial planning and investment
advisory services designed to accommodate individual investment goals and risk profiles
Brief Background (cont’d)
Investment Management– Provides global asset management products and
services for individual and institutional investors– Private equity activities
Credit Services– Offers Discover-branded cards and other consumer
finance products and services– Includes the operation of Discover Business Services
A network of merchant and cash access locations primarily in the United States
Approximately 46.1 million general purpose credit card accounts as of November 30, 2003
Macroeconomic Review
MWD operates in the financial sector and the investment services industry
Competitors include Goldman Sachs, Merrill Lynch, Citigroup, JP Morgan, CSFB, and other investment and commercial banks
– Macroeconomic forces Investment banking business, individual investments, and
credit card spending are very market dependent– Company specific forces
Reputation Relationships
Stock Market Prospects – Recent Updates
Nine months ended 8/31/04– Revenues rose 13% to $29.13 billion. – Net income increased 18% to $3.31 billion
Results reflect higher fixed income and trading revenues, lower loan loss provisions, and decreased dividends on preferred securities
Stock Market Prospects – 1YR
Stock Market Prospects – 5YR
Stock Market Prospects – Dow Comparison
Stock Market Prospects – Comparison with Competitors
Company Strategy
Global Firm– Operates in 27 countries– 51,000 employees– Revenues of $38.61 billion in the last twelve months
“Product excellence and technical skills are essential to our success. They are necessary but they are not sufficient. What we truly prize is the quality of the relationships we build with our clients.”
– Recognizes that large size creates a powerful platform, but also realizes that personal relationships still drive revenue growth
Company Strategy (cont’d)
Four key priorities set out for Fiscal 2003– Profitability– Market Share– Brand– Quality of People
Success in 2003– #1 Global Equity Trading– #2 in Announced Global Mergers and Acquisitions– #3 in Global Equity Underwriting– #4 in Global Debt Underwriting
Company Strategy (cont’d)
Accolades in 2003– Best Global Investment Bank — Euromoney magazine– U.S. Equity House of the Year — International Financing
Review– Derivatives House of the Year — Risk magazine– 100 Best Companies to Work For — Sunday Times (U.K.) – Top 50 Companies for Diversity — DiversityInc magazine
Company Strategy (cont’d)
Fiscal 2004 – Looking forward– A strong economy next year is a critical driver for financial
services firms Individual level
– Increased consumer wealth will increase credit card spending, which generates significant revenue for Morgan Stanley
Corporate level– Improving business prospects will increase the need for capital,
both debt and equity– A stronger economy will reinvigorate the mergers and acquisition
and IPO markets, which are very profitable activities for Morgan Stanley
– The company seems dedicated to its client-focused strategy which should position it well in the upcoming year
EPS Sensitivity
Sales have grown an average of only 2.39% over the last 5 years but EPS has grown at an average rate of 4.55% over the last 5 years
– The five year revenue growth rate includes the boom of 1999-2000 as well as the less profitable 2001-2003 period
2004 2005 2006 2007 2008EPS at 2% Revenue Growth 3.57 3.73 3.90 4.06 4.24EPS at 4% Revenue Growth 3.64 3.87 4.12 4.39 4.66EPS at 8% Revenue Growth 3.77 4.17 4.61 5.08 5.61
Combined Sensitivity
Low P/E = 10 Current P/E in Market = 13 Sector P/E = 16 Wide range of prices when revenue growth and P/Es
are sensitized
2004 2005 2006 2007 2008Price at Low Revenue Growth / Low P/E $35.68 $37.29 $38.95 $40.65 $42.39Price at Moderate Revenue Growth / Low P/E $36.36 $38.74 $41.23 $43.86 $46.61Price at High Revenue Growth / Low P/E $37.73 $41.70 $46.06 $50.83 $56.07Price at Low Revenue Growth / Current P/E $46.38 $48.48 $50.64 $52.84 $55.11Price at Moderate Revenue Growth / Current P/E $47.27 $50.36 $53.60 $57.01 $60.60Price at High Revenue Growth / Current P/E $49.04 $54.21 $59.87 $66.08 $72.89Price at Low Revenue Growth / Sector P/E $57.09 $59.67 $62.32 $65.04 $67.83Price at Moderate Revenue Growth / Sector P/E $58.18 $61.98 $65.97 $70.17 $74.58Price at High Revenue Growth / Sector P/E $60.36 $66.72 $73.69 $81.33 $89.71
Dividend and Growth Rates
Dividends MWD Industry Sector S&P 500Dividend Yield 1.88 1.29 2.34 2.03Dividend 5 Year Growth Rate 18.13 16.34 13.28 7.33Payout Ratio (TTM) 22.39 17.07 27.34 27.73
Growth Rates (%) MWD Industry Sector S&P 500Sales (TTM) vs. TTM 1 Yr. Ago 11.93 17.2 12.43 15.21Sales - 5 Yr. Growth Rate 2.39 3.83 7.22 9.62EPS (TTM) vs. TTM 1 Yr. Ago 17.57 40.57 21.59 25.88EPS - 5 Yr. Growth Rate 4.55 14.18 15.24 12.85
Comparable dividend yields but lower growth rates due to difficult last three years
Ratio Analysis and Valuation
See Excel
Considerations
Add to position– Downsides
Between JP Morgan and Morgan Stanley, we have a fairly sizable stake in the financial sector already
Banks are very dependent on the overall health of the economy
– The last three years were not very profitable due to the decreased number of IPOs and mergers and acquisitions
Sell– Downsides
Company appears to be well positioned going forward Both EPS and ratio analysis showed that there is growth left in
this stock as long as revenue growth materializes
Recommendation
Hold 400 shares of Morgan Stanley Morgan Stanley operates in a fairly cyclical industry
and it appears that the next few years might bring about an upturn
Must continue to monitor Morgan Stanley to see if customer-focused strategy continues to generate revenue
Must ensure that revenue growth and EPS growth are maintainable and realistic
Any Questions
?