Thursday, February 4, 2010

Adding Morgan Stanley (MS) to the U.S. Focus List

The Credit Suisse Investment Policy Committee (IPC) is adding Morgan
Stanley to the U.S. Focus List. Credit Suisse Brokerage analyst Howard Chen
rates MS Outperform and has a 12-month target of $37, representing 40%
upside from current levels. Please refer to his recent notes on the Credit Suisse

Research and Analytics website for more details on the company.
Investment Thesis: With the stock trading at book value, we see limited
downside to MS shares and believe 2010 will represent an inflection point for
franchise profitability, operating margins and book value growth, which we
believe should drive share price outperformance.

Assuming good execution, the IPC believes that MS’ emphasis on the lower
volatility/less capital intensive wealth management business could help increase
the stock’s valuation over time (we estimate this business could ultimately
contribute 35% of the company’s revenue and 25% of its earnings). We also
think that MS remains a top tier player in the investment banking and
institutional securities business and that the firm will clearly benefit if capital
markets remain firm in 2010.

Growth potential: For 2010, we are forecasting 17% book value growth and
23% tangible book value growth for the firm driven by earnings expansion, the
lack of 2009’s outsized headwinds in addition to other benefits (China
Investment Corporation (CIC) strategic stake, Van Kampen sale). From an EPS
perspective, we see almost 20% growth from 2010 to 2011 ($2.75 to $3.25).

Catalysts: 1) We think the next few quarters will act as positive catalysts as we
model book value and ROE steadily increasing from Q1 to Q4 2010; 2) we think
the company’s capital position will further improve in 2H10 with the conversion
of CIC’s and MUFG’s (Mistubishi UFJ Financial Group) converts into common
Capital Position: Capital ratios remain robust in Q4 2009 – on a Basel I basis,
Morgan Stanley’s Tier 1 ratio was 15.4% (stable with 3Q09), and the firm’s Tier
1 Common ratio was 8.2% (also stable with 3Q09).
Valuation: Our D
CF-derived target of $37 translates to 1.2x forecast 2010
yearend BV and 1.4x TBV, still well below the firm’s historical averages of 2.7x
BV and 2.9x TBV.
Risks to the call: 1) a significant decline in capital markets activity, 2) a
significant erosion in Morgan Stanley’s institutional trading franchise, 3)
increased government regulations/fees.


  1. You wouldn't happen to have seen the recent Credit Suisse on Verizon, have you ? Thanks

  2. The link doesn't appear to work for this or the "UBS Investor's Guide". (The two I most wanted to read!)

    By the way, this is a freakin' invaluable site.