Morgan Stanley
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Gleb Zarkh - Dave Wetherell - Kate Dong
April 10th, 2007
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Outline
• Introduction
• Economics
• Equity Analysis
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Introduction
• History
• Business
• Holdings
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History
• 1934: Glass- Steagell Act: Morgan Stanley I-Bank
• 1971: Establish M&A Division: Enter Sales & Trading
• 1977: Establish Private Wealth Mgmt. Division
: Merge with Shuman (Brokerage firm)
• 1986: Sears launches Discover Card
• 1997: Merger with Dean Witter and Discover
• 2002: Prices largest Russian stock offering
• 2005: Advises largest Chinese IPO to date
• 2006: Opens office in Dubai (First in Middle East)
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Management
•
CEO Philip J. Purcell (1997- 2005): Former Dean Witter Discover
CEO
-
•
Underperformed expectations as merged firm
Eight former executives send letter to Board to replace Purcell
CEO John Mack (2005- Present): President 1997- 2001
Long career (about 30 years) at Morgan Stanley
Investment banking background
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Management (2)
•
•
April 1st 2007: Corporate Governance Quotient
(CGQ) is better than 65.2% of S&P 500
companies and 90.6% of Diversified Financials
companies.
CSQ:
1.
2.
3.
4.
Board of Directors
Audit
Anti- takeover provisions
Executive compensation
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Introduction
• History
• Business
• Holdings
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Business Segments
•
•
•
•
Institutional Securities
Global Wealth Management
Asset Management
Discover
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Breakdown
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Institutional Securities
• Investment banking
-Capital raising
-Corporate lending
-Financial advisory (M&A, restructuring,real estate, project finance)
• Sales,trading,financing and market-making activities
-Equity securities and related products
-Fixed income securities and related products
• Other activities
-Benchmark indices and risk management analytics
-Research
-Investments
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Investment Banking Rankings
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Global Wealth Management
• Clients
-Individuals
-Small-to-medium size business and institutions
• Products and Services
-Brokerage and investment advisory services
-Financial and wealth planning services
-Annuity and insurance products
-Credit and other lending products
-Banking and cash management
-Retirement plan services
-Trust services
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Asset Management
• Global asset management products and services
- Equity
- Fixed income
- Alternatives
- Private Equity
• Three principal distribution channels
- Proprietary channel  MS representatives
- Non-proprietary channel third-party brokerdealers,banks, financial planners and other
intermediaries
- Institutional sales
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Asset Management Rankings
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Discover
•
Discover financial services
-Discover@-branded cards
-Related consumer finance products and services
•
Discover network
- A network of merchants and cash access locations primarily in the U.S.
-transaction network for Discover @ Network branded cards
•
PULSE@EFT association LP (PULSE)
- An automated teller machine /debit and electronic funds transfer network
•
Consumer banking group international
-MS –branded and affinity credit cards and other consumer finance products and
services in the U.K.
-Credit cards issued on the mastercard network
* Spin off in 3Q 2007: Tax- free dividend to shareholders
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Strong Financial Performance
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Business Global Distribution
Over 600 Offices in 31 Countries
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Global Breakdown
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Introduction
• History
• Business
• Holdings
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Holdings
•
•
•
•
•
•
•
400 Shares
Bought: April 11th, 2001
Paid : $57.19
Initial Value: $22,876
Current % of Portfolio: ~ 10%
Current Price: $80.30
Gain: $9,244 (40.4 %)
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Portfolio Composition
Portfolio Composition
WAG, 7.04%
AEE, 6.21%
SRZ, 7.42%
AEO, 17.88%
SRCL, 4.99%
MVSN, 1.55%
MS, 9.74%
CPRT, 8.43%
KMB, 6.30%
FR, 13.87%
JPM, 13.63%
Total Financials: 23%
JKHY, 2.94%
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Correlation Matrix
AEE
AEO
CPRT
FR
JKHY
JPM
KMB
MS
MVSN
SRCL
SRZ
AEE
1
0.048723
0.081975
0.367574
-0.01901
0.116134
0.269318
0.05955
-0.00805
-0.08209
0.18692
AEO
0.048723
1
0.11757
-0.05087
0.032337
0.411586
-0.00439
0.36912
0.288482
0.031983
0.220978
CPRT
0.081975
0.11757
1
0.206554
0.355021
0.25705
0.162158
0.494638
0.298356
0.097895
0.209306
FR
0.367574
-0.05087
0.206554
1
0.115471
0.073081
0.253799
0.171635
0.172026
0.089123
0.074113
JKHY
-0.01901
0.032337
0.355021
0.115471
1
0.100646
0.024066
0.215932
0.361587
0.082507
0.317867
JPM
0.116134
0.411586
0.25705
0.073081
0.100646
1
0.090147
0.489052
0.525371
-0.04632
-0.03424
KMB
0.269318
-0.00439
0.162158
0.253799
0.024066
0.090147
1
0.025011
-0.01872
0.126343
-0.05782
0.05955
0.36912
0.494638
0.171635
0.215932
0.489052
0.025011
1
0.474603
0.11836
0.084887
MVSN
-0.00805
0.288482
0.298356
0.172026
0.361587
0.525371
-0.01872
0.474603
1
-0.05048
0.059827
SRCL
-0.08209
0.031983
0.097895
0.089123
0.082507
-0.04632
0.126343
0.11836
-0.05048
1
0.06491
SRZ
0.18692
0.220978
0.209306
0.074113
0.317867
-0.03424
-0.05782
0.084887
0.059827
0.06491
1
WAG
0.015172
0.05226
-0.05025
0.007667
0.191207
-0.08597
0.216148
0.033172
-0.00857
0.180412
0.069583
MS
Market Correlation:
MKT
MS
0.755409
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Outline
• Introduction
• Economics
• Equity Analysis
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Economics
• 75% of Profit from Institutional Securities
– 60% from Americas
• Fragmented industry
– MS 2nd largest w/ 6.7% Global Market Share
• Maximize margins by “Streamlining”
– MS outsourcing
Source: Datamonitor
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Drivers
• Key players are in U.S. and driven by
current M&A activity & Equity Segment
• U.S. contributes approximately 53% of
sector’s value
• Asia expected to increase in importance
• Expansion slowing down
• Still expected to be about 12.5%
Source: Datamonitor
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Smaller Segment
• Global Wealth/Asset Management
– Roughly 10% of BT Profits
• Growth forecasted to “decelerate”
– E(g) 2007 = 4.2%
Source: Datamonitor
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“The case for global decoupling concludes
that world GDP growth – which surged at
a 30-year high of 4.9% over the past four
years – will barely skip a beat in 2007.”
--- Stephen Roach, Chief Economist of MS
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• Expect IPO market to be active esp. in
Fixed Income IPOs
– 48% of Institutional Securities Revenue
• Overall outlook good for big players
Sources:
Valueline Industry Reports
MS Presentation – Credit Suisse
Financial Markets Conference
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Outline
• Introduction
• Economics
• Equity Analysis
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Equity Analysis
• Multiples Approach
• Modeling and Forecasting
• Recommendation
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Multiples
P/E in line
DY low but expected to grow after spin-off
P/E Ratio (TTM)
Dividend Yield
Dividend 5 Year Growth Rate
EPS (TTM) vs TTM 1 Yr. Ago
MS
9.86
1.38
3.26
57.4
CS
12.21
2.56
78.26
88.18
GS
9.7
0.68
22.05
59.15
MER
10.72
1.72
9.34
48.06
LEH Average Industry Sector S&P 500
10.09 10.52 21.62 15.6 20.11
0.85
0.01 1.36 2.51
2.17
27.94 28.17 15.28 15.22 10.66
21.22 54.80 39.82 21.71 21.83
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Valuations
• Dividends and Earnings growing faster than
price
• P/E & DY – Reflect ST
Valuation
P/S
P/E
DY
$92.82
$74.71
$75.10
'09-'11
Price Gain
High 160 95%
Low 105 25%
Ann'l Ret
19%
7%
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Position
HOWEVER!
• Sell off, not good.
Port Var
Port Std Dev
Port Er
Port Sharpe
w/ MS
0.42%
6.45%
0.77%
w/o MS
0.46%
6.78%
0.77%
200 shr
0.44%
6.61%
0.77%
0.120
0.114
0.117
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Equity Analysis
• Introduction
• Modeling and Forecasting
• Recommendation
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Modeling and Forecasting(1)
With Discover
• Assumptions
– Beta: 1.38
– Risk Free Rate: 4.55%
– Market Risk Premium:
6%
– CAPM: 12.83%
– Growth Rate: 3.5%
• Value per share (with
Discover):
=Price Per Share
+ 10%
89.11
- 10%
72.90
81.00
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Modeling and Forecasting(2)
Without Discover
• Assumptions
– Beta: 1.20
– Risk Free Rate: 4.55%
– Market Risk Premium:
6.%
– CAPM: 11.75%
– Growth Rate: 3.5%
• Value per share (without
Discover):
=Price Per Share
+
10%
109.69
- 10%
89.75
99.72
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Recommendation
• Hold
•
•
•
•
•
Discover Spin-off will add value
Shift to Focus on Investment Banking
Good Future Business Prospects
Good Global Positioning
Strong Management
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Q & A?
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RCMP:
Gleb Zarkh
email:gzarkh2@uiuc.edu
David Wetherell
Bo (Kate) Dong
Email :katedong@gmail.com
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Citations
•
•
•
Yahoo Finance. April 7th, 2007. http://finance.yahoo.com/q/pr?s=MS
Thompson Financial. April 8th, 2007. http://www.thomson.com/solutions/financial/investbank/leaguetable_home/
2006 Morgan Stanley Annual Report. April 8th, 2007.
http://www.morganstanley.com/about/ir/shareholder/10k2006/10k11302006.pdf
•
Global – Investment Banking & Brokerage, Datamonitor, (Apr. 2006), available at <http://www.datamonitor.com/>
(last visited Apr. 8, 2007).
•
Global – Asset Management & Custody Banks, Datamonitor, (Apr. 2006), available at
<http://www.datamonitor.com/> (last visited Apr. 8, 2007).
•
Stephen S. Roach, Spillovers versus Linkages, Morgan Stanley – Global Economic Forum, (Apr. 9, 2007), available
at <http://www.morganstanley.com/views/gef/archive/2007/20070409-Mon.html> (last visited Apr. 9, 2007).
•
Tom Nikic, Securities Brokerage Industry, Value Line Publishing, Inc., (Jan. 26, 2007), available at <
http://www.valueline.com/> (last visited Apr. 8, 2007).
•
Tom Nikic, Morgan Stanley, Value Line Publishing, Inc., (Jan. 26, 2007), available at < http://www.valueline.com/>
(last visited Apr. 8, 2007).
•
David H. Sidwell & John A. Shapiro, Credit Suisse Financial Services Conference, Morgan Stanley, (Feb. 7, 2007),
available at <http://www.morganstanley.com/about/ir/02072007disc.html> (last visited Apr. 8, 2007).
•
Reuters Research Inc., Morgan Stanley – Competitors Report, OneSource Information Services, Inc., (Apr.
2007), available at < http://businessbrowser.onesource.com/HomePage.asp> (last visited Apr. 8, 2007).
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