Morgan Stanley: Goldman May Lead to Increased Market Share (NYSE:GS),(NYSE:MS)

Morgan Stanley.jpg

Goldman Sachs Group, Inc. (NYSE:GS) has been the news of late, but could their bad news be good news for other financial firms?  Take for example Morgan Stanley (NYSE:MS).  Morgan Stanley has been recovering from the market crash and has worked its way toward profit.  Paul Price has the story at SeekingAlpha.

(Paul Price) - With most current ire focused on Goldman Sachs (GS), other similar financial service giants are down a bit in sympathy even though they have not been targeted by the SEC. Morgan Stanley (NYSE:MS) has been in earnings recovery mode since posting losses in fiscal Q4 of 2008 through Q2 of 2009 when the firm switched to calendar year reporting. EPS turned positive last September and March 2010 earnings (see earnings call transcript here) turned out well above estimates with $1.03 versus d.0.57.

Zacks now sees 2010 – 2011 earnings of $2.99 and $3.48 per share respectively - numbers that are more or less in line with Standard and Poors and Value Line’s projections. At this morning’s price of $31.10 MS now trades at about 10.4x this year’s and < 9x next year’s expected EPS. Both those multiples are extremely low for MS by historical standards.

Here are Morgan Stanley’s per share results (excluding non-recurring items) as reported by Value Line:

Revenues EPS Dividend B/V Avg. P/E 52-wk. Range
2002 29.97 2.84 0.92 20.24 16.4x 28.80 – 60.00
2003 32.21 3.45 0.92 22.93 13.2x 32.50 – 58.80
2004 36.37 4.08 1 25.94 13.2x 46.50 – 62.80
2005 49.44 4.4 1.08 27.7 12.2x 47.70 – 60.50
2006 72.98 6.82 1.08 32.67 9.5x 54.50 – 83.40
2007 80.78 2.43 1.08 28.56 30.3x 47.30 – 90.90
2008 59.43 1.54 1.08 30.24 25.2x 6.70 – 53.40
2009 22.1 d. 0.93 0.44 27.26 NMF 13.10– 35.80
* Fiscal years ended Nov. 30 through 2008. Results since 2009 are on calendar years.


Revenues for 2010 are estimated to rebound to about $6 billion or $42.70 /share taking into account the increased share count from secondary issuance during 2009. Clearly Morgan Stanley appears to have ‘normalized’ earnings power of at least $3 - $4 per share. It also seems logical to expect at least a 13 multiple within the next year or two as the negative June 2009 quarter and the weak results from Q2 and Q3 last year are replaced with what figure to be much improved results.

13x this year’s projection would lead to a 12-month target of almost $39 /share or about 25% appreciation from the current quote. That same multiple on the 2011 estimate would bring MS back up to over $45 by year-end 2011.

Are those achievable goals? Why not? Just a glance at the old 52-week ranges show peak prices well above those targets in each of the seven years preceding the late 2008 –early 2009 market meltdown. In fact, even the old yearly lows from the entire period 2004 through 2007 are above my target prices for this year and 2011.

The tarnishing of Goldman Sachs may lead to increased market share for the other major investment houses.

Dividends were cut from $1.08 to $0.20 annually to conserve cash during the crunch but are now poised to increase gradually with the present rate at under 7% of projected 2010 earnings. Book value may exceed $36 by December 31st putting MS’s price at a rare discount to B/V. Typically; Morgan Stanley shares have traded at double to triple this valuation measure.

Unless you’re quite bearish on the markets in general or MS in particular these shares look well positioned for a 25% - 50% resurgence even after their upward path since bottoming in the fall of 2008.

See here for a trade combination Price set up.


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