Morgan Stanley Sherlyn Lim RCPM 16 th March 2006
Outline History History Macro Review Macro Review Business Business Company Life Cycle Company Life Cycle Swot Analysis Swot Analysis Industry Comparison Industry Comparison Financial Projection Financial Projection Sensitivity Analysis Sensitivity Analysis Recommendation Recommendation
History Morgan Stanley Morgan Stanley 1933 – Glass Steagall forces JP Morgan & Co. to chose between commercial and investment banking business 1933 – Glass Steagall forces JP Morgan & Co. to chose between commercial and investment banking business 1935 – Henry S. Morgan and Harold Stanley leave JP Morgan & Co. to form Morgan Stanley and Co – Henry S. Morgan and Harold Stanley leave JP Morgan & Co. to form Morgan Stanley and Co – Joins New York Stock Exchange and enters brokerage business 1941 – Joins New York Stock Exchange and enters brokerage business 1986 – Morgan Stanley Group becomes a publicly listed company 1986 – Morgan Stanley Group becomes a publicly listed company 1997 – Merger of Morgan Stanley and Dean Witter 1997 – Merger of Morgan Stanley and Dean Witter
History Dean Witter Dean Witter 1924 – Opens first office in San Francisco 1924 – Opens first office in San Francisco 1950s – Expands through acquisition and mergers 1950s – Expands through acquisition and mergers 1972 – Goes public 1972 – Goes public 1978 – Mergers with Reynolds & Co. in largest industry merger to date 1978 – Mergers with Reynolds & Co. in largest industry merger to date 1981 – Joins Sears, Roebuck 1981 – Joins Sears, Roebuck 1987 – Launches Discover 1987 – Launches Discover 1993 – Sears Spins of Dean Witter Discover 1993 – Sears Spins of Dean Witter Discover 1997 – Merger with Morgan Stanley 1997 – Merger with Morgan Stanley
Holdings 400 Shares 400 Shares Bot: 11 th April 2001 Bot: 11 th April 2001 Paid : $ Paid : $ Total: $23, Total: $23, % of portfolio: % % of portfolio: % Current Price: $60.31 Current Price: $60.31 Gain: 5.46% Gain: 5.46%
Business Institutional Securities Institutional Securities Investment banking Investment banking Financial advisory services Financial advisory services Merger and Acquisitions, Restructuring advice Merger and Acquisitions, Restructuring advice Sales and trading Sales and trading Fixed income securities Fixed income securities Equity securities Equity securities
Business Retail Brokerage Retail Brokerage Individuals, Small to medium size business Individuals, Small to medium size business Brokerage and investment advisory services Brokerage and investment advisory services Financial and wealth planning Financial and wealth planning Annuity and insurance products Annuity and insurance products Credit and other lending products Credit and other lending products Banking and cash management Banking and cash management Retirement plan services Retirement plan services Trust services Trust services
Business Asset Management Asset Management Global asset management product and services Global asset management product and services Equity, Equity, Fixed income Fixed income Alternatives Alternatives
Business Discover Discover Discover branded cards Discover branded cards Other consumer finance products and services Other consumer finance products and services
Key Statistics Fiscal Year Ends : 30 Nov Fiscal Year Ends : 30 Nov Management Effectiveness: Management Effectiveness: Return on Assets (ttm) : 0.63% Return on Assets (ttm) : 0.63% Return on Equity (ttm) : 17.21% Return on Equity (ttm) : 17.21% Profitability: Profitability: Profit Margin (ttm) : 18.44% Profit Margin (ttm) : 18.44% Operating Margin (ttm) : 33.16% Operating Margin (ttm) : 33.16%
Macroeconomic Cycle Performance is cyclical and dependent upon economy Performance is cyclical and dependent upon economy
Macroeconomic Cycle
Company Life Cycle Continuous reinvention Continuous reinvention 1924: Dean Witter opens office in San Francisco 1935: Formation of Morgan Stanley 1997: Merger of Morgan Stanley and Dean Witter 1986: Morgan Stanley Group becomes publicly listed 1987: Dean Witter launches Discover nationally : Falling stock price, attributed to market and management : Management shakeup; new business model
SWOT Analysis Strengths -Leader in investment banking services -Large market share in many areas of investment banking -Good Reputation in the market -Ability to continuously reinvent itself Weaknesses -Uncertainty about management -Cyclical nature of business -High human capital turnover; investment banking business is highly dependant on individuals -Discover is considered out of line with the general business model; not an expertise Opportunities -Emerging markets; enhancing presence in South Korea and Russia by obtaining bank licenses -Shift of focus towards growth rather than margins in Asset management -Employment of company’s equity capital in investment ideas; increasing returns to the firm Threats -High competition in the market; market is dominated by few bulge brackets -Inability to compete in foreign markets; lost dominance in the Chinese market -Reputation can be damaged by unethical individuals
Chart Comparison
Direct Comparison MSPvt1GSMERINDUSTRY Market Cap:63.24BN/A65.15B74.56B10.24B Employees:53,218400,00131,00554, K Qtrly Rev Growth (yoy):28.40%N/A38.20%N/A31.70% Revenue (ttm):26.78B23.07B B M798.93M Gross Margin (ttm):92.10%N/A91.06%N/A83.91% EBITDA (ttm):N/A M Oper Margins (ttm):33.16%N/A33.07% %35.84% Net Income (ttm):5.19B-1.44B B5.05B48.74M EPS (ttm):4.573N/A P/E (ttm):13.13N/A PEG (5 yr expected):0.95N/A P/S (ttm):2.36N/A2.58N/A3.73
Multiple Phase DDM Three Phases Three Phases 2006 – Based on earnings forecast 2006 – Based on earnings forecast Based on dividend growth Based on dividend growth 2021 – Based on dividend growth 2021 – Based on dividend growth Terminal Value Terminal Value Forecasted Price : $61.76 Forecasted Price : $61.76
Sensitivity Analysis Multi Phase Dividend Discount Model Terminal Payout ratioDividend Growth ( )Dividend Growth ( ) Terminal ValueShare Price 30.00%15.67%13.00%6.00%$ %15.67%13.00%6.00%$ %15.67%13.00%6.00%$ %15.67%13.00%6.00%$ %15.67%13.00%6.00%$ %15.67%10.00%6.00%$ %15.67%11.00%6.00%$ %15.67%12.00%6.00%$ %12.00%13.00%6.00%$ %13.00% 6.00%$ %14.00%13.00%6.00%$ %16.00%13.00%6.00%$ %17.00%13.00%6.00%$ %18.00%13.00%6.00%$71.76
P/E Approach Year Basic EPS Diluted EPS Share Price Year P/E ratio P/E Morgan Stanley13.04 Merrill Lynch15.26 Goldman Sachs13.29 JP Morgan17.21 Sector15.33 Industry22.81 Share Price: $62.72
Recommendation Company has been able to reinvent itself over its history Company has been able to reinvent itself over its history It is one of the premier banks in the world It is one of the premier banks in the world Buy recommendation would be have been made Buy recommendation would be have been made % of financials in portfolio = 21.2% % of financials in portfolio = 21.2% % of financials in S&P 500 = 21% % of financials in S&P 500 = 21% Hold: 400 Shares Hold: 400 Shares