rcmp rcmp gleb zarkh - dave wetherell - kate dong
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RCMP
RCMP
Gleb Zarkh - Dave Wetherell - Kate Dong
April 10th, 2007
Morgan Stanley
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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. Board of Directors
2. Audit
3. Anti- takeover provisions
4. 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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• 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
Institutional Securities
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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 broker-
dealers,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
Total Financials: 23%
Portfolio Composition
AEE, 6.21%
AEO, 17.88%
CPRT, 8.43%
FR, 13.87%
JKHY, 2.94%JPM, 13.63%
KMB, 6.30%
MS, 9.74%
MVSN, 1.55%
SRCL, 4.99%
SRZ, 7.42%
WAG, 7.04%
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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
MS 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
MSMKT 0.755409
Market Correlation:
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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 ReportsMS 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 lineDY low but expected to grow after spin-off
MS CS GS MER LEH Average Industry Sector S&P 500P/E Ratio (TTM) 9.86 12.21 9.7 10.72 10.09 10.52 21.62 15.6 20.11Dividend Yield 1.38 2.56 0.68 1.72 0.85 0.01 1.36 2.51 2.17Dividend 5 Year Growth Rate 3.26 78.26 22.05 9.34 27.94 28.17 15.28 15.22 10.66EPS (TTM) vs TTM 1 Yr. Ago 57.4 88.18 59.15 48.06 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 '09-'11P/S $92.82 Price Gain Ann'l RetP/E $74.71 High 160 95% 19%DY $75.10 Low 105 25% 7%
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Position
HOWEVER!• Sell off, not good. w/ MS w/o MS 200 shrPort Var 0.42% 0.46% 0.44%Port Std Dev 6.45% 6.78% 6.61%Port Er 0.77% 0.77% 0.77%
Port Sharpe 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):
+ 10% 89.11
=Price Per Share 81.00
- 10% 72.90
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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):
+ 10%
109.69
=Price Per Share 99.72
- 10% 89.75
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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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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).