A Reality Check on Morgan Stanley

“We need a merger partner or we’re not going to make it” –  Purported quote from John Mack, Morgan Stanley CEO, talking to Citigroup CEO Vikram Pandit – NY Times on September 17, 2008 (later pulled)

Trading at $33.24 as of Friday’s close, Morgan Stanley (MS) is knocking on the door of $35 again, a price level not seen for almost 5 years.  I say again, because MS started the year at about the same price after rising 60% in 2013, but the stock has been in a trading range since.  Investors are now wondering if there’s still great upside to be had or if Morgan Stanley has tapped out on valuation.

There are still some challenges that exist for the business.  For one, expenses and liabilities continue to persist from their role in subprime mortgages, including a recent fine of $275 million from the SEC related to residential mortgage securities sold in 2007.  Their Asset Management division, at around $400 Million AUM, is pretty light in comparison to key rivals and their Fixed Income business, albeit purposely scaled back, continues to struggle.  The biggest issue however might be with investors, both professional and retail, who were burned badly in 2008 and have no interest in jumping bank into the turnaround early.

There’s recent cause for optimism however, and CEO James Gorman’s strategy to focus on Wealth Management and Advisory Services, and mute the impact of FICC appears to be working.  They reported strong Q2 results, and more than doubled net income from a year earlier.  The purchase of the full assets of the joint venture with Smith Barney from Citigroup is already paying dividends in Wealth Management and earlier this month Moody’s raised its credit rating on the company.

But all of this information is already baked into the stock price, so the question remains, “is this a good entry point?”  EidoSearch provides a reality check of sorts in situations like this, by finding historical comps to the current environment to see how stocks have typically reacted.  This provides fundamental investors with a gauge, and a range of likely outcomes, as an additional input to every investment decision.

For Morgan Stanley, we took their current one year price trend and looked across all Financial Services stocks over the past 40 years to find the most similar instances historically and to see what typically happens next.  We found 35 statistically similar comps to the current price trend, and in the next 1 year, the stock is up in 80% of the instances and the average return is 24.7% (16% relative to the S&P 500).

One year price chart for Morgan Stanley (MS)

Chart of the 1 year forward returns for each of the 35 historical comps for Morgan Stanley’s current 1 year price trend in Financial Services Stocks.  There are no instances down greater than 20% in the next year, while 35% of the instances are up greater than 20% providing a strong upside/downside ratio

Replicating the Market Call in EidoSearch (Clients Only)

• Go to New Search tab, type in MS or Morgan Stanley, and hit Enter
• Select the 1 year tab at the top of the chart, and then hit Search at the bottom right of the chart
• Click on the 1 year forecast horizon, and view historical analogs, projections and other underlying analytics

Have a great week!