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Morgan Stanley. RCMP Gleb Zarkh - Dave Wetherell - Kate Dong April 10 th , 2007. Outline. Introduction Economics Equity Analysis. Introduction. History Business Holdings. History. 1934: Glass- Steagell Act: Morgan Stanley I-Bank 1971: Establish M&A Division: Enter Sales & Trading
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Morgan Stanley RCMP Gleb Zarkh - Dave Wetherell - Kate Dong April 10th, 2007
Outline • Introduction • Economics • Equity Analysis
Introduction • History • Business • Holdings
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)
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
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: • Board of Directors • Audit • Anti- takeover provisions • Executive compensation
Introduction • History • Business • Holdings
Business Segments • Institutional Securities • Global Wealth Management • Asset Management • Discover
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
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
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
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
Business Global DistributionOver 600 Offices in 31 Countries
Introduction • History • Business • Holdings
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 %)
Portfolio Composition Total Financials: 23%
Correlation Matrix Market Correlation:
Outline • Introduction • Economics • Equity Analysis
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
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
Smaller Segment • Global Wealth/Asset Management • Roughly 10% of BT Profits • Growth forecasted to “decelerate” • E(g) 2007 = 4.2% Source: Datamonitor
“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
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
Outline • Introduction • Economics • Equity Analysis
Equity Analysis • Multiples Approach • Modeling and Forecasting • Recommendation
Multiples P/E in line DY low but expected to grow after spin-off
Valuations • Dividends and Earnings growing faster than price • P/E & DY – Reflect ST
Position HOWEVER! • Sell off, not good.
Equity Analysis • Introduction • Modeling and Forecasting • Recommendation
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):
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): Modeling and Forecasting(2)Without Discover
Recommendation • Hold • Discover Spin-off will add value • Shift to Focus on Investment Banking • Good Future Business Prospects • Good Global Positioning • Strong Management
Thank you! RCMP: Gleb Zarkh email:gzarkh2@uiuc.edu David Wetherell Bo (Kate) Dong Email :katedong@gmail.com
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).