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Morgan Stanley
December 7th, 2004
By Adam Freda
Introduction
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We currently own 400 shares of Morgan Stanley and
purchased shares on 4/11/01 for just under 57.19
Total cost of position (adjusted for dividends) $22,876
Market value of position - $21,308 for a loss of
$1,568 as of the 12/6/04 market close of $53.27
Recommendation is to hold
Relevant Financial Statistics
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52 Week Range: $46.54 - $62.83
Market Cap: 58.51B
P/E: 13.62
EPS (ttm): $3.91
Dividend: $1.00
Dividend Yield: 1.88%
Brief Background
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Morgan Stanley is a global financial services
firm that operates in four business segments
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Institutional Securities
Individual Investor Group
Investment Management
Credit Services
Brief Background (cont’d)
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Institutional Securities
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Provides worldwide financial advisory and capitalraising services to a diverse group of corporate
and other institutional clients
Individual Investor Group
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Provides financial planning and investment
advisory services designed to accommodate
individual investment goals and risk profiles
Brief Background (cont’d)
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Investment Management
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Provides global asset management products and
services for individual and institutional investors
Private equity activities
Credit Services
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Offers Discover-branded cards and other
consumer finance products and services
Includes the operation of Discover Business
Services
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A network of merchant and cash access locations
primarily in the United States
Approximately 46.1 million general purpose credit card
accounts as of November 30, 2003
Macroeconomic Review
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MWD operates in the financial sector and the
investment services industry
Competitors include Goldman Sachs, Merrill Lynch,
Citigroup, JP Morgan, CSFB, and other investment
and commercial banks
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Macroeconomic forces
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Investment banking business, individual investments, and
credit card spending are very market dependent
Company specific forces
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Reputation
Relationships
Stock Market Prospects – Recent
Updates
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Nine months ended 8/31/04
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Revenues rose 13% to $29.13 billion.
Net income increased 18% to $3.31 billion
 Results
reflect higher fixed income and trading
revenues, lower loan loss provisions, and
decreased dividends on preferred securities
Stock Market Prospects – 1YR
Stock Market Prospects – 5YR
Stock Market Prospects – Dow
Comparison
Stock Market Prospects – Comparison
with Competitors
Company Strategy
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Global Firm
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Operates in 27 countries
51,000 employees
Revenues of $38.61 billion in the last twelve months
“Product excellence and technical skills are essential
to our success. They are necessary but they are not
sufficient. What we truly prize is the quality of the
relationships we build with our clients.”
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Recognizes that large size creates a powerful platform, but
also realizes that personal relationships still drive revenue
growth
Company Strategy (cont’d)
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Four key priorities set out for Fiscal 2003
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Profitability
Market Share
Brand
Quality of People
Success in 2003
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#1 Global Equity Trading
#2 in Announced Global Mergers and Acquisitions
#3 in Global Equity Underwriting
#4 in Global Debt Underwriting
Company Strategy (cont’d)
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Accolades in 2003
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Best Global Investment Bank — Euromoney magazine
U.S. Equity House of the Year — International Financing
Review
Derivatives House of the Year — Risk magazine
100 Best Companies to Work For — Sunday Times (U.K.)
Top 50 Companies for Diversity — DiversityInc magazine
Company Strategy (cont’d)
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Fiscal 2004 – Looking forward
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A strong economy next year is a critical driver for financial
services firms
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Individual level
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Increased consumer wealth will increase credit card spending,
which generates significant revenue for Morgan Stanley
Corporate level
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Improving business prospects will increase the need for capital,
both debt and equity
– A stronger economy will reinvigorate the mergers and acquisition
and IPO markets, which are very profitable activities for Morgan
Stanley
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The company seems dedicated to its client-focused strategy
which should position it well in the upcoming year
EPS Sensitivity
EPS at 2% Revenue Growth
EPS at 4% Revenue Growth
EPS at 8% Revenue Growth
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2004
3.57
3.64
3.77
2005
3.73
3.87
4.17
2006
3.90
4.12
4.61
2007
4.06
4.39
5.08
2008
4.24
4.66
5.61
Sales have grown an average of only 2.39% over the
last 5 years but EPS has grown at an average rate of
4.55% over the last 5 years
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The five year revenue growth rate includes the boom of
1999-2000 as well as the less profitable 2001-2003 period
Combined Sensitivity
Price at Low Revenue Growth / Low P/E
Price at Moderate Revenue Growth / Low P/E
Price at High Revenue Growth / Low P/E
Price at Low Revenue Growth / Current P/E
Price at Moderate Revenue Growth / Current P/E
Price at High Revenue Growth / Current P/E
Price at Low Revenue Growth / Sector P/E
Price at Moderate Revenue Growth / Sector P/E
Price at High Revenue Growth / Sector P/E
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2004
$35.68
$36.36
$37.73
$46.38
$47.27
$49.04
$57.09
$58.18
$60.36
2005
$37.29
$38.74
$41.70
$48.48
$50.36
$54.21
$59.67
$61.98
$66.72
2006
$38.95
$41.23
$46.06
$50.64
$53.60
$59.87
$62.32
$65.97
$73.69
2007
$40.65
$43.86
$50.83
$52.84
$57.01
$66.08
$65.04
$70.17
$81.33
2008
$42.39
$46.61
$56.07
$55.11
$60.60
$72.89
$67.83
$74.58
$89.71
Low P/E = 10
Current P/E in Market = 13
Sector P/E = 16
Wide range of prices when revenue growth and P/Es
are sensitized
Dividend and Growth Rates
Dividends
Dividend Yield
Dividend 5 Year Growth Rate
Payout Ratio (TTM)
MWD
1.88
18.13
22.39
Industry
1.29
16.34
17.07
Sector
2.34
13.28
27.34
S&P 500
2.03
7.33
27.73
Growth Rates (%)
Sales (TTM) vs. TTM 1 Yr. Ago
Sales - 5 Yr. Growth Rate
EPS (TTM) vs. TTM 1 Yr. Ago
EPS - 5 Yr. Growth Rate
MWD
11.93
2.39
17.57
4.55
Industry
17.2
3.83
40.57
14.18
Sector
12.43
7.22
21.59
15.24
S&P 500
15.21
9.62
25.88
12.85
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Comparable dividend yields but lower growth rates
due to difficult last three years
Ratio Analysis and Valuation
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See Excel
Considerations
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Add to position
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Downsides
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Between JP Morgan and Morgan Stanley, we have a fairly
sizable stake in the financial sector already
Banks are very dependent on the overall health of the
economy
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The last three years were not very profitable due to the
decreased number of IPOs and mergers and acquisitions
Sell
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Downsides
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Company appears to be well positioned going forward
Both EPS and ratio analysis showed that there is growth left in
this stock as long as revenue growth materializes
Recommendation
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Hold 400 shares of Morgan Stanley
Morgan Stanley operates in a fairly cyclical industry
and it appears that the next few years might bring
about an upturn
Must continue to monitor Morgan Stanley to see if
customer-focused strategy continues to generate
revenue
Must ensure that revenue growth and EPS growth
are maintainable and realistic
Any Questions