Morgan Stanley stock worth more than $100 (NYSE:MS)

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Over the past 12 months, Morgan Stanley (NYSE: MS) the stock price fell from $80 on April 12, 2021 to $108 on February 9, 2022. Since then, the stock price has fallen more than 20%. Is it time to buy the dip? By using the free cash flow to equity (FCFE) model, I estimate Morgan Stanley stock to be worth $102 per share (based on my base case scenario). According to Seeking Alpha ratings (Wall Street price target), Morgan Stanley has a low price target of $93, a median price target of $109, and a high price target of $125. Based on my scenarios for MS’s total asset growth rate, capital requirements, and cost of equity, I calculate a fair value of $90 to $119 for the stock. In a nutshell, I am bullish on the stock.

2021 results

In its financial results for the fourth quarter and full year 2021, Morgan Stanley reported net revenue of $14,524 million in the 4th quarter of 2021, compared to net revenue in the 4th quarter of 2020 of $13,597 million. , up 7%. Additionally, the company’s full-year 2021 net revenue increased to $59,755 million, up 23% year-over-year. Morgan Stanley reported 2021 non-interest expense of $40,083 million, compared to 2020 non-interest expense of $33,578 million, up 19%. The company’s earnings per diluted share for fiscal 2021 increased 24% year-on-year to $8.03. Additionally, MS’s allowance for credit losses decreased from $761 million in 2020 to $4 million in 2021, down 99%. The company announced a 4th quarter 2021 Common Equity Tier 1 (CET1) ratio of 16%, compared to a 4th quarter 2020 CET1 ratio of 17.4%, down 140 basis points. Morgan Stanley’s Liquidity Coverage Ratio (LCR) has increased from 129% in 2020 to 134% in 2021. In the next section, I examine the company’s performance against its peers in more detail.

Performance

To analyze management’s ability to control expenses and revenue, I look at Morgan Stanley’s efficiency ratio and compare it to some of its peers. Looking at MS’s efficiency ratio quarter over quarter indicates that the company has decreased its ratio by increasing revenue and decreasing expenses. MS efficiency ratio at the end of December 2021 decreased by 123 basis points to 58.85%, compared to 60.08% last quarter. Generally speaking, an efficiency rate of 50% or less is optimal and a sign of productivity (see Figure 1).

Figure 1 – Morgan Stanley Efficiency Ratio

Figure 1 - Morgan Stanley Efficiency Ratio

Author’s calculations based on Seeking Alpha data

Moreover, to study whether the management could generate profits for the shareholders and to analyze the productivity of the bank’s operations, the efficiency ratio is a tool for quick comparison between peers. As shown in Figure 2, Morgan Stanley’s efficiency ratio declined by 297 basis points to 60.73% in 2021, compared to an efficiency ratio of 63.70% in 2020. Among its peers, Citigroup ( C) saw the biggest decline from 77.12% in 2020 to 63.37% in 2021. Additionally, the efficiency ratios of Goldman Sachs (GS) and JPMorgan (JPM) fell to 53, 24% and 54.17%, respectively (see Figure 2).

Figure 2 – Morgan Stanley’s efficiency ratio compared to its peers

    Figure 2 - Morgan Stanley's efficiency ratio compared to its peers

Author’s calculations based on Seeking Alpha data

To be more thorough, combining efficiency ratio and revenue growth for comparison purposes might provide a better perspective on management’s ability to reward investors. Figure 3 shows that Morgan Stanley’s revenue growth is 6.96%, which is above the peer average of 1.68%.

Figure 3 – Morgan Stanley’s revenue growth relative to its peers

Figure 3 - Morgan Stanley versus peers by revenue

Y-Charts

Evaluation

Using the FCFE model, I estimate that Morgan Stanley is worth $102.35 per share (under my base scenarios). I used two approaches to construct a proper way to use the FCFE model to value Morgan Stanley. According to first approach to use the FCFE model to value bank stocks, I estimate total assets, total liabilities, tier 1 common stock, total risk-weighted assets (RWA), net income and net income of Morgan Stanley from 2022 to 2032. According to the second approachI calculate the FCFE of the company (I suggest you read these two approaches to better understand the procedure of my evaluation).

Table 1 shows that between 2018 and 2011, MS’s total assets grew from $854 billion to $1.188 billion, an increase of 39%. From 2020 to 2021, the ratio of loans to total company assets fell from 0.14 to 0.17. This was due to the economic recovery after the start of vaccination against Covid-19. Moreover, Table 2 shows that the ratio of deposits to total assets of Member States fell from 0.21 in 2019 to 0.28 in 2020, reflecting the short-term recession caused by the pandemic. As things return to normal, I estimate a Loans to Total Assets ratio of 0.16 for Morgan Stanley. Also, I estimate a deposit to total asset ratio of 0.25 for the company. To estimate MS’s total assets from 2022 to 2032, I use US GDP growth forecasts. The US Bureau of Labor Statistics (BLS) projects that the U.S. economy will grow 2.3% per year, on average, from 2020 to 2030. Also, based on knoema.com According to the data, inflation in the United States is expected to be between 2.1% and 2.4% from 2022 to 2030. According to forecasts for economic growth and inflation in the United States, my base scenario for the growth rate of total assets is a compound annual growth rate of 5%.

According to Table 1, Morgan Stanley’s total assets to total liabilities ratio is stable. Thus, I used the company’s total assets to total liabilities ratio to estimate MS’s total liabilities from 2022 to 2032. Also, using the total risk-weighted assets to total assets of the company, which is stable, I predict MS RWAs from 2022 to 2032. Morgan Stanley’s Tier 1 ratio (Tier 1 capital to RWA) has been around 18% for the past four years (in under Basel III regulations, a bank’s minimum Tier 1 ratio should be 10.5%). MS Tier 1 ratio is 18% in my base case. As MS’s annual RWAs increase, the company will need to increase its Tier 1 capital to maintain the Tier 1 ratio of 18% from 2022 to 2032. Subtracting the change in Tier 1 capital from the net income, I calculate the 2022 FCFE to 2032. Then, using the firm’s cost of equity, I calculate the net present value (NPV) of MS from 2022 to 2031. Then, using the estimated data from 2032, I calculate the terminal value of the ‘business. Finally, I calculate the equity value and the fair value per share of the company.

Table 1 – Valuation of Morgan Stanley shares according to the FCFE model

Table 1 - Valuation of Morgan Stanley shares

Author’s calculations

Table 2 shows the fair value of MS shares under different scenarios for the growth rate of the company’s total assets, the Tier 1 ratio and the cost of equity. The pace of economic recovery from the pandemic, the fiscal policy of the US government and the monetary policy of the Federal Reserve will determine the growth of MS’s total assets. I use four scenarios of the annual growth rate of total assets from 2022 to 2032: 3%, 4%, 5% and 6%. From 2012 to 2021, MS’ total assets grew with a CAGR of 4.3%. In my base scenario, I estimate that the company’s total assets will grow with a CAGR of 5% from 2022 to 2032.

According to finbox.com, MS’s cost of equity is between 7.8% and 8.5%. In my base scenario, I use a COE of 8.13%. In addition, I use four scenarios for the Tier 1 ratio: 18% (base scenario), 17%, 16% and 10.5% (Basel II minimum requirement). A higher Tier 1 ratio means better risk management, and a lower Tier 1 ratio means riskier performance. Considering all scenarios based on asset growth rate, Tier 1 ratio and COE, I estimate the stock is worth between $90 and $140. I don’t see Morgan Stanley dropping its Tier 1 ratio to 10.5% because of its risk management approaches. So, I reduce the stock value range to $90-$120. With a total asset CAGR of 5%, a Tier 1 ratio of 18%, and a COE of 8.13% (my base case), I estimate MS stock to be worth $102.35.

Table 2 – Value of Morgan Stanley shares under different scenarios (the result of the base scenario is highlighted in Yellow)

Table 2 - Morgan Stanley Total Assets

Author’s calculations

Risk

From 2019 to 2021, Morgan Stanley’s risk-weighted assets grew from $394 billion to $472 billion, up 20%. The company’s Common Equity Tier 1 capital ratio decreased by 140 basis points to 16% from 2019 to 2021. Additionally, MS’s Tier 1 capital ratio decreased by 180 basis points to 17, 6% from 2019 to 2021. However, Morgan Stanley’s CET1 ratio and Tier 1 ratio are still above the minimum Basel III requirements. In addition, the company’s cash coverage ratio increased from 129% in 2020 to 134% in 2021, to return to its 2019 level (see Figure 4). Under Basel III, a standard LCR is 100%.

Figure 4 – Morgan Stanley LCR from 2017 to 2021

Figure 4 - Morgan Stanley Cash Coverage Ratio

Morgan Stanley 2021 Investor Presentation

Moreover, relative to the peer group, Morgan Stanley’s net profit margin is lower than that of its competitors. A lower net profit margin can lead to the risk of ineffective cost structure or management strategies (see Figure 5).

Figure 5 – Morgan Stanley Net Profit Margin vs Peers

Figure 5 - Morgan Stanley versus peers by net margin

Looking for Alpha

Summary

Morgan Stanley’s diluted earnings per share rose from $6.46 in 2020 to $8.03 in 2021, up 24%. However, the stock price is almost the same compared to its price a year ago. I estimate the stock to be worth $102 per share (based on my base case scenario). The company will announce its first quarter 2022 financial results on April 14, 2022. A strong quarterly financial result could push MS’ price up to $100. At prices around $85 (its current prices), Morgan Stanley stock is a buy.

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