REAL CLIENT MANAGED PORTFOLIO memorandum
Investment Manager: Sherlyn Lim
subject: Morgan Stanley Investment recommendation
date: March 16, 2006
Current Position
Real Client Managed Portfolio (RCMP) currently holds 400 shares of Morgan Stanley (NYSE: MS) that were purchased on April 11th, 2001 at $57.1898 per share. As of March 13th 2003, the share price was at $60.31 which represents a 5.46% gain since purchase. Our position in Morgan Stanley accounts for 8.3157% of our entire portfolio based on market value. Together with JP Morgan Chase & Co, this brings our total position of financials in the portfolio to 21.2%
Discussion
Morgan Stanley is one of the world’s premier financial institutions. The company’s businesses lie in institutional sales, asset management, retail brokerage and discover brand cards. As a financial institute, the company is susceptible to the cyclical effects of the economy. Since its purchase, the company share price has had little gain in value mainly due to the economic slowdown. However, the company has historically had the ability to reinvent itself to compete efficiently in the markets. Each sector of the business was analyzed and overall growing trends were observed. The company holds leading positions in many areas of financial advisory services.
In 2005, the company experienced a management shakeup as the company had been experiencing stagnant stock price and little gain in value. The new management is lead by John Mack, a veteran of the Morgan Stanley. The new management focuses on taking value adding approaches for the firm. The economy saw a recovery in 2005 and 2006 has been an extremely strong year; with market indices reaching new highs. The company has also set a new direction for it discover brand of cards which has been the company’s poorest performing sector.
Recommendation: Hold
Multiple phase dividend discount model analysis provided a stock price range of $38.99 - $84.99. The low value was obtained from very conservative estimates. In this model, each sector of the firm’s business was forecasted for its earnings and future dividends were forecasted based on historic dividend ratios. The model forecasts dividends for three different time periods.
The P/E approach based on the firm’s present P/E, competitor’s P/E, sector P/E and industry P/E provided a stock price range of $62.72- $109.72. Based on present ratios, the share price forecasted was $61.76, which is close it present market price of $60.31. The model’s conservatism, Morgan Stanley’s ability to reinvent itself over the years and the strength of the economy prompted a buy action. However, taking into account the portfolio as a whole; with the percentage of financials in the portfolio at 21.2% which is approximately similar to its weight in the S&P 500 index, a hold recommendation was made.
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