Is Morgan Stanley (NYSE:MS) Worth $51.32 Based On Intrinsic Value?

Pricing capital market stocks such as MS is particularly challenging. Given that these companies adhere to a different set of rules relative to other companies, their cash flows should also be valued differently. For instance, these businesses must hold a certain level of cash reserves on the books as a safety precaution. Focusing on line items like book values, as well as the return and cost of equity, can be suitable for gauging MS’s true value. Today I’ll determine how to value MS in a reasonably useful and easy approach. See our latest analysis for Morgan Stanley

What Model Should You Use?

Two main things that set financial stocks apart from the rest are regulation and asset composition. Financial firms operating in United States face strict financial regulation. In addition, capital markets generally don’t possess large portions of physical assets on their books. The Excess Returns model overcomes the required capital kept on hand and lack of tangibles by focusing on forecasting stable earnings, rather than less relevant factors such as depreciation and capex, which more traditional models focus on.

NYSE:MS Intrinsic Value Jun 14th 18

Deriving MS’s True Value

The main assumption for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:

Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (12.09% – 11.11%) * $43.34 = $0.42

Excess Return Per Share is used to calculate the terminal value of MS, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= $0.42 / (11.11% – 2.95%) = $5.19

Combining these components gives us MS’s intrinsic value per share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= $43.34 + $5.19 = $48.53

Relative to the present share price of $51.32, MS is currently priced in-line with its intrinsic value. Therefore, there’s a bit of a downside if you were to buy MS today. Valuation is only one part of your investment analysis for whether to buy or sell MS. Fundamental factors are key to determining if MS fits with the rest of your portfolio holdings.

Next Steps:

For capital markets, there are three key aspects you should look at:

1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.

2. Future earnings: What does the market think of MS going forward? Our analyst growth expectation chart helps visualize MS’s growth potential over the upcoming years.

3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether MS is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on MS here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.