Yahoo Finance Investors Are Undervaluing Morgan Stanley (NYSE:MS) By 25.47%
MS operates in the capital markets sector, which has characteristics that make it unique to other industries. Understanding these differences is crucial when it comes to putting a value on the financial stock. Maintaining a certain level of cash capital ratio is common for these financial firms to abide by, in order to minimize risks to their shareholders. Emphasizing elements such as book values, with the return and cost of equity, is appropriate for evaluating MS’s valuation. Below I will take you through how to value MS in a fairly useful and simple method.
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What Is The Excess Return Model?
Financial firms differ to other sector firms primarily because of the kind of regulation they face and their asset composition. MS operates in United States which has stringent financial regulations. In addition to this, capital markets tend to not hold substantial amounts of physical assets as part of total assets. As traditional valuation models put weight on inputs such as capex and depreciation, which is less meaningful for finacial firms, the Excess Return model places importance on forecasting stable earnings and book values.
Calculating MS’s Value
The central belief 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 in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.12% – 11%) x $44.3 = $0.78
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)
= $0.78 / (11% – 2.9%) = $10.32
Putting this all together, we get the value of MS’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $44.3 + $10.32 = $54.63
This results in an intrinsic value of $54.63. Relative to the present share price of US$40.71, MS is , at this time, trading below what it’s actually worth. This means you can buy MS at a discount to its value of $54.63. Pricing is only one aspect when you’re looking at whether to buy or sell MS. There are other important factors to keep in mind when assessing whether MS is the right investment in your portfolio.
Next Steps:
For capital markets, there are three key aspects you should look at:
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.
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.
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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
