We are reiterating our buy rating on Morgan Stanley (MS). Global bank valuations have improved substantially, reflecting prospects for reduced financial regulation, including the rollback of various Dodd-Frank rules and lower capital requirements, under the Trump administration, notes Stephen Biggar of Argus Research.
That said, we have not included the impact of specific regulatory changes in our base-case earnings forecast for 2017, as any revised regulations will likely take time to move through Congress. Looking ahead, we also expect an improved environment for equities to benefit the company’s capital market-sensitive businesses.
We note that activist investor ValueAct Holdings has now taken a 2% stake in the company, making it Morgan Stanley’s sixth-largest shareholder.
In announcing its investment, ValueAct echoed our view that MS has made significant progress in lowering its risk profile, strengthening its capital buffers, and reducing earnings volatility.
In particular, the Wealth Management segment, which has a more stable revenue and profit profile, now accounts for nearly 50% of revenues, and risk-weighted assets continue to decline.
Results in this segment have also been helped by the company’s focus on high- and ultra-high net worth clients, which are seeing the fastest growth.
On January 17, Morgan Stanley reported 4Q16 operating earnings of $0.81 per share, up from $0.39 in the year-earlier quarter and well ahead of the $0.65 consensus.
In 2016, the company said it ranked second in global announced & completed M&A, second in global IPOs and second in global equity and equity linked underwriting.
Based on recent equity market strength, which should lead to a more robust investment banking, trading and M&A environment, we are raising our 2017 estimate to $3.31 from $3.18, representing 13% growth. We are initiating a 2018 estimate of $3.60, which assumes 9% growth next year.
In our view, management remains transparent with its near- and long-term financial targets, which we believe are achievable. MS trades at 13.3-times our 2017 EPS estimate, below the historical average multiple, which is closer to the S&P 500 multiple.
We believe that higher multiples are warranted given the company’s improving ROE and capital metrics and prospects for a less onerous regulatory environment. Our 12-month target price of $50 assumes a multiple of 15.1-times our 2017 forecast.
