Morgan StanleyMorgan Stanley

Sherlyn LimSherlyn Lim

RCPMRCPM

1616thth March 2006 March 2006

OutlineOutline HistoryHistory Macro ReviewMacro Review BusinessBusiness

Company Life CycleCompany Life Cycle Swot AnalysisSwot Analysis

Industry ComparisonIndustry Comparison Financial ProjectionFinancial Projection Sensitivity AnalysisSensitivity Analysis RecommendationRecommendation

HistoryHistory Morgan StanleyMorgan Stanley

1933 – Glass Steagall forces JP Morgan & Co. to 1933 – Glass Steagall forces JP Morgan & Co. to chose between commercial and investment chose between commercial and investment banking businessbanking business

1935 – Henry S. Morgan and Harold Stanley leave 1935 – Henry S. Morgan and Harold Stanley leave JP Morgan & Co. to form Morgan Stanley JP Morgan & Co. to form Morgan Stanley and Co.and Co.

1941 – Joins New York Stock Exchange and enters 1941 – Joins New York Stock Exchange and enters brokerage businessbrokerage business

1986 – Morgan Stanley Group becomes a publicly 1986 – Morgan Stanley Group becomes a publicly listed companylisted company

1997 – Merger of Morgan Stanley and Dean Witter1997 – Merger of Morgan Stanley and Dean Witter

HistoryHistory

Dean WitterDean Witter 1924 – Opens first office in San Francisco1924 – Opens first office in San Francisco 1950s – Expands through acquisition and 1950s – Expands through acquisition and

mergersmergers 1972 – Goes public1972 – Goes public 1978 – Mergers with Reynolds & Co. in largest 1978 – Mergers with Reynolds & Co. in largest

industry merger to dateindustry merger to date 1981 – Joins Sears, Roebuck1981 – Joins Sears, Roebuck 1987 – Launches Discover1987 – Launches Discover 1993 – Sears Spins of Dean Witter Discover1993 – Sears Spins of Dean Witter Discover 1997 – Merger with Morgan Stanley1997 – Merger with Morgan Stanley

HoldingsHoldings

400 Shares400 Shares Bot: 11Bot: 11thth April 2001 April 2001 Paid : $57.1898Paid : $57.1898 Total: $23,516.00Total: $23,516.00 % of portfolio: 8.3157%% of portfolio: 8.3157% Current Price: $60.31Current Price: $60.31 Gain: 5.46%Gain: 5.46%

BusinessBusiness

Institutional SecuritiesInstitutional Securities Investment bankingInvestment banking

Financial advisory servicesFinancial advisory services Merger and Acquisitions, Restructuring Merger and Acquisitions, Restructuring

adviceadvice Sales and tradingSales and trading

Fixed income securitiesFixed income securities Equity securitiesEquity securities

BusinessBusiness

Retail BrokerageRetail Brokerage Individuals , Small to medium size Individuals , Small to medium size

businessbusiness Brokerage and investment advisory servicesBrokerage and investment advisory services Financial and wealth planningFinancial and wealth planning Annuity and insurance productsAnnuity and insurance products Credit and other lending productsCredit and other lending products Banking and cash managementBanking and cash management Retirement plan servicesRetirement plan services Trust servicesTrust services

BusinessBusiness

Asset ManagementAsset Management Global asset management product and Global asset management product and

servicesservices Equity, Equity, Fixed incomeFixed income AlternativesAlternatives

BusinessBusiness

DiscoverDiscover Discover branded cardsDiscover branded cards Other consumer finance products and Other consumer finance products and

servicesservices

Key StatisticsKey Statistics

Fiscal Year Ends : 30 NovFiscal Year Ends : 30 Nov Management Effectiveness:Management Effectiveness:

Return on Assets (ttm) : 0.63%Return on Assets (ttm) : 0.63% Return on Equity (ttm) : 17.21%Return on Equity (ttm) : 17.21%

Profitability:Profitability: Profit Margin (ttm) : 18.44%Profit Margin (ttm) : 18.44% Operating Margin (ttm) : 33.16% Operating Margin (ttm) : 33.16%

Macroeconomic CycleMacroeconomic Cycle

Performance is cyclical and Performance is cyclical and dependent upon economydependent upon economy

Macroeconomic CycleMacroeconomic Cycle

Company Life CycleCompany Life Cycle

Continuous reinventionContinuous reinvention

1924: Dean Witter opens office in San Francisco1935: Formation of Morgan Stanley

1997: Merger of Morgan Stanley and Dean Witter

1986:Morgan Stanley Group becomes publicly listed1987:Dean Witter launches Discover nationally

2004-2005:Falling stock price, attributed to market and management

2005-2006:Management shakeup; new business model

SWOT AnalysisSWOT AnalysisStrengths- Leader in investment banking services- Large market share in many areas of

investment banking- Good Reputation in the market- Ability to continuously reinvent itself

Weaknesses- Uncertainty about management- Cyclical nature of business- High human capital turnover;

investment banking business is highly dependant on individuals

- Discover is considered out of line with the general business model; not an expertise

Opportunities- Emerging markets; enhancing presence

in South Korea and Russia by obtaining bank licenses

- Shift of focus towards growth rather than margins in Asset management

- Employment of company’s equity capital in investment ideas; increasing returns to the firm

Threats- High competition in the market; market

is dominated by few bulge brackets- Inability to compete in foreign markets;

lost dominance in the Chinese market- Reputation can be damaged by unethical

individuals

Chart ComparisonChart Comparison

Direct ComparisonDirect Comparison  MS Pvt1 GS MER INDUSTRY

Market Cap: 63.24B N/A 65.15B 74.56B 10.24B

Employ ees: 53,218 400,001 31,005 54,800 1.32K

Qtrly Rev Growth (yoy): 28.40% N/A 38.20% N/A 31.70%

Revenue (ttm): 26.78B 23.07B1 25.24B -562.00M 798.93M

Gross Margin (ttm): 92.10% N/A 91.06% N/A 83.91%

EBITDA (ttm): N/A N/A N/A N/A 210.37M

Oper Margins (ttm): 33.16% N/A 33.07% 3189.86% 35.84%

Net Income (ttm): 5.19B -1.44B1 5.61B 5.05B 48.74M

EPS (ttm): 4.573 N/A 11.214 5.163 0.83

P/E (ttm): 13.13 N/A 13.32 15.27 22.81

PEG (5 yr expected): 0.95 N/A 0.84 1.08 1.23

P/S (ttm): 2.36 N/A 2.58 N/A 3.73

Multiple Phase DDMMultiple Phase DDM

Three PhasesThree Phases 2006 – 2010 --- Based on earnings 2006 – 2010 --- Based on earnings

forecast forecast 2011- 2020 --- Based on dividend 2011- 2020 --- Based on dividend

growthgrowth 2021 – 2020 --- Based on dividend growth2021 – 2020 --- Based on dividend growth Terminal ValueTerminal Value

Forecasted Price : $61.76Forecasted Price : $61.76

Sensitivity AnalysisSensitivity AnalysisMulti Phase Dividend Discount Model

Terminal Payout ratio Dividend Growth (2011-2020) Dividend Growth (2021-2030)

Terminal Value Share Price

30.00% 15.67% 13.00% 6.00% $38.99

40.00% 15.67% 13.00% 6.00% $50.38

50.00% 15.67% 13.00% 6.00% $61.76

60.00% 15.67% 13.00% 6.00% $73.15

70.00% 15.67% 13.00% 6.00% $84.54

50.00% 15.67% 10.00% 6.00% $55.21

50.00% 15.67% 11.00% 6.00% $57.22

50.00% 15.67% 12.00% 6.00% $59.38

50.00% 12.00% 13.00% 6.00% $48.89

50.00% 13.00% 13.00% 6.00% $52.05

50.00% 14.00% 13.00% 6.00% $55.45

50.00% 16.00% 13.00% 6.00% $63.02

50.00% 17.00% 13.00% 6.00% $67.24

50.00% 18.00% 13.00% 6.00% $71.76

P/E ApproachP/E ApproachYear 2006 2007 2008 2009 2010

Basic EPS 4.95 5.49 5.96 6.40 6.85

Diluted EPS 4.81 5.33 5.80 6.22 6.66

           

  Share Price

Year 2006 2007 2008 2009 2010

P/E ratio          

13.04 62.72 69.56 75.60 81.10 86.84

15.26 73.40 81.41 88.47 94.90 101.63

13.29 63.93 70.90 77.05 82.65 88.51

17.21 82.78 91.81 99.77 107.03 114.62

15.33 73.74 81.78 88.87 95.34 102.09

22.81 109.72 121.68 132.24 141.85 151.91

  P/E

Morgan Stanley 13.04

Merrill Lynch 15.26

Goldman Sachs 13.29

JP Morgan 17.21

Sector 15.33

Industry 22.81

Share Price: $62.72

RecommendationRecommendation Company has been able to reinvent itself Company has been able to reinvent itself

over its historyover its history It is one of the premier banks in the It is one of the premier banks in the

worldworld Buy recommendation would be have Buy recommendation would be have

been madebeen made % of financials in portfolio = 21.2% % of financials in portfolio = 21.2% % of financials in S&P 500 = 21%% of financials in S&P 500 = 21%

Hold: 400 SharesHold: 400 Shares