Bernstein: Is Morgan Stanley Worth More Dead or Alive?

I tend to read research by Brad Hintz, a senior analyst at Bernstein Research in New York, very carefully. He covers the financial services sector and what sets him apart is that he once was the CFO for Lehman Brothers back in the day. (Hintz was picked off by Berstein's then-CEO Sallie Krawcheck; Hintz told me that, as a result, Sallie saved his life: Hintz would have been in the World Trade Center on September 11, 2001, if he had not relocated to his new job uptown at Bernstein.) In a recent report, Hintz notes that "investors have grown impatient with the performance of Morgan Stanley" . . . "the stock is trading at a 13 percent discount to tangible book value, indicating a clear lack of confidence in the future business model and earnings power of the firm." Hintz's reaction?

"Despite the looming uncertainty regarding the firma and the industry at large, we believe the equity market has overreacted." He notes that without the liquidity crisis, a buyer could pay 1 times tangible book, liquidate the balance sheet and pay off the liabilities and "walk away with more cash than they paid for the company." Hintz concludes, "Thus at a certain P/TB (price to tangible book), a broker is worth more dead than alive." The base tangible book would always be 1, theoretically.

I won't take you through the details of Hintz's analysis, but he concludes that the sum of the parts (trading and capital markets businesses, its "top-tier M&A franchise" and its "leading retail brokerage") are way undervalued; the current shares are trading at a 28 percent discount to this implied value. (He's including a one-time dividend that implies a valuation of $31.47 per share for the company.)

Hintz's price target for MS is $35.00 (it is now around $22.51); he expects earnings of $1.15 eps in 2011 and $3.18

eps in 2012. He sums up thusly: "Even the most pessimistic outlook for the financial services industry, absent a major liquidity run, does not justify current valuation levels for Morgan Stanley, and Bernstein believes MS stock should pay off handsomely for long-term investors. MS' retail brokerage joint venture with Citigroup will ultimately give MS control of the largest domestic retail platform as measured by both number of brokers and client assets. This 'new' Morgan Stanley will lead an oligopoly of mega-retail channel distributors--along with BAC, WFC and SCHW--that will likely dominate the brokerage market in the coming decade."