Goldman Sachs analyst William Tanona thinks investors need to calm down about Morgan Stanley (MS). And now that the government has saved Wall Street’s arse, they have!
In any event, Tanona thinks the concerns of the past week (pre-bailout) were nonense:
Although some of the price declines may have been understandable given the issues at Lehman Brothers, Merrill Lynch and AIG, we believe most of the stock’s downward spiral was exaggerated by short sellers. With the SEC and FSA implementing new short sale rules, enhanced liquidity facilities by the Fed and a consortium of global banks, and indications the government may establish funds – $800 bn to purchase failed assets and $400 bn to insure investors in money market funds, Morgan Stanley should be well positioned to capitalise on future opportunities. We believe Morgan Stanley is sound as an ongoing entity.
Additionally, Tanona insists that, for MS, liquidity concerns are overblown. While spreads on MS credit default swaps have almost quadrupled, which would make raising debt expensive, Tanona thinks that MS has enough liquidity to avoid public debt markets for a year, by which time, things will have presumably calmed down:
Accessing the debt markets would be very expensive at this point; however, we estimate MS has ample liquidity to avoid having to do so for about a year. On the conference call, CFO Colm Kelleher stated that the firm could delay issuance well into 2009. Overall, CDS spreads have been volatile in recent weeks and may not be indicative of the firm’s actual cost of debt. We believe the firm’s ability to price a new offering at a lower rate would significantly calm the market’s fears.
In addition to raising a significant amount of long-term debt during 2007, ensuring that the entire repayment schedule for 2008 was covered by issuance during 1H 2008, and tapping private debt markets during 3Q 2008 when the public markets all but closed, MS has also moved to reduce its reliance on commercial paper as a funding source. CP outstanding fell from $28 bn at the end of 1Q 2007 to $8 bn at the end of 3Q 2008.
Fears about a liquidity crisis and a poor capital position are also overblown, according to Tanona. The Fed’s Primary Dealer Credit Facility (PDCF) eliminates much of the risk. Also, and more importantly, Morgan’s ratio of risky assets to shareholder equity is tiny compared to Lehman and Merrill. What’s more, they have marked their risky assets lower:
In almost every asset class, based on Morgan Stanley management commentary, it would
seem that Morgan Stanley has marked their books to levels below their peers, and in some
cases, even lower than the current market indices would have implied.
Tanona reiterates his Buy rating and $44 price target.
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