Shares of Morgan Stanley (MS) are up 39 cents, or 1.4%, at $28.19, defying the dip in financials, as FBR Capital analyst Steve Stelmach this morning raised his rating on the stock to “Outperform” from “Market Perform,” with a $35 price target, writing that Morgan is “transitioning into what we believe will be a more stable, retail-oriented business model.”
Stelmach’s note comes a day after rumors spread that the firm is under criminal investigation related to its dealings in mortgage derivatives. But he brushes that off, writing that “Regulatory risks are likely to persist, however we do not view Morgan Stanley as any more or less exposed to regulatory risks than competitors.”
Stelmach sees book value rising $2 to $24 later this year, and to $30 by the end of 2011, assuming a “mid-teen long-term return on equity.” The stock is currently at 1 times book, which reflects a mere 10% return on equity, an overly conservative valuation, he believes.
Stelmach sees the firm gaining in its trading business, by being more focused on retail customers than peers, who are chasing institutions, predominantly. With “aggressive” hiring of traders in investment banking, moreover, the company will at least be able to support the “current run rate” in investment banking business even as peers see a deceleration in revenue “as market conditions become less accomodative.”
Stelmach also sees the Euro zone’s $1 trillion bailout package as providing “more opportunities for market share gains, as increased uncertainty and volatility tends to engender higher revenue opportunities.”
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