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Here is a look at how Morgan Stanley (NYSE:MS) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass all 6 of the following tests: Score = 3/6

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  3. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  4. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  5. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  6. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass all 3 of the following tests or be suitable for a defensive investor: Score = 1/3

  1. Earnings Stability - positive earnings per share for at least 5 years - FAIL
  2. Dividend Record - currently pays a dividend - PASS
  3. Earnings growth - EPSmg greater than 5 years ago - FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG OpinionOvervalued
Value Based on 3% Growth$16.44
Value Based on 0% Growth$9.64
Market Implied Growth Rate10.48%
PEmg29.45
PB Ratio1.00

Balance Sheet - 9/30/2013

Long Term Debt$178,704,000,000
Total Assets$832,223,000,000
Intangible Assets$10,105,000,000
Total Liabilities$767,095,000,000
Outstanding Shares1,953,350,000

Earnings Per Share

2013$1.84
2012$0.02
2011$1.26
2010$2.44
2009-$0.93
2008$1.54
2007$2.37
2006$7.09
2005$4.81
2004$4.08
2003$3.45

Earnings Per Share - ModernGraham

2013$1.13
2012$0.81
2011$1.25
2010$1.66
2009$1.84
2008$3.48

Conclusion:

Morgan Stanley is not suitable for either the Enterprising Investor or the Defensive Investor at this time. The company has not sufficiently grown earnings over the ten year period, had a negative earnings year in 2009, and is current trading at a high PEmg ratio. The Enterprising Investor's time horizon only includes the five year historical period, but the lack of earnings growth and stability over that time period eliminates the company from contention for that investor type as well. Therefore, value investors seeking to follow Benjamin Graham's methods may wish to seek other opportunities, such as by reviewing companies that pass the ModernGraham requirements.

From a valuation perspective, the company fares poorly in the ModernGraham valuation model, due to the drop in EPSmg (normalized earnings) from $3.48 in 2008 to $1.13 for 2013. The market is estimating earnings will grow at a pace of 10.48%, which is clearly not supported by the historical performance of the company. As a result, it appears that Morgan Stanley is overvalued at the current time.

What do you think? What value do you place on Morgan Stanley? Is the company not suitable for Defensive Investors or Enterprising Investors? Is there a company you like better?

Disclosure: The author did not hold a position in Morgan Stanley (MS) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Valuation Of Morgan Stanley