Analyzing Morgan Stanley's 7 Top Holdings

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Includes: AAPL, ESRX, MSFT, PG, PM, SPG, XOM
by: The Analyst Hub

The following is a list of Morgan Stanley’s (NYSE:MS) top holdings, as released in its latest 13F filing with the SEC.

Stock

Symbol

Shares Held - 09/30/2011

% of Portfolio

Apple Inc.

AAPL

7255203

1.86

Microsoft Corporation

MSFT

66058566

1.1

Express Scripts Inc.

ESRX

36058859

0.9

Simon Property Group Inc.

SPG

9815045

0.72

Philip Morris International Inc.

PM

16657482

0.7

Exxon Mobil Corp.

XOM

14426981

0.7

Procter & Gamble Co.

PG

16013635

0.68

Click to enlarge

My favorite long candidates among above stocks are Apple, Microsoft and Philip Morris. However, I would like to avoid Exxon Mobil due to its greater-than-peers exposure to U.S. natural gas, as I am not bullish on U.S. natural gas fundamentals in the near term.

I like Apple despite of its last quarter earnings miss. This miss was largely due to customers holding back on new iPhone purchases before iPhone 4S launch in October. iPhone 4S is currently is currently seeing very strong demand, with over 4 million units sold in just three days after the launch in early October.

Recent read throughs from the earnings calls of AT&T (NYSE:T),Verizon (NYSE:VZ) and Sprint (NYSE:S) have also indicated strong trends for iPhone 4S. The carriers have witnessed a slowdown in sales of Android and BlackBerry phones in addition to iPhone sales from Q2 to Q3. There is a good chance that a number of Android/BlackBerry customers also waited to switch to the iPhone 4S in October, and that’s why they delayed purchases.

Going forward, in the near term, Apple is likely to continue seeing strong demand on the back of holiday sales and anticipated iPad3 and iPhone5 launches next year. From a medium- to long-term perspective, Apple’s secular growth and market share gain story in the smartphone and tablet space is likely to continue for the next several years.

Apple's strategy of customer-centric innovation and launching products that have a potential to create whole new markets on their own is still intact and if one goes by Steve Job’s biography, Apple TV is likely the next such product in the line. At valuation of just 8.25x forward earnings (adjusted for cash), Apple is trading at very attractive levels and I believe it is a good opportunity to go long on the stock.

Microsoft Corporation is another interesting long candidate in the above list. Microsoft is engaged in developing, licensing and supporting a range of software products and services. The company also designs and sells hardware, and delivers online advertising to customers. It operates in five segments: Windows & Windows Live Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division.

Microsoft’s EPS forecast for the current year is 2.85 and next year is 3.13. According to the consensus estimates, its top line is expected to grow 6.50% in the current year and 6.90% next year. It is trading at a forward P/E of 8.61. Out of 33 analysts covering the company, 23 are positive and have buy recommendations, one has a sell recommendation and nine have hold ratings.

I find Microsoft a very attractive medium-term buy at 8.61x next year's EPS. At these levels, I don’t think the market is pricing in any of the positive initiatives the company is taking. Some of the important initiatives that can drive meaningful growth over the next one year are the Windows 8 launch, Office 365, which is gaining traction, and good adoption of Nokia's (NYSE:NOK) WP7 phones.

In addition, Microsoft’s excess cash position provides a downside cushion. Microsoft recently raised its dividend by 25% and it has significant potential to increase its dividend pay-out ratio further to support the stock. I think Microsoft offers an attractive risk reward for investors who can hold the stock for the next year.

I also like Philip Morris. The company is engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States of America. Trading at 13.6x Forward PE and with ~4% dividend yield Philip Morris (NYSE:PM) appears to be an interesting defensive buy with a stable business model.

One company that I would like to avoid from the above list is Exxon Mobil. Exxon is the second most gas-focused among the major companies in the sector. It is next only to Royal Dutch Shell (NYSE:RDS.A) with 48% of its current production from natural gas, compared with 42% of the global majors.

Although globally natural gas prices are strong, they have lagged oil prices in the US. Thus, Exxon, which is overexposed to gas, is definitely not in a sweet spot. Although Exxon’s management is positive that US natural gas prices will catch up with the global prices eventually, I don’t see this happening in near to medium term.

Since the start of 2010, U.S. natural gas production has climbed by an average of 0.4 Bcf/day per month. With macro uncertainty and talks of another recession, I don’t see any factor that can cause supply demand tightness in the US natural gas market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.