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I don't like pushing operating companies whose operations aren't measuring up. I don't like Safeway (SWE), even at these prices, because consumers can go to other stores and, thus, there's no residual value beyond the franchise.

We should make an exception with banking companies, however. Sometimes, a beaten-down bank becomes irresistible. As Willie Sutton observed, they're where the money is.

Exhibit one is Morgan Stanley (MS).

The problems are well-known. Their credit rating has been downgraded. They've laid off 3,000 employees this year and they're planning on laying off more. Their earnings miss was spectacular.

But don't you think that's baked into the current price?

Besides, they have assets. Assets have value no matter how badly they're managed, at least when they're held by a bank. Assets can be sold.

The book value of MS at the end of March was $34.91/share. The most recent figure is $30.74, marked to market. Tangible book value, a more rigorous figure, is listed as $25.25.

Compare those numbers to the current price of $13.32/share. They're more. A lot more.

Can we discount that book, though? Yes, we can. Our Colin Lokey says that the company has yet to offload its full derivatives exposure, and that regulators are unlikely to allow the move this late in the game. So maybe we discount that book value.

But how much? By half?

Right now all the major financials are selling at a discount to their book value. Rajan Hulugalle expects Morgan Stanley to buy back up to $2 billion in shares next year, once the government unwinds its AIG positions. Well, $2 billion on a $26.4 billion market cap is not much, but it has to mean book value per share goes up a little bit, doesn't it?

You can argue that Morgan Stanley's results will deteriorate as it lays off more people and sells some assets. But based on its expected earnings for 2013, you're looking at a forward PE of 6.35. This is still a profitable company, in a growing economy (albeit, slow-growing).

Is it really just worth what it's selling at? Or is there an opportunity here for a patient buyer to pick up a bargain?

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

Source: Morgan Stanley Becoming Attractive