Morgan Stanley, owner of the world's largest brokerage, could shut down its trading businesses and the company would be worth 28% more than Thursday's share price, according to Brad Hintz, an analyst at Sanford C. Bernstein & Co.
Analysis of the liquidation of the sales and trading operations, which constitute 80% of the company's balance sheet, shows that the equity market is overreacting to impatience in the firm's turnaround, Hintz wrote in a note to investors Friday.
Hintz, however, said he isn't endorsing that company dismantle its trading operations.
Morgan Stanley shares have dropped 27% from their recent peak in February, as investors express concern over new regulations and capital rules.
After accounting for the planned conversion of Mitsubishi UFJ Financial Group Inc.'s preferred stake in the New York company, the shares are trading at a 13% discount to tangible book value, Hintz said.
"We have long argued that absent a liquidity crisis, the mark-to-market balance sheets of Wall Street trading firms support a trough valuation at tangible book value," he wrote.
"This is because at low valuations, an acquirer could simply liquidate the trading balance sheet, pay off the liabilities and walk away with more cash than they paid for the company. Thus, at certain [price to tangible book] levels, such as today, a broker is worth more dead than alive," Hintz added.
Morgan Stanley's shares on Thursday touched their lowest level since April 2009.
The company's current share price is undervalued even under the most pessimistic outlooks for regulation and retail investor activity, barring a major liquidity run similar to 2008, Hintz wrote.
Morgan Stanley should pay off "handsomely" for long-term investors that buy now, he said.
