Morgan Stanley

December 7th, 2004

By Adam Freda

Introduction

We currently own 400 shares of Morgan Stanley and purchased shares on 4/11/01 for just under 57.19

Total cost of position (adjusted for dividends) - $22,876

Market value of position - $21,308 for a loss of $1,568 as of the 12/6/04 market close of $53.27

Recommendation is to hold

Relevant Financial Statistics

52 Week Range: $46.54 - $62.83 Market Cap: 58.51B P/E: 13.62 EPS (ttm): $3.91 Dividend: $1.00 Dividend Yield: 1.88%

Brief Background

Morgan Stanley is a global financial services firm that operates in four business segments – Institutional Securities– Individual Investor Group– Investment Management– Credit Services

Brief Background (cont’d)

Institutional Securities– Provides worldwide financial advisory and capital-

raising services to a diverse group of corporate and other institutional clients

Individual Investor Group– Provides financial planning and investment

advisory services designed to accommodate individual investment goals and risk profiles

Brief Background (cont’d)

Investment Management– Provides global asset management products and

services for individual and institutional investors– Private equity activities

Credit Services– Offers Discover-branded cards and other consumer

finance products and services– Includes the operation of Discover Business Services

A network of merchant and cash access locations primarily in the United States

Approximately 46.1 million general purpose credit card accounts as of November 30, 2003

Macroeconomic Review

MWD operates in the financial sector and the investment services industry

Competitors include Goldman Sachs, Merrill Lynch, Citigroup, JP Morgan, CSFB, and other investment and commercial banks

– Macroeconomic forces Investment banking business, individual investments, and

credit card spending are very market dependent– Company specific forces

Reputation Relationships

Stock Market Prospects – Recent Updates

Nine months ended 8/31/04– Revenues rose 13% to $29.13 billion. – Net income increased 18% to $3.31 billion

Results reflect higher fixed income and trading revenues, lower loan loss provisions, and decreased dividends on preferred securities

Stock Market Prospects – 1YR

Stock Market Prospects – 5YR

Stock Market Prospects – Dow Comparison

Stock Market Prospects – Comparison with Competitors

Company Strategy

Global Firm– Operates in 27 countries– 51,000 employees– Revenues of $38.61 billion in the last twelve months

“Product excellence and technical skills are essential to our success. They are necessary but they are not sufficient. What we truly prize is the quality of the relationships we build with our clients.”

– Recognizes that large size creates a powerful platform, but also realizes that personal relationships still drive revenue growth

Company Strategy (cont’d)

Four key priorities set out for Fiscal 2003– Profitability– Market Share– Brand– Quality of People

Success in 2003– #1 Global Equity Trading– #2 in Announced Global Mergers and Acquisitions– #3 in Global Equity Underwriting– #4 in Global Debt Underwriting

Company Strategy (cont’d)

Accolades in 2003– Best Global Investment Bank — Euromoney magazine– U.S. Equity House of the Year — International Financing

Review– Derivatives House of the Year — Risk magazine– 100 Best Companies to Work For — Sunday Times (U.K.) – Top 50 Companies for Diversity — DiversityInc magazine

Company Strategy (cont’d)

Fiscal 2004 – Looking forward– A strong economy next year is a critical driver for financial

services firms Individual level

– Increased consumer wealth will increase credit card spending, which generates significant revenue for Morgan Stanley

Corporate level– Improving business prospects will increase the need for capital,

both debt and equity– A stronger economy will reinvigorate the mergers and acquisition

and IPO markets, which are very profitable activities for Morgan Stanley

– The company seems dedicated to its client-focused strategy which should position it well in the upcoming year

EPS Sensitivity

Sales have grown an average of only 2.39% over the last 5 years but EPS has grown at an average rate of 4.55% over the last 5 years

– The five year revenue growth rate includes the boom of 1999-2000 as well as the less profitable 2001-2003 period

2004 2005 2006 2007 2008EPS at 2% Revenue Growth 3.57 3.73 3.90 4.06 4.24EPS at 4% Revenue Growth 3.64 3.87 4.12 4.39 4.66EPS at 8% Revenue Growth 3.77 4.17 4.61 5.08 5.61

Combined Sensitivity

Low P/E = 10 Current P/E in Market = 13 Sector P/E = 16 Wide range of prices when revenue growth and P/Es

are sensitized

2004 2005 2006 2007 2008Price at Low Revenue Growth / Low P/E $35.68 $37.29 $38.95 $40.65 $42.39Price at Moderate Revenue Growth / Low P/E $36.36 $38.74 $41.23 $43.86 $46.61Price at High Revenue Growth / Low P/E $37.73 $41.70 $46.06 $50.83 $56.07Price at Low Revenue Growth / Current P/E $46.38 $48.48 $50.64 $52.84 $55.11Price at Moderate Revenue Growth / Current P/E $47.27 $50.36 $53.60 $57.01 $60.60Price at High Revenue Growth / Current P/E $49.04 $54.21 $59.87 $66.08 $72.89Price at Low Revenue Growth / Sector P/E $57.09 $59.67 $62.32 $65.04 $67.83Price at Moderate Revenue Growth / Sector P/E $58.18 $61.98 $65.97 $70.17 $74.58Price at High Revenue Growth / Sector P/E $60.36 $66.72 $73.69 $81.33 $89.71

Dividend and Growth Rates

Dividends MWD Industry Sector S&P 500Dividend Yield 1.88 1.29 2.34 2.03Dividend 5 Year Growth Rate 18.13 16.34 13.28 7.33Payout Ratio (TTM) 22.39 17.07 27.34 27.73

Growth Rates (%) MWD Industry Sector S&P 500Sales (TTM) vs. TTM 1 Yr. Ago 11.93 17.2 12.43 15.21Sales - 5 Yr. Growth Rate 2.39 3.83 7.22 9.62EPS (TTM) vs. TTM 1 Yr. Ago 17.57 40.57 21.59 25.88EPS - 5 Yr. Growth Rate 4.55 14.18 15.24 12.85

Comparable dividend yields but lower growth rates due to difficult last three years

Ratio Analysis and Valuation

See Excel

Considerations

Add to position– Downsides

Between JP Morgan and Morgan Stanley, we have a fairly sizable stake in the financial sector already

Banks are very dependent on the overall health of the economy

– The last three years were not very profitable due to the decreased number of IPOs and mergers and acquisitions

Sell– Downsides

Company appears to be well positioned going forward Both EPS and ratio analysis showed that there is growth left in

this stock as long as revenue growth materializes

Recommendation

Hold 400 shares of Morgan Stanley Morgan Stanley operates in a fairly cyclical industry

and it appears that the next few years might bring about an upturn

Must continue to monitor Morgan Stanley to see if customer-focused strategy continues to generate revenue

Must ensure that revenue growth and EPS growth are maintainable and realistic

Any Questions

?