Analyst Matthew Czepliewicz on Monday lowered earnings estimates through 2014 for the investment bank citing weaker economic outlook and an eventual reversal in debt-valuation adjustment (DVA) gains that have been recorded amid widening spreads on its own debt.
Still, assuming the EU policymakers will eventually craft a response that prevents a disorderly default situation in Europe, the bank's share price now discounts greater risks than implied by revised forecasts and the likely response by the EU, the analyst said.
Shares of Morgan Stanley trade at about 6 times the analyst's 2012 diluted earnings.Czepliewicz expects the volatility in the investment bank's core earnings to subside in 2012 and added that the company is making good progress towards strengthening its balance sheet. A Eurozone stabilization would be a short-term catalyst to the stock, the analyst wrote, advocating an intra-company equity-CDS pair trade. Shares of Morgan Stanley were down 2.5% in premarket trading, as spreads widened in Europe and reports that the Super Committee might say they failed to reach an agreement on deficit reduction. --Written by Shanthi Bharatwaj in New York
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