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Morgan Stanley: Financial Winner

Stocks in this article: C AAPL MS I:BKX

Heading into Friday morning's start to earnings season for the largest U.S. banks, with reports from JPMorgan Chase (JPM) and Wells Fargo (WFC), Mosby said his favorite bank stock picks include Regions Financial (RF) and PNC Financial Services Group (PNC), for which he expects "operating earnings momentum improvements" to push stocks higher. The analyst's price target for Regions is $9.25, and his target for PNC is $83.00.

Mosby also favors Citigroup (C), with a price target of $45, as the stock "has a strong return-to-risk ratio and could display further progress in minimizing future exposure to Citi Holdings," which is the runoff subsidiary, part of CEO Vikram Pandit's long-term "good bank/bad bank" strategy for right-size the company's balance sheet and free up capital for an eventual increase in dividends and share buybacks.

The analyst's price target for Citigroup is "based on 9.8x our 2013 EPS" estimate of 98 cents and 0.8 times his estimated year-end tangible book value for the shares. Citigroup's shares rose 1% on Thursday to close at $35.52, trading for 7.7 times Mosby's 2013 EPS estimate of $4.60 and 0.7 times the company's reported June 30 tangible book value of $51.81.

The KBW Bank Index (I:BKX) rose 1% to close at 51.26, with all but four of the 24 index components showing gains for the session.

Morgan Stanley

Morgan Stanley's shares have returned 19% year-to-date, following a 44% decline during 2011.

The shares trade for 0.6 times their reported June 30 tangible book value of $27.70, and for nine times the consensus 2013 EPS estimate of $1.98, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate is 86 cents.

The company will announce its third-quarter results on Oct. 18, with a consensus operating earnings estimate of 24 cents, declining from 29 cents in the second quarter. During the third quarter of 2011 Morgan Stanley's results include $3.4 billion in positive revenue from debit valuation adjustments (DVA) and "other credit factors."

KBW analyst David Konrad rates Morgan Stanley "Market Perform," and estimates the company will report third-quarter operating EPS of 20 cents, although the analyst expects "a sizable DVA adjustment in 3Q12 of nearly $2 billion, and as a result, we expect the company to announce a reported loss of $0.47 per share."

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