Morgan Stanley's Best Stock Ideas Now

BOSTON (TheStreet) -- Morgan Stanley (MS) Best Ideas, the global investment bank's top stock picks, when last examined on December 7, comprised eight stocks that were expected to outperform benchmarks. Here's a look at how those stocks have performed since December 7. For purposes of comparison, the S&P 500 Index has gained 6% since that date.

Apple ( AAPL), +7%
BorgWarner ( BWA), +12%
Ford ( F), -13%
Republic Services ( RSG), +2%
Schlumberger ( SLB), +8%
Scripps Networks ( SNI), -3%
Tyco ( TYC), +10%
Union Pacific ( UNP), +2%

Four of the bank's eight picks have beaten their large-cap benchmark since Dec. 7. However, several have since been removed from Best Ideas. Scripps was pulled from the list on Feb. 13 due to opacity concerning potential return of capital to shareholders. The bank reiterated its "overweight" ranking on Scripps, which owns Food Network and Travel Network, and expects its stock to rise 19% to $60.

Also, Morgan Stanley added Eastman Chemical ( EMN) to Best Ideas on Jan. 12 and subsequently pulled it, this week, citing higher consensus expectations. Eastman's stock climbed nearly 8% over that span. Morgan Stanley still rates it "overweight."

Apple was removed from the list mid-December due to outperformance, but retained its top ranking.

Here are the current Best Ideas, with price targets and upside projections, followed by an examination of an intriguing new pick: CBS Corp. ( CBS).

BorgWarner ( BWA), Target: $88, Upside: 20%
CBS Corp. ( CBS), Target: $27, Upside: 10%
Ford ( F), Target: $21, Upside: 46%
Google ( GOOG), Target: $750, Upside: 30%
Pepsi ( PEP), Target: $82, Upside: 28%
Schlumberger ( SLB), Target: $160, Upside: 81%
Tyco ( TYC), Target: $52, Upside: 17%
Union Pacific ( UNP), Target: $112, Upside: 18%

Morgan Stanley named CBS a Best Idea on Feb. 24, predicting it will double earnings by 2012. The following is a breakdown of CBS's fundamentals and prospects. It's a stock to consider.

CBS is a media conglomerate, with television, publishing and billboard-advertising revenue streams. Formerly known as Viacom ( VIA.B), CBS went public in 2006. Viacom, now an independent publicly traded company, was later spun off. CBS owns its flagship television station, radio stations, with over 130 in U.S. markets, as well as premium-subscription channel Showtime and its subsidiary stations, which include Flix and The Movie Channel.

CBS has lucrative licensing deals for sports broadcasting, including the AFC of the National Football League and the NCAA Men's College Basketball Championship, which is currently enjoying ratings at a 17-year high, in part due to a new four-channel coverage strategy, which includes TBS and TNT. Brand-name assets barely scratch the surface.

CBS also owns book publisher Simon & Schuster and an outstanding interactive media division, which runs tech-site CNET and review aggregator Metacritic. Also, the CBS Outdoor division does more than $2 billion in billboard advertising sales a year. Exposure to this integrated media strategy is offered by few U.S. equities. CBS has more than doubled net income and earnings per share, on a trailing 12-month basis. Adjusted fourth-quarter earnings advanced 84% to 46 cents, exceeding consensus by 6%. Sales grew 11% to $3.9 billion, beating consensus by a more modest 1.4%. The operating margin rose from 12% to 16%.

Morgan Stanley expects CBS to benefit from a recent deal with Netflix ( NFLX) and climbing advertising spending. Also, its near-peak margins, with a gross spread at 38%, provides opportunity for expansion and brand investment. CBS, which has a market value of $17 billion, is expected to buy back shares, but maintain its dividend, in 2011 and 2012. Morgan Stanley's base-case scenario has CBS rising to $27.

That outcome is consistent with "a steady ad recovery", or a roughly 1% increase in ad sales, and a billion worth of share repurchases in 2011 and 2012 as margins expand by roughly 150 basis points. Its bull case has the stock rising 38% to $34, provided ad sales stretch 3% and the board purchases $1.5 billion of stock during 2011 and $1.5 billion in 2012.

The bear-case target is $18, contingent upon multiple contraction, a decline in ad sales of roughly 2.5% and just $500 million of buybacks in 2011. One notable risk to the bullish thesis is an NFL lockout, which is looking increasingly likely as negotiations between team owners and the players association have broken down in recent weeks due to a dispute over upfront revenue desired by team owners. If this issue isn't resolved soon, the 2011-2012 season is in jeopardy, as are CBS's fall schedule and broadcasting profits.

At quarter's end, CBS held $480 million of cash, down 33% year-over-year, and $6 billion of debt, down 14% year-over-year, for a quick ratio of 0.9 and a debt-to-equity ratio of 0.6. Although other analysts have a net-positive view of CBS, which receives 15 "buy" recommendations, 10 "hold" calls and no "sell" ratings, the median upside target, at $26.25, suggests a modest return during the next 12 months.

Yet, the stock is cheap on the basis of relative valuation, commanding a forward earnings multiple of 13, a book value multiple of 1.7, a sales multiple of 1.2 and a cash flow multiple of 9.6, 52%, 39%, 48% and 68% peer discounts. Its PEG ratio, calculated by dividing the trailing P/E by the terminal earnings growth forecast, of 0.5 signals a 50% discount to fair value.

The major upside for CBS, in Morgan Stanley's view, could result from international syndication, which is "a growth sector for the media industry, and CBS -- both from a content-quality perspective and as a potential earnings driver -- is most exposed."

The recent deal with Netflix, whose streaming subscriber base accounted for more than a third of its quarterly net-subscription additions, is a two-year non-exclusive licensing agreement, allowing Netflix to stream select shows from CBS's library, including currents like Medium and classics like Cheers.

The financial terms of the deal haven't been disclosed, but it is undoubtedly a lucrative move for both parties as much of the content covered, particularly hit classics, also encompassing Family Ties, Star Trek and The Andy Griffith Show, aren't getting playtime on-air, but are likely to attract viewers on the Web, benefitting both parties.

-- Written by Jake Lynch in Boston.

To see these stocks in action, visit the Morgan Stanley's Best Stock Ideas Portfolio on Stockpickr.


Become a fan of TheStreet on Facebook.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

More from Investing

Has Wall Street Completely Lost Its Mind on General Electric?

Has Wall Street Completely Lost Its Mind on General Electric?

3 Must Reads on the Market From TheStreet's Top Columnists

3 Must Reads on the Market From TheStreet's Top Columnists

Did Trump Just Torpedo the Stock Market Again?

Did Trump Just Torpedo the Stock Market Again?

Venture Capital Funding Surges 49% as Tech Innovation Piques Investor Interest

Venture Capital Funding Surges 49% as Tech Innovation Piques Investor Interest

10 Questions for PayPal Ahead of Its Big Investor Day

10 Questions for PayPal Ahead of Its Big Investor Day