May 15 (Bloomberg) -- Michael Mayo, an analyst at CLSA Ltd., raised his share-price estimate on Morgan Stanley to $36 after Chief Executive Officer James Gorman said the firm may reach his profitability target next year.
Morgan Stanley shares can rally almost 50 percent, Mayo said yesterday in a note to investors, raising the price estimate from $30. Reaching Gorman’s target of 10 percent return on equity implies earnings per share of $3 for 2014, higher than the average estimate of $2.50, Mayo wrote.
Gorman, 54, laid out a plan in January to double return on equity, a measure of how well the New York-based firm reinvests earnings, from 5 percent in 2012, without assigning a date to the goal. He said at yesterday’s annual shareholder meeting, in response to a question from Mayo, that the target can be reached next year if regulators allow Morgan Stanley to return “reasonable” amounts of capital to shareholders through buybacks and dividends.
“The new explicit time frame for consolidated ROE allows investors to keep the pressure on,” Mayo wrote. Gorman and Morgan Stanley board members Robert Kidder and Erskine Bowles “were on the same page about the importance of ROE” at the meeting, Mayo said.
Mayo raised his Morgan Stanley rating on July 19 to outperform, after having it at underperform for at least three years, according to data compiled by Bloomberg. He upgraded the firm to buy in September and maintained that rating yesterday.
The shares, which climbed 2.5 percent to $24.27 yesterday in New York, have advanced 83 percent since July 19.
Gorman’s plan to boost ROE involves cutting $1.6 billion of costs in the next two years, reducing capital used by the firm’s fixed-income trading business and boosting the pretax margin at the wealth-management division.
“We’re now in a position where we have excess capital; however, returning that to shareholders is dependent upon our regulators granting that desire to return it,” Gorman said yesterday. “But we expect, with reasonable capital returns, that we will deliver those goals in 2014. That’s been our expectation.”
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