The Razor’s Edge

2-Year Price History

Ockham’s Rating

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MS Revenue

As a value investing shop, we are interested in seeing how MS’s revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock’s current underlying value. Using this method, we have established a high range for Price to Sales of 0.67x and the low end of the range at 0.37x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for MS of 0.68x is well above its historical average. This means that MS looks relatively expensive compared to its historical Price to Sales average, and thus it is more difficult to believe that there is significant price appreciation potential. In order for the stock to become more attractive, we would like to see a decline in the Price to Sales ratio of 31% just to return MS to its historical average.

MS Cash Earnings

Cash Earnings is always one of the most important factors to review for a company and, more importantly, an investment in a stock. MS is significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from MS. For example, MS’s Cash Earnings ratio per share has fluctuated between 5.06 and 11.49 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where MS is with respect to prior business periods.

So with MS’s current price (latest close of $22.93) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, MS is 53% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn’t exist in a vacuum. So if the market doesn’t recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with MS.

MS Dividends

A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive Ockham rating. That being said, we don’t require dividend payments for company’s whose management has elected to forgo them entirely.

When reviewing dividend yields for MS, we compare the historic high and low levels over the past, which is similar to our evaluation of Sales and Cash Earnings per share. Paying a dividend is not necessary for any company, but changes in dividend often can lend clues as to the health of the business. A rising dividend is a strong sign for an established company, as it reflects management’s confidence in the company. MS’s estimated annual dividend is $1.08 resulting in a current dividend yield of 4.71%. The highest dividend yield from MS over recent history was 16.19% while the lowest dividend yield was 0.88%. It is never a good sign for a company to pay significantly lower dividends, in this case 44.82% below the median yield. Although, dividends are a relatively small portion of our analysis framework, we still see this as a negative factor.