We Are Upgrading This Portfolio Holding to a One Rating

* We are upgrading the shares of Morgan Stanley to a One rating.

* Morgan was a named financial advisor in Verizon’s deal to acquire Frontier Communications.

* Further improvement in M&A and IPO activity should drive Morgan’s investment banking business.

* The Fed’s rate-cutting cycle should help bring capital back into the market, also helping Morgan Stanley.

Thursday morning, Verizon VZ announced it would acquire Frontier Communications FYBR in an all-cash transaction valued at $20 billion. That’s roughly 3.35x expected 2025 revenue and 8.4x expected 2025 earnings before interest, tax, depreciation, and amortization (EBITDA).

Billed as a strategic move to expand Verizon’s fiber footprint, Verizon expects to recognize at least $500 million in run-rate cost synergies by year three after the deal's closing. While we have no dog in this transaction, reading the fine print provides a nice data point for TheStreet Pro Portfolio position Morgan Stanley MS.

Buried deep in the announcement by Verizon, it shared that it was advised by Centerview Partners LLC and Morgan Stanley. We think this is a very nice feather in the cap for Morgan’s investment banking business and bodes well for its investment banking revenue stream in H2 2024. The transaction should also shore up Morgan’s standing in the M&A league tables, where it had a strong position for the first half of 2024.

Deal making activity picked up in July, per data from FactSet, and KPMG’s midyear M&A pulse survey of 200 large corporate and private equity M&A decision-makers points to a ramp-up of activity in H2 2024. What we saw Thursday from Verizon supports that view and the growing IPO pipeline suggests that activity should continue to improve as well.

With a potential pickup in M&A and IPO activity along with the Fed’s eventual rate-cutting cycle likely putting a damper on high-yield savings accounts, it stands to reason that we will see some capital flowing into the market over the ensuing quarters. That should foster Morgan’s investment management business and could speed up the level of activity in the M&A and IPO markets too.

That combination along with the upside to our $120 price target and layers of support between $97-$99 is leading us to upgrade MS shares to a One rating. For now, we’ll keep our panic point at $84. Should we see the market pull MS shares toward the lower end of that $97-$99 range, that would be a compelling opportunity.

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At the time of publication, TheStreet Pro Portfolio was long MS.