The Motley Fool

Morgan Stanley says AMP Limited (ASX:AMP) is a Buy

With all the bad news facing AMP Limited (ASX: AMP), it would seem to be a no brainer to steer clear of the wealth management group right now.

After all there’s been the fallout from the Royal Commission, board and executive changes, two class action lawsuits and the threat of more profit downgrades from the company.

All these negative factors pushed AMP to a fresh-year low of $3.73 a day after the group’s annual general meeting on May 10.

But some market watchers are saying now is good time to take a fresh look at the stock, saying concerns have been overplayed.

Broker Morgan Stanley is of this view. It says AMP offers deep value, with the stock trading at levels not seen since 2002/2003. The broker also says that market fears of a mass client and planner exodus alongside a dramatic fee squeeze seem overdone.

“In our view, investors cannot ignore the opportunity presented and now is the time to build a position. We have for a long time believed that the inherent value in AMP is not recognised by the market and we have highlighted tail risks of AMP becoming a value trap. These tail risks reflected potential adverse outcomes arising from the lack of Board cohesion, potential Chair and CEO fallout, challenges to executing on unlocking value in the existing structure and potential regulatory risks undermining its reputation in financial advice,” it said in a report.

“Fair to say, in quick succession all these risks have come home to roost. In the >15 years we have been analysing AMP, this is unprecedented.”

Morgan Stanley adds that the circa 30% fall in AMP’s share price since the resignation of Chief Executive Officer (CEO), Craig Meller, on March 26 implies around a 75% in wealth earnings, but notes that its wealth divisions remain largely unaffected.

According to Reuters estimates, AMP is also looking pretty cheap at current levels. It is trading on a P/E of 13.5 times, compared to Perpetual Limited (ASX: PPT) on 13.7 times and Magellan Financial Group Ltd (ASX: MFG) on 25.4 times. The sector P/E is 19.6 times.

Morgan Stanley concedes, however that AMP Limited is not without risks, with a client exodus, regulatory intervention on grandfathered products and a prolonged CEO transition some of the factors that could present negative surprises.

The broker cut its target price to $4.50 from $5.75 due to earnings downgrades to its base case scenario, a re-working of its bull and bear cases and an increase in cost of equity to 11.5% (from 10.5%) to reflect heightened business risks.

Top 3 ASX Blue Chips To Buy In 2018

But knowing which blue chips to buy, and when, can be fraught with danger.

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of The Motley Fool’s Top 3 Blue Chip Stocks for 2018.

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

Click here to claim your free report.

Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.