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On Monday, Morgan Stanley (NYSE:MS) downgraded ASX Limited (ASX:AU) (OTC: ASXFY) stock from Equalweight to Underweight, adjusting the price target to AUD55.05 from the previous AUD58.00. Currently trading at a P/E ratio of 26.17x with a dividend yield of 3.36%, the stock has shown resilience with a 26-year track record of consistent dividend payments. The decision reflects the firm's analysis that ASX Limited's stock does not offer a compelling investment case when compared to others in its coverage. Stifel analysts highlight that with the stock trading at 25 times the forecasted FY26 earnings per share (EPS) and only showing low-single-digit EPS growth, it falls short of the performance seen by its financial market peers.
ASX Limited's future revenue growth in the futures market is expected to moderate, and the recovery of domestic capital markets is anticipated to be slower than that of the United States. While the company achieved impressive revenue growth of 12.57% in the last twelve months, InvestingPro data indicates analysts anticipate a sales decline in the current year. Additionally, the company is facing persistent cost pressures. Despite a stabilizing earnings outlook for ASX, Morgan Stanley's projected 3% compound annual growth rate (CAGR) in EPS from FY24 to FY27 does not justify the stock's current valuation, especially when compared to the earnings growth and trading multiples of other financial stocks covered by the firm.
Comparatively, ASX's capital market peers, Computershare (CPU) and Macquarie Group (OTC:MQBKY) (MQG), are on a trajectory for mid- to high-single-digit EPS growth or better. Furthermore, the entirety of Morgan Stanley's general insurer coverage, which includes five stocks, is on course for double-digit earnings growth in FY25E while trading at price-to-earnings (P/E) ratios below 20 times. Additionally, the wealth and asset managers within their coverage are similarly positioned in terms of earnings growth versus trading multiples.
The downgrade and price target adjustment reflect Morgan Stanley's assessment of ASX Limited's financial prospects and market position relative to its industry counterparts. The firm's analysts have taken into account various factors, including earnings growth potential, market recovery rates, and cost challenges, in making their recommendation. According to InvestingPro analysis, the stock appears slightly undervalued based on its Fair Value calculations, with additional ProTips available for subscribers. Investors seeking deeper insights into ASX Limited's valuation metrics and growth prospects can explore more detailed analysis on InvestingPro's undervalued stocks watchlist.
In other recent news, ASX Limited has seen its stock price target upgraded by UBS, despite maintaining a Sell rating on the shares. This revision comes in light of the firm's updated plans for its CHESS replacement project, a system designed to provide cash equity settlement and sub-registry services by the fiscal year 2029. The second release of this project is expected to cost ASX Limited approximately AUD420 million, following a significant AUD250 million write-down of its initial solution in 2023.
The first release of the project, focused on cash equity clearing, is slated for the fiscal year 2026. ASX Limited's capital expenditure is projected to remain high until the fiscal year 2028, with depreciation and amortization costs set to nearly triple by the fiscal year 2029. This financial trajectory suggests a compound annual growth rate (CAGR) for ASX's earnings per share (EPS) of around 4% from the fiscal year 2025 to 2029, based on UBS estimates.
These recent developments, including the forthcoming investments in the CHESS replacement solution and the subsequent financial projections, have contributed to UBS's decision to retain its Sell rating for ASX Limited. The expected high costs and the impact on the company's earnings growth are seen as factors that could limit the potential upside in the value of ASX Limited's shares.
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