Morgan Stanley ModelWare's Approach to Intrinsic Value: Focusing on Risk-Reward Trade-offs

Trevor Harris and his colleagues at Morgan Stanley have developed ModelWare, which attempts to assess the intrinsic value of enterprises. In this part, they begin with adjustments to reported accounting data, attempting to move accounting metrics closer to economic reality for each company. They then apply the basic concepts of the discounted cash flow approach described in Part I, such as the tradeoff between risk and reward, and consider the components of return on equity, including operating margins, asset turnover, and financial leverage. Their discussion provides an extremely useful review of the state of model building among professional investors.