March 11 (Reuters) - Goldman Sachs upgraded Morgan Stanley (MS.N) to "buy," saying the company was well positioned to outperform peers, and downgraded American Express Co (AXP.N) to "sell" on continued earnings challenges, while recommending the two as a conviction-list pair trade.
Shares of Morgan Stanley rose as much as 14 percent in early morning trade Wednesday, while those of American Express fell 8 percent.
"Capital market activity is a relative bright spot in conversations, while consumer credit appears to be deteriorating by the day," analysts, including Richard Ramsden, wrote in a note to clients.
Goldman analysts also upgraded U.S. Bancorp (USB.N) to "neutral" from "sell" as they expect the bank's recent dividend cut to quickly rebuild its tangible common equity ratio -- which measures a bank's financial strength. [ID:nWNAB2839]
Analysts also raised their 2009 and 2010 profit estimates for Morgan Stanley, and said their first-quarter earnings estimate of 40 cents a share assumes $2.3 billion in write-downs for the company based on the performance of credit indices since the start of December last year.
Goldman analysts, who previously rated Morgan Stanley stock "neutral," said the company is well positioned to outperform peers due to its high capital position, reasonable valuation levels and leverage to improve in capital markets.
American Express, however, faces continued earnings headwinds which may force the company to break even in 2009, excluding settlement payments from Visa Inc (V.N) and Mastercard Inc (MA.N), the analysts said. Still, American Express has a stronger capital position than an average bank on any metric and the risk of a dilutive capital raise was hard to see for now, they added.
Goldman analysts said they maintained their cautious view on U.S. banks as credit deterioration accelerates and government intervention hits valuations.
Shares of American Express were down 23 cents at $11.94 while those of Morgan Stanley were up $2.27 at $23.11 in morning trade on the New York Stock Exchange. US Bancorp shares were up more than 11 percent at $12.69. (Reporting by Tenzin Pema in Bangalore; Editing by Deepak Kannan)