Transcript Financials David Kaplan, Nikhil Ketkar, Jonathan Khoury, Steve Kuljko Agenda • • • • • Sector Analysis Economic Analysis Financial Analysis Valuation Recommendations.

Financials
David Kaplan, Nikhil Ketkar,
Jonathan Khoury, Steve Kuljko
Agenda
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Sector Analysis
Economic Analysis
Financial Analysis
Valuation
Recommendations
SIM v. S&P 500 Weightings
Sector
S&P 500 Weight
SIM Weight
+/-
10.11%
9.53%
-0.58%
Consumer Staples
11.26
11.77
0.51
Energy
10.88
10.10
-0.78
Financials
16.50
11.93
-4.57
Health Care
12.15
15.27
3.11
Industrials
10.50
13.03
2.53
Information Technology
18.87
19.87
1.00
Materials
3.48
1.80
-1.67
Telecommunications
2.81
3.62
0.82
Utilities
3.44
1.88
-1.57
Consumer Discretionary
Returns by sector (as of 3/31/2010)
Comparison of Returns - as of April 26, 2010
Time period
S&P 500
Financial Sector
2 weeks
-0.31%
-2.62%
1 month
2.06
0.77
3 months
8.49
10.72
6 months
11.97
11.17
Sector Composition
Market Cap – 6.8 T
• SIM Holdings
• Key Industries
 Goldman Sachs Group (GS)
4.97%
 Hudson City Bancorp (HCBK)
2.50%
 JP Morgan Chase (JPM)
1.74%
 Progressive Corp (PGR)
2.73%
 Life Insurance – 2,199B
 Money Center Banks – 1,014B
 Foreign Money Center Banks –
753B
 Closed-End Fund Equity –
586B
 Prop & Casualty Ins – 440B
 Foreign Regional Banks – 284B
Sector Analysis
• The sector is extremely cyclical
• Sector beta: 1.7
• In the mature phase of the life
cycle
• External drivers:
– Financial Regulation
– Interest Rates
– Housing starts
Industry Analysis
Product Segmentation
Industry Breakdown
Ease of Entry
Percent
1. Diversified Financial Services
28.30%
2. Insurance
22.70%
3. Commercial Banks
19.80%
4. Capital Markets
16.40%
5. Real Estate Investment Trusts (REITs)
7.50%
6. Consumer Finance
4.70%
7. Thrifts & Mortgage Finance
0.40%
8. Real Estate Management & Development
0.20%
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Company
Market
Cap (in
Billions)
Goldman Sachs
$82.80
J.P. Morgan
$178.50
Hudson City
$7.20
Not an easy industry to enter
Large companies with years of experience
Learning curve
Intellectual property; e.g. Financial Models,
Research Documents etc
Economic Analysis
2-Year Treasury vs. Financials
R= .67
• 10 Year Treasury Yield Vs.
Financials
R= .54
Economic Analysis
Employment
R= .82
Consumer Spending
R= .73
Competition
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High level of interdependence
– Swaps, Derivatives, Futures
– Repurchase, Reverse
Repurchase
– E.g.- Lehman Brothers
collapse
Economic Analysis- Multiple
regression
Multiple
Summary
R
0.9184
0.8435
Coefficient Standard
Regression Table
R= .83
R-Square
Adjusted
StErr of
R-Square
Estimate
0.8375
37.881306
1
t-Value
p-Value
Error
Confidence Interval
95%
Lower
Constant
247.29848 12.322808
67
18
20.0684
Federal Funds Rate
14.247159 6.8247714
75
66
Case Schiller
Upper
< 0.0001
222.86189 271.73507
56
77
2.0876
0.0393
0.7133818 27.780937
25
68
2.1043657 0.3881713
85
89
5.4212
< 0.0001
1.3346073 2.8741242
53
17
Business Spending- Real
Capital Spending
3.7337790 0.5987534
24
12
6.2359
< 0.0001
2.5464285 4.9211295
4
08
2 year Treasury Rate
19.582109 9.0145009
32
55
2.1723
0.0321
1.7060156 37.458202
41
99
Financial Analysis
Net Income Vs. S&P 500
ROE Vs. S&P 500
Key Indicators
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Revenues
– 30% from the high in ‘07
– Negative in terms of growth for the past 5 years
– 50% increase over the past 10 years
EPS growth
– Large amount of volatility
– Increased exponentially in 2009-2010
– Expected reversion to mean by 2011
Net profit margins:
– Winners: Foreign closed end funds, diversified investments, healthcare and industrial
REITS
– Losers: Investment brokerage, banks, hotel REITS
Net profit margins decreasing since 1994, now at par with the S&P
ROE had been at par with the S&P now trading at discount
Margins are increasing
Net Income Chart- by Industry
Largest Companies by market
Capitalization
company
Bank of America
JPMorgan Chase
Wells Fargo
Goldman
Citigroup
US Bancorp
AMEX
Morgan Stanley
Bank of New York Mellon
MetLife
Average
weight 05-'09 operating margin chg
earnings past 12 months year est EPS difference
10.27%
-10%
0.67
1.03
-1.7
10.20%
-3%
3.01
3.27
-6.28
9.25%
24%
2.5
1.94
-4.44
5.15%
2%
24.75
19.46
-44.21
4.56%
-14%
-0.71
0.25
0.46
2.84%
-7%
1.33
1.59
-2.92
2.83%
-3%
0.71
2.77
-3.48
2.35%
-5%
0.7
2.99
-3.69
2.14%
-13%
2.39
2.3
-4.69
2.04%
-5%
2.9
4.24
-7.14
51.63%
-3%
3.825
3.984
-7.809
Financial Sector Valuation
•Price to Book lower than 22 yr median
• P/S and P/ Trailing E currently near
record lows
• Price to Forward E remains elevated
Technical Analysis: Historical Data
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Levels of support and resistance evident
Sharp uptick in valuation compared to Bollinger Bands
Trading above 50/200 day averages
7
6
5
4
3
2
1
0
Industry Price to Cash Flow vs. S&P
500
8
7
6
5
4
3
2
1
0
High
High
High
High
High
High
Low
Low
Low
Low
Low
Low
Median
Median
Median
Median
Median
Median
Current
Current
Current
Current
Current
500
30
High
High
High
High
High
High
Low
Low
Low
Low
Low
Low
Median
Median
Median
Median
Median
Median
Current
Current
Current
Current
Current
High
High
High
High
High
High
Low
Low
Low
Low
Low
Low
Median
Median
Median
Median
Median
Median
Current
Current
Current
Current
Current
High
High
High
High
High
High
Low
Low
Low
Low
Low
Low
Median
Median
Median
Median
Median
Median
Current
Current
Current
Current
Current
Variation
Across
Industries
Industry Price to Book Value vs. S&P
Industry P / Forward E vs. S&P 500
25
20
15
10
5
0
25
Industry P / Trailing E vs. S&P 500
20
15
10
5
0
Variation Across Companies
Charles Schwab (SCHW)
Morgan Stanley (MS)
Goldman Sachs (GS)
Recommendations
• We are overweight in Financials, sell Financials
and invest in something more reliable
• Technical Analysis suggests we are overvalued
• What happens when interest rates increase?
• Political Reform will affect the financial sector
negatively, so let’s be prepared