Transcript S & P 500 Financials Sector Stock Recommendations 8/11/2009 Jerod Tilton Jon Verworn Zachary Wang.

S & P 500 Financials Sector
Stock Recommendations
8/11/2009
Jerod Tilton
Jon Verworn
Zachary Wang
Agenda
•
•
•
•
•
•
•
•
Recap of Sector Presentation
Current Valuation
JPMorgan Chase (JPM)
Hudson City Bankcorp (HCBK)
Wells Fargo (WFC)
Visa (V)
Recommendation Recap
Questions
S & P 500 Financials Sector Stock Recommendations
8/11/2009
2
Sector Recap – As Presented (7/14/09)
S&P 500 Sector Weighting
• Financial Sector
Underweight
Relative to S&P 500
by 4.4%
Rank
1
2
3
4
5
6
7
8
9
10
– 4.0% excl cash
Market
Percentag
Capitalization
e of SIM
Name
Billions
Percentage Shares
Information Technology
1,463
18.43%
28.69%
Health Care
1,116
14.06%
9.52%
Financials
1,088
13.70%
9.33%
Consumer Staples
978
12.32%
6.87%
Energy
956
12.05%
6.38%
Industrials
778
9.79%
14.93%
Consumer Discretionary
712
8.97%
9.27%
Utilities
325
4.10%
2.29%
Telecommunications Services
269
3.39%
2.86%
Materials
254
3.20%
9.86%
S&P 500
7,939
SIM Weight
S & P 500 Weight
Telecommunication
Services
3.4%
Materials
3.2%
Utilities
Consumer
4.1% Cash Discretionary
9.0%
0.0%
Information
Technology
18.4%
Industrials
9.8%
Consumer Staples
12.3%
Consumer
Discretionary
7.5%
Consumer Staples
12.4%
Energy
10.7%
Industrials
Health Care
11.6%
13.6%
Financials
13.7%
S & P 500 Financials Sector Stock Recommendations
Utilities Cash
3.9% 3.5%
Information
Technology
20.2%
Energy
12.0%
Health Care
14.1%
Telecommunication
Services
3.3%
Materials
4.1%
Financials
9.3%
8/11/2009
3
Sector Recap – Current (7/31/09)
• Financial Sector
Underweight
Relative to S&P 500
by 4.93%
– 4.61% excl cash
&dividends
• SIM portfolio not
performing up to
S&P 500
S&P 500 Sector Weighting
Prior
Rank
(7/14/09)
1
3
2
5
4
6
7
8
10
9
Market
Capitalizati
New Rank
on Billions
(8/7/09) Name
(7/14/09)
1
Information Technology
1,463
2
Financials
1,088
3
Health Care
1,116
4
Energy
956
5
Consumer Staples
978
6
Industrials
778
7
Consumer Discretionary
712
8
Utilities
325
9
Materials
254
10
Telecommunications Services
269
S&P 500
7,939
S & P 500 Weight
Telecommunication
Services
3.4%
Materials
3.4%
Utilities Cash
3.9% 0.0% 0.0%
Utilities
3.6%
Consumer
Discretionary
9.1%
Consumer Staples
11.8%
Information
Technology
18.7%
%
18.38%
15.17%
13.27%
11.76%
11.39%
10.22%
9.32%
3.83%
3.45%
3.23%
%
Percenta
Diff
ge of SIM
(7/14 - 8/7) Shares
-0.05% 28.69%
1.46%
9.33%
-0.80%
9.52%
-0.29%
6.38%
-0.93%
6.87%
0.43% 14.93%
0.35%
9.27%
-0.27%
2.29%
0.25%
9.86%
-0.16%
2.86%
SIM Weight
Telecommunicatio
n Services
3.4% Materials
Cash
3.4%
Consumer
Discretionary
7.2%
0.1%
Consumer Staples
11.7%
5.0%
Energy
10.7%
Industrials Health Care
12.4%
13.3%
Financials
13.9%
Financials
8.9%
Health Care
13.7%
S & P 500 Financials Sector Stock Recommendations
%
18.72%
13.86%
13.73%
12.04%
11.81%
9.98%
9.11%
3.94%
3.40%
3.41%
Market
Capitaliz
ation
Billions
(8/7/09)
1,632
1,347
1,178
1,044
1,012
908
828
340
306
287
8,883
Information
Technology
20.4%
Energy
12.0%
Industrials
10.0%
%
18.43%
13.70%
14.06%
12.05%
12.32%
9.79%
8.97%
4.10%
3.20%
3.39%
Market
Capitaliz
ation
Billions
(7/31/09)
1,621
1,200
1,189
1,043
1,023
864
789
341
294
295
8,660
8/11/2009
4
Potential Causes for Downside
• More Bank Failures
• Deeper Recession
– e.g. Double-dip Recession
•
•
•
•
•
•
Low Investor Confidence
Federal Funds Rate Increase
Increased Regulation
Credit Card Defaults Due to unemployment
Lack of Dividends
Toxic Assets
S & P 500 Financials Sector Stock Recommendations
8/11/2009
5
Potential Causes for Upsides
• Systemic recovery—high beta
• Less competition for those left = more market
share
• Potential privatization of Social Security
savings
• Increased savings trends
• Purging of toxic assets
S & P 500 Financials Sector Stock Recommendations
8/11/2009
6
Sector Recommendation
• Keep financials services underweight
• In the short term, returns will poor. Financial services will not out perform
the market, however, once the credit crisis and other issues are resolved,
then returns will increase
• Currently risk outweighs reward. We feel that a systemic rebound can be
experienced in other sectors without as much risk.
• We are bullish long term, however for the short term, we are bearish.
We recommend leaving the financial services at 440 basis points
underweight
S & P 500 Financials Sector Stock Recommendations
8/11/2009
7
Current Valuation
• Current upside for stocks
Financial Sector Current Portfolio and Stocks Under Consideration (7/31/09)
Name
Berkshire Hathaway Inc. - CL A
Goldman Sachs Group Inc.
Hudson City Bancorp
JP Morgan Chase & Co.
Wells Fargo
Visa
SIM Financial Number of
Symbol SIM Weighing Sector Weighing Shares
BRK/A
2.247%
25.147%
4
GS
0.945%
10.584%
1,000
HCBK
2.255%
25.242%
27,700
JPM
1.334%
14.930%
5,960
WFC
2.153%
24.097%
15,200
V
0.000%
0.000%
8.933%
100.000%
Unit Cost
109,449.23
146.01
11.63
35.15
31.36
109,673.38
Price
(7/31/09)
97,000.00
163.30
14.06
38.65
24.46
65.46
97,305.93
Current Price
(8/7/09)
108,099.99
163.65
14.50
42.36
28.76
69.17
108,418.43
Target Price
130,000.00
170.00
16.18
47.84
26.14
88.00
130,348.16
Price Upside
%
(Current vs
Target)
20.26%
3.88%
11.59%
12.94%
-9.11%
27.22%
7.90% *
*8/7 vs Target based on Cap
S & P 500 Financials Sector Stock Recommendations
8/11/2009
8
Stock Performance
• Two year stock performance of the SIM
financial stocks in addition to Visa (Black) and
the S&P 500 Financial Sector Index (Purple)
S & P 500 Financials Sector Stock Recommendations
8/11/2009
9
JPM Info
• Pro’s
– Jamie Dimon can do no wrong on Wall Street
– Washington Mutual conversion complete by EOY
– Repaid TARP funds
– New organic growth opportunities
• Con’s
– Jamie Dimon can do no wrong on Wall Street
– Total insured Share 9.2%
• Growth by acquisition limited
– Decreases dividend from $0.35 to $0.05
S & P 500 Financials Sector Stock Recommendations
8/11/2009
10
JPM Data
• Has outperformed the S&P 500 financial
sector for almost the last two years
• Peak in late 2008 due to WaMu aquisition
S & P 500 Financials Sector Stock Recommendations
8/11/2009
11
JPM Data Cont’d
• JPM Price is passing two year median.
– Is it close to maxing out?
JPM Price History
60
50
Price
40
30
Price
2 Year Median Price
20
10
0
08/13/2007
08/13/2008
S & P 500 Financials Sector Stock Recommendations
8/11/2009
12
JPM Valuation
• Using combination of DCF & Valuation
Model Target Price of $47.84
• 9 out of 10 analysts assign inline rating or
better (yahoo.com)
Absolute Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
23.4
3
1.8
7.45
29.4
9.6
1.2
0.6
2.16
7.5
Median
Current
12.2
19
2.3
2
1.3
1.2
4.08
7.45
9.4
29.4
*Not included in average
S & P 500 Financials Sector Stock Recommendations
8/11/2009
#Your
Target
*Your Target E, Your Target
Multiple S, B, etc/Share Price (F x G)
15.00
3.57
53.55
2.30
1.46
3.35 *
1.30
35.30
45.89
6.50
5.69
36.96
22.00
1.44
31.70
Average
42.02
DCF
53.66
Target Price
47.84
13
HCBK Info
• Pro’s
– Did not take TARP
– Did not show price swing during week of 8/3/09
– Increased dividend from $0.14 to $0.15
• Con’s
– In 22 counties, only top five in eight, ranked first in
only one
– Only beat earnings estimates by $0.01
– 7.69% Tier 1 Capital Rating
• WFC 9.8%; JPM 9.7%
S & P 500 Financials Sector Stock Recommendations
8/11/2009
14
HCBK Data
• Has outperformed the S&P 500 financial
sector for almost the last two years
– Has growth maxed out?
S & P 500 Financials Sector Stock Recommendations
8/11/2009
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HCBK Data Cont’d
• Near Two Year Median Price
– May be more growth potential
HCBK Price History
25
Price
20
15
Price
10
2 Year Median Price
5
0
08/13/2007
S & P 500 Financials Sector Stock Recommendations
08/13/2008
8/11/2009
16
HCBK Valuation
• Using combination of DCF & Valuation Model
Target Price of $16.18
• Thompson Mean Price Target $14.67
(yahoo.com)
• Concensous Hold
– Thompson Reuters
#Your
Target
*Your Target E, Your Target
Absolute Valuation High
Low
Median Current Demoninator Multiple S, B, etc/Share Price (F x G)
P/Forward E
27.9
9.8
21.7
13.2
12.95
17.00
1.12
19.04
P/S
15.8
6.3
13.2
6.7
7.53
10.00
1.93
19.27
P/B
5.7
1.1
1.7
1.5
1.50
1.60
9.67
15.47
P/EBITDA
14.24
2.86
8.37
3.4
3.40
5.00
4.26
21.32
P/CF
29.9
10.9
25.5
13.4
13.40
17.00
1.08
18.40
Average
18.70
DCF
Target Price
S & P 500 Financials Sector Stock Recommendations
8/11/2009
13.67
16.18
17
WFC Info
• Pro’s
– Continuous restructuring could help nullify some
of Wachovia’s toxic assets
• Con’s
– Total insured Share 9.6%
• Growth by Acquisition Limited
– Assets are heavily exposed to Wachovia’s toxic
assets
– Current price has surpassed the target price
S & P 500 Financials Sector Stock Recommendations
8/11/2009
18
WFC Data
• Has outperformed the financial sector in the last two years
• Spike in 2008 due to acquisition of Wachovia
– However, toxic assets has declined performance
– Recent increase due to restructuring
 Wells Fargo Securities
S & P 500 Financials Sector Stock Recommendations
8/11/2009
19
WFC Data Cont’d
• Based on the price history, Wells Fargo is
getting close to the 2 year median.
WFC Price History
45
40
35
Price
30
25
Price
20
2 Year Median Price
15
10
5
0
08/13/2007
08/13/2008
S & P 500 Financials Sector Stock Recommendations
8/11/2009
20
WFC Valuation
• Equally weighing the DCF and the Valuation Model
suggests a target price of $26.14
• Current Price of $28.76 (8/7/09) has already
surpassed target price
- Potential downside of 9.11% to reach target
*Your Target
Absolute
#Your Target E, S, B,
Your Target
Valuation
High
Low
Median
Current
Multiple
etc/Share
Price (F x G)
A.
B.
C.
D.
E.
F.
G.
H.
P/Forward E
18.8
9.3
13.1
17.3
14.50
1.60
23.20
P/S
3.6
0.9
3.3
3.1
3.00
4.72
14.17
P/B
3.1
0.8
2.6
1.8
2.35
15.98
37.55
P/EBITDA
6.71
2.23
5.75
6.44
6.00
4.47
26.80
P/CF
14.3
5.1
10
11.8
10.00
2.44
24.37
Average
25.22
S & P 500 Financials Sector Stock Recommendations
8/11/2009
DCF
27.06
Target Price
26.14
21
V Info
• U.S. market share ranked by transaction
processor, based on credit card receivables
outstanding:
1. Visa -- 46 percent
2. MasterCard -- 36 percent
3. American Express -- 12 percent
4. Discover Card -- 6 percent
(Source: Nilson Report, May 2008)
S & P 500 Financials Sector Stock Recommendations
8/11/2009
22
V Info Cont’d
• 2008 worldwide purchase volume by card
type
Visa credit - 31.7 percent
Visa debit - 28.6 percent
MC credit - 22.0 percent
Amex credit - 10.0 percent
MC debit - 6.3 percent
JCB credit - 0.9 percent
Diners credit 0.4 percent
(Source: Nilson Report, May 2009)
S & P 500 Financials Sector Stock Recommendations
8/11/2009
23
V Info Cont’d
• 2008 global market share for general purpose
credit cards
(Ranked in terms of purchase volume)
Visa - 60.25 percent
MasterCard - 28.33 percent
American.Express - 10.04 percent
JCB - 0.94 percent
Diners Club - 0.44 percent
(Source: Nilson Report, May 2009)
S & P 500 Financials Sector Stock Recommendations
8/11/2009
24
V Info Cont’d
• U.S. Visa cardholders alone conduct more than $1 trillion in annual
volume. (Source: Visa USA internal statistics, 4th quarter 2006)
• Consumers carry more than 1 billion Visa cards worldwide. More than 450
million of those cards are in the United States. (Source: Visa USA internal
statistics, 4th quarter 2006)
• There were 984 million bank-issued Visa and MasterCard credit card and
debit card accounts in the U.S in 2006. (Sources: Visa USA, MasterCard
International)
• In 2008, 72 percent of consumers indicated they used a debit card in the
past year. In 2007, that number was 65 percent. (Source: Javelin, "Credit
Card Spending Declines" study, March 2009)
• 74 percent of monthly college spending is with cash and debit cards. Only
7 percent is with credit cards. (Source: Student Monitor annual financial
services study, 2008
S & P 500 Financials Sector Stock Recommendations
8/11/2009
25
V Info Con’t
• More than 23 billion credit cards transactions were processed in the
United States in 2007, and they are projected to grow by 26 percent over
the next five years. (Source: Nilson Report) Visa says rewards cards now
make up more than half of all credit cards and about 80 percent of money
spent on a credit card. (Source: Aite Group, January 2008)
• Consumers say rewards are the second-most important reason for
choosing to apply for a specific card, behind no annual fees and ahead of
low interest rates. (Source: Aite Group survey, January 2008)
• More than one third of consumers choose which card to use in order to
maximize card rewards. (Source: ComScore, September 2008)
S & P 500 Financials Sector Stock Recommendations
8/11/2009
26
MA Growth Since IPO
V Data
• Outperformed
Mastercard (MA),
American Express
(AXP), and Discover
(DFS)
S & P 500 Financials Sector Stock Recommendations
8/11/2009
28
V Data Cont’d
• Outperformed S & P 500
S & P 500 Financials Sector Stock Recommendations
8/11/2009
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V Data Con’t
• Above price median since IPO March 2008
V Price History
100.0000
90.0000
80.0000
Price
70.0000
60.0000
50.0000
Price
40.0000
2 Year Median Price
30.0000
20.0000
10.0000
0.0000
03/19/2008
S & P 500 Financials Sector Stock Recommendations
8/11/2009
30
V Quantitative
• At a conservative P/E Ratio of 20, expect
average annual return of 9%
VISA INCOME STMNT
2004
2005
2006
2007
2008 1Q 2009
Revs
exp
2429
1999
2665
2212
2948
2218
5193
6309
6263
5031
1739
773
1647
766
430
-75
210
453
3
360
730
-8
455
-1116
108
-861
1232
104
804
966
-13
574
881
6
536
9.72%
10.62%
76.15%
20.60%
18.00%
17.00%
25.00%
-21.00%
20.00%
55.55%
53.49%
49.94%
51.52%
0.27
9.72
6.75
5.40
0.46
16.66
11.57
9.25
0.58
21.05
14.62
11.70
-1.11
-39.84
-27.67
-22.13
1.03
37.20
25.84
20.67
0.74
26.56
18.44
14.76
0.69
24.80
17.22
13.78
0.93
33.55
23.30
18.64
0.77
27.76
19.28
15.42
Op Inc
Other
Net
Rev Gr %
Op Inc Gr%
Op Inc %
EPS
if P/E 36
if P/E 25
if P/E20
Shares Out
2Q 2009
3Q 2009
4Q 2009E 2009E
2010
2011
2012
1646
824
1650
800
6682
3163
7217
3258
7794
3356
8417
3456
822
475
725
850
10
600
3519
3959
4438
4961
2435
2739
3071
3433
6.69%
52.66%
8%
12.49%
54.86%
8%
12.11%
56.95%
8%
11.78%
58.94%
Avg Ann Ret
3.13
112.67
78.25
62.60
3.52
126.75
88.02
70.42
3.95
142.11
98.69
78.95
4.41
158.85
110.31
88.25
42%
19%
9%
778
S & P 500 Financials Sector Stock Recommendations
8/11/2009
31
Recommendation
• Swap Wells Fargo for Visa
• Equal Weight JPM & HCBK
Financial Sector Current Portfolio and Stocks Under Consideration (7/31/09)
Name
Berkshire Hathaway Inc. - CL A
Goldman Sachs Group Inc.
Hudson City Bancorp
JP Morgan Chase & Co.
Wells Fargo
Visa
Symbol
BRK/A
GS
HCBK
JPM
WFC
V
SIM Weighing
7/31/09*
2.247%
0.945%
2.255%
1.334%
2.153%
0.000%
8.933%
Proposed
SIM Weighig SIM Weighing
8/11/09*
Difference
2.247%
0.000%
0.945%
0.000%
1.794%
-0.461%
1.794%
0.461%
0.000%
-2.153%
2.153%
2.153%
8.933%
0.000%
SIM
Financial
Sector
Weighing Number of
Price
New
Shares
(7/31/09)
25.147%
4 97,000.00
10.584%
1,091
163.30
20.086%
23,373
14.06
20.086%
8,001
38.65
0.000%
24.46
24.097%
5,878
65.46
100.000%
97,305.93
Current Price
(8/7/09)
108,099.99
163.65
14.50
42.36
28.76
69.17
108,418.43
Target Price
130,000.00
170.00
16.18
47.84
26.14
88.00
Price Upside %
20.26%
3.88%
11.59%
12.94%
-9.11%
27.22%
130,348.16
16.99% **
*Assumes keeping the weighting at the 7/31/09 level
**8/7 vs Target based on Cap
S & P 500 Financials Sector Stock Recommendations
8/11/2009
32
Financial Sector
Questions??
S & P 500 Financials Sector Stock Recommendations
8/11/2009
33