FINANCIAL SECTORS
STOCK PRESENTATION
SUMMER 2015
Graham Tucker
Rita Xu
Table of Content:
I.  Overview
II.  Wells Fargo
III.  KeyCorp
IV.  Citigroup
V.  SunTrust
VI. American Express
VII. Conclusion
1
OVERVIEW
Recap of Sector Recommendation
KEYS:
SIM: 16.6%
S&P Financials:16.7%
•  Overweight 40 percent basis points to capture returns
•  Rising interest rate in September
•  Hedge against possible regulatory risk
OSU SIM FUND VS. S&P 500
Market Cycle
Market Cycle Out of Synchronization
•  QE kept interest rates ar-ficially low, while increased regulatory requirements leading to a decrease in net income margin. •  Monetary policy is in direct conflict with regulatory requirements/fiscal policy with financial ins-tu-ons in the middle. •  Target infla-on s-ll below op-mal levels, QE offsets natural demand-­‐pull infla-on, decrease in oil offsets cost-­‐push infla-on for elas-c goods. Federal Reserve Ink Blot
(Source: FOMC mee-ng, 06/17/15) •  FOMC revisi-ng slow interest rate step-­‐up on a mee-ng-­‐to-­‐mee-ng basis. •  Treasury futures/fed funds futures markets imply step up in November/December. 2
Wells Fargo
Company Overview
Market'Por*olio'(6/30/2015)
!52$Week!Range!
46.44$58.26
Price/Earning!(7m)!
13.75
Price/Booking
1.74
EPS!
4.09
Beta!
0.83
Dividend!Yield!
2.49%
ROE!(7m)!
13.1%
ROA!(7m)!
1.4%
Market!Cap.!
289.59B
Shares!outstanding!
5.15B
Total!Assets!
1.7T
Employees!
266,000
•  Largest market share 9.8% •  Diversified Financial Services •  Cross-­‐selling strategy and focuses on customer-­‐centric. •  Upcoming rising interest rates will improve the economic condi-on. •  Rela-vely low P/E, but keep growing revenue and EPS. Trilling 12 Months WFC Price
•  WFC has outperformed the S&P500 over the last twelve months due to overall favorable economic condi-on. •  It is in 52-­‐weeks high of $58.52, but s-ll goes up. •  Price target $65.26 (11.5% upside poten-al) Growth Drivers
•  Earnings of $5.7 billion •  Diluted earnings per common share of $1.03 •  Net interest income up 4% YoY and 3% LQ, Noninterest income down 2% both YoY and LQ •  Average loans up 5% YoY and 1% LQ •  Average deposits up 8% YoY and 1% LQ •  Credit quality remained strong with net charge-­‐offs of 30 bps of average loans Valuation and Recommendation
•
Current Price: $58.55 •
Target Price: $65.26 •
Unit Cost: $35.19 •
% Asset: 4.52% •
HOLD 3
KeyCorp
KeyCorp (KEY) 52-­‐week range $11.55-­‐$15.70
KEY Company Brief
Shares Outstanding
848.31M
Beta
1.4
Market Capitalization $12.77B
TTM P/E
15.24
Forward P/E
15.42
Book value per share
$12.12
EPS
1
Dividend Yield
.30 (2.00%)
Branches
994
Employees
13,853
ROE
8.31%
Financial Analysis
Value Drivers •  Acquired Pacific Crest Investments in 2014. •  Disciplined capital management (interest income for 2014 increased by 1.4% while non-­‐interest expense decreased 2.2%. •  Dives-ture of sovereign debt (currently holding small posi-ons in Ireland and Spain debt). •  Equity/Fixed Income/Deriva-ves trading increased by 2.6%, securi-es lending increased by 41.3% •  KEY’s es-mated Capital Ra-o is 10.7% under Basel III, currently at 11.3%. KEY earnings by LOB
Earnings by Line of Business (2014) Community Bank (24.4%) Corporate Bank (51.9%) Trust and Investment Services (23%) Other (1.7%)) (KEY) Revenue
Figure 12. Line of Business Results (Source: 2014 KeyCorp 10-K)
Year ended December 31,
dollars in millions
REVENUE FROM CONTINUING OPERATIONS
(TE)
Key Community Bank
Key Corporate Bank
Other Segments
Total Segments
Reconciling Items
Total
INCOME (LOSS) FROM CONTINUING
OPERATIONS ATTRIBUTABLE TO KEY
Key Community Bank
Key Corporate Bank
Other Segments
Total Segments
Reconciling Items
Total
2014
2013
2012
2,217 $
1,630
271
4,118
(4)
$ 4,114 $
2,316 $
1,536
263
4,115
(1)
4,114 $
2,308 $
1,499
353
4,160
(16)
4,144
234 $
497
226
957
(18)
939 $
205 $
475
220
900
(30)
870 $
162 $
425
204
791
44
835 $
$
$
$
Change 2014 vs. 2013
Amount
Percent
(99)
94
8
3
(3)
—
(4.3)%
6.1
3.0
.1%
N/M
—
29
22
6
57
12
69
14.1%
4.6
2.7
6.3
N/M
7.9%
(KEY) 2015 Q2 Earnings Call Highlights(07/16/15)
•  Missed EPS es-mates by .01 (posted .27), however beat revenue es-mates of $1.05B with $1.08B (4.7% increase from Q2 2014). •  Investment banking fees increased 42.4%. •  Capital Ra-os Under Basel III high 11.3%, es-mated 10.6% for 2015. •  Will begin origina-ng mortgage loans again (last done in 2006). •  Stock repurchase (8 million shares in 2015 Q2). •  Leveraged for short-­‐term, divested sovereign debt, low exposure to oil & gas, reduc-on in net charge-­‐offs. DCF Valuation
•  WACC: 10.6% •  Growth Rate: 3% •  Tax Rate: 27% WFC
Implied Share Price
Weight
•  Target Price: $16.61 (9.7% upside poten-al) DCF
16.55
75%
P/E Absolute
16.81
25%
•  Consensus: $16.55 Target Price
16.61
100%
•  Current Price $15.18 •  Recommenda-on: HOLD 4
Citi Group
Citi Group VALUATION
•  52-­‐week range: $60.53-­‐
$46.60 •  Beta: 1.36 •  Current Price: $60.44 •  Target Price: $63.74 •  Upside Poten-al: (5.6%) C
DCF
P/E Absolute
Implied Share Price
Weight
64.80
75%
60.56
25%
5
SunTrust
(STI)
SunTrust VALUATION
•  52-­‐week range: $33.97-­‐45.53 •  Beta: 1.09 •  Current Price: 44.82 •  Current Price: 46.50 •  Upside Poten-al: (3.7%) STI
DCF
P/E Absolute
Target Price
Implied Share Price
Weight
46.50
75%
45.61
25%
46.21
100%
6
American
Express (AXP)
Performance of Various Banks
AXP DCF Valuation
American)Express)(AXP))
Consolidated+Statement+of+Income+(USD+$)
(In+Millions,+except+Per+Share+data)
Terminal Discount Rate =
Terminal FCF Growth =
Net Income
5,890
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
45,659
54,522
100,181
10.01%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
(in million)
Current Price
Implied equity value/share
Upside/(Downside) to DCF
14.1
17.0
3.2
3.7
5,440
6,128
9.8%
4.0%
6,352
46%
54%
100%
6,479
6,609
6,741
6,876
7,013
7,154
Terminal Value
Free Cash Yield
15.2
18.4
3.3
3.7
13.5
16.3
3.2
3.7
5.58%
19.0
Terminal EV/EBITDA
4.1
78.79 premarket after preannouncement
95.32
21.0%
•
•
•
•
•
138,865
Terminal P/E
1,051
$
$
7,297
Current Price: $78.79 Target Price: $95.32 EPS: $5.71 BUY P/E: 13.83 52 Weeks Rage: $75.75-­‐$94.89 7
RECOMMENDATION
Stock Recommendation
SIM Portfolio (Maintain 100 bps overweight)
S&P 500 Financial Sector GICS Sub
(As of 07/19/15)
Industry
Ticker
Current
Target
Upside
Potential Recommendation
Citigroup Inc.
Banks (4.53%) C
$54.71
$63.54
13.90%
Hold
KeyCorp
Banks (4.04%) KEY
$14.92
$16.55
9.85%
Hold
Wells Fargo
Banks (4.30%) WFC
$56.19
$58.15
3.37%
Hold
SunTrust Banks
Banks (3.82%) STI
Consumer
Finance
AXP
$43.17
$45.28
3.70%
Sell
$77.42
$85.96
9.93%
Buy
American Express Co.
Q&A