Financial Sector Stock Recommendation
Student Investment Management
Yuxi Bi, Yao Yao, Andrew Zalic and Sally Zhang
1st, April, 2014
JP Morgan Chase
JPMorgan Chase & Co. operates as a financial holding company in
the United States of America. Founded in 1823, the company has
over $2.4 trillion in assets, over 260,000 employees, and operates in
more than 60 countries. The company offers investment banking
and financial services for consumers and small businesses,
commercial banking, financial transaction processing, asset
management, and private equity.
•Consumer and Community Banking (CCB)
•Corporate and Investment Bank (CIB)
•Commercial Bank (CB)
•Asset Management (AM)
Sustainable Advantages
• Top-Tier Management
• Fortress balance sheet
• Segment performance
• Size – “Too Big to Fail”
• Safety creates more brand equity – less risks as a customer
• Size benefits relationship banking – more business, more
referrals
• Brand Equity
• 200 year reputation of experience and trust
Key Drivers
•
Expense management in the face of interest rate volatility
•
Interest Rate Volatility Effects
•
Long-term – less business
•
Short-term – bank borrowing (deposits) cost more
•
$2 billion reduction in expense in CCB
•
Automation – the branch of the future
•
Focusing on core competencies and more quality business in CB and
Mortgage Banking
•
Growth Opportunities
•
Segment synergies will gain momentum through recovery
•
International footprint expanding – GDP growth favors EM
•
More branches in growth face phase than any other bank – CCB
highest source of revenue
Attractive Fundamentals
JPM
WFC
BAC
GS
C
Industry S&P 500
Market Cap:
228.00B 261.72B 181.77B
76.58B 144.54B
Employees:
251,196 264,900 242,000 32,900 251,000
Qtrly Rev Growth (yoy):
0
0.01
0.42
-0.05
0.05
Revenue (ttm):
96.38B
81.46 85.39B 34.21B 68.76B
Operating Margin (ttm):
0.39
0.43
0.27
0.35
0.28
Net Income (ttm):
16.59B 20.89B 10.08B 7.7B
12.95B
EPS (ttm):
$ 4.35 $ 3.89 $ 0.90 $ 15.46 $ 4.35
P/E (ttm):
13.96
12.79
19.05
10.6
10.96
14.52
17.26
Forward P/E:
9.58
11.68
10.62
9.82
8.42
PEG (5 yr expected):
1.76
1.18
0.64
1.93
1.09
Terminal Discount Rate =
Terminal FCF Growth =
Year
2014E
Revenue
96,724
% Grow th
36,392
Operating Margin
37.6%
Interest and Other
Interest % of Sales
Taxes
38.0%
39.0%
4.0%
46,886
39.0%
123,827
3.0%
48,293
39.0%
127,542
3.0%
49,741
39.0%
131,368
3.0%
51,234
39.0%
2022E
135,309
3.0%
52,771
39.0%
2023E
139,369
3.0%
54,354
39.0%
2024E
143,550
3.0%
55,984
39.0%
-
-
-
-
-
-
-
-
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
25,475
11,709
30.0%
27,320
27,320
7.2%
185,734
115,855
301,589
11.17%
9.0
11.8
3,760
$
$
45,083
120,221
2021E
-
% Grow th
Shares Outstanding
38.6%
5.0%
2020E
0.0%
7.2%
Current P/E
Projected P/E
42,504
115,597
2019E
-
25,475
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
7.2%
2018E
0.0%
% Grow th
Free Cash Flow
110,092
2017E
-
30.0%
Net Income
39,029
2016E
0.0%
10,918
Tax Rate
Debt
Cash
Cash/share
102,683
6.2%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2015E
12.0%
1.0%
60.66
80.21
32.2%
641,820
978,600
260.27
12,751
30.0%
29,753
8.9%
29,753
8.9%
62%
38%
100%
13,525
30.0%
31,558
6.1%
31,558
6.1%
14,066
30.0%
32,820
4.0%
32,820
4.0%
14,488
30.0%
33,805
3.0%
33,805
3.0%
14,922
30.0%
34,819
3.0%
34,819
3.0%
15,370
30.0%
35,864
3.0%
35,864
3.0%
15,831
30.0%
36,939
3.0%
36,939
3.0%
16,306
30.0%
38,048
3.0%
38,048
3.0%
30.0%
39,189
3.0%
39,189
3.0%
Terminal Value 359,827
Free Cash Yield
8.3
11.0
16,795
7.7
10.1
Terminal P/E
10.89%
9.2
Recommendation
I recommend a BUY for JP Morgan Chase (JPM) with an implied equity
value of $80.21 representing a 32.3% upside.
•Sustainable advantages warrant a premium
•Attractive fundamentals
•Positioned for growth
Key Drivers
BUY
Target Price: $89.75
Upside Potential: 16.32%
• Strong Market Position
• Solid Financial Position with Reasonable Debt Level
• Promising Net Interest Margin
• Relative Cheap Price
• Focus on Growth through Acquisitions
300
200
100
0
2008
2009
2010
Capital One
S&P Financial Index
2011
2012
S&P 500 Index
2013
Company Overview
Total Revenue
-4%
9%
Credit Card
Consumer Banking
28%
59%
Commercial Banking
Other
Sustainable Advantages
• Focusing on Growth by actively Seeking Acquisitions
• High Net Interest Margin
• Pursuing Digital Leadership in Consumer Banking Operations
Relative Valuation
Ticker
COF
Current Price
Date
75.06
2014/3/23
Current Multiple
9.90
1.80
1.03
P/E
P/S
P/B
BAC
11.40
1.64
0.75
Peers
C US
JPM DFS
10.33
9.19 11.62
1.71
2.08 2.93
0.80
1.10 2.58
GS Target Multiple
Target Price
9.74
10.46
79.27
2.05
2.08
86.79
1.16
1.28
93.10
Average
P/E
P/S
P/B
% chg from
current price
5.6%
15.6%
24.0%
86.39
Target Price
Current Multiple Lowest Highest
Average
9.9
69.66
88.12
79.27
1.8
68.51
122.14
86.79
1.03
54.66
187.87
93.10
15.1%
DCF Valuation
COF(Millions)
Terminal Discount Rate=
Terminal FCF Growth=
Analyst: Sally Zhang
Date: 04/01/2014
Year
Free Cash Flow
% Growth
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
2014E
2015E
2016E
2017E
8.00%
4.00%
2018E
2019E
2020E
2021E
2022E
2023E
2024E
3991.85 4379.04 4186.03 3142.14 3210.98 3281.20 3352.83 3425.88 3537.66 3671.98 3830.86
9.70% -4.41% -24.94%
2.19%
2.19%
2.18%
2.18%
3.26%
3.80%
4.33%
24365.59
46135.14
70500.73
11.36
17.66
0.14
4.21
587.60
$ 77.14
$ 120.0
55.54%
35%
65%
100%
10.35
16.10
0.12
3.86
Terminal Value 99602.32
10.83
16.84
0.13
4.03
Free Cash Yield
3.85%
Terminal P/E
26.00
Terminal EV/EBITDA
7.74
Valuation
DCF
Relative
Valuation
Estimated Price
$120
$86.39
Weights
10%
90%
Valuation
Target Price
Current Price:
$77.16
$89.75
BUY
KeyCorp
Regional banking industry
Headquartered in Cleveland, OH
$93 billion in assets—15th largest in the U.S.
1,028 branches in 12 states
14,000 employees
($ in millions)
12/31/2013
Average deposits
Percent of total
Average commercial
loans
Percent of total
Average home equity
loans
Percent of total
Geographic Region
East
Ohio
Eastern
New
New
York
England
$4,461
9.0%
$8,675
17.4%
$8,055
16.2%
$806
5.4%
$1,179
7.8%
$2,064
13.7%
$467
4.6%
$832
8.2%
$1,255
12.4%
Oregon &
Alaska
Washington
Rocky
Mountains
$4,289
8.6%
$6,597
13.3%
$4,768
9.6%
$2,312
4.6%
$1,649
11.0%
$1,815
12.1%
$1,620
10.8%
$1,338
13.3%
$1,861
18.5%
$1,553
15.4%
Indiana
West
Ohio/Michigan
Western
New York
NonRegion
Total
$2,913
5.9%
$5,005
10.1%
$2,648
5.3%
$49,723
100.0%
$1,753
11.7%
$790
5.3%
$526
3.5%
$2,839
18.9%
$15,041
100.0%
$1,284
12.7%
$625
6.2%
$760
7.5%
$111
1.1%
$10,086
100.0%
KeyCorp
Market Profile (as of 3/31/2014)
52-Week Range
$9.29 – $14.70
P/E (ttm)
14.35
Price/BV
1.26
Beta
1.6
Dividend Yield
1.50%
ROE
8.44%
ROA
0.96%
Market Cap.
$12.43 billion
Institutional Holdings
83.90%
Shares outstanding
889.40M
Book Value per Share
$11.24
Assets
$93 billion
Deposits
$69 billion
Cash per Share
$2.37
50%
KEY stock performance compared to S&P 500 and KBW
Bank Index
40%
41.48%
30%
26.21%
20%
18.31%
10%
0%
-10%
Mar-13
May-13
Jul-13
KEY
Aug-13
Oct-13
KBW Bank Index
Dec-13
Jan-14
S&P 500
Mar-14
2013 Financial Highlights
• Average total loans grew 3.4% from a year earlier. strongest growth
category was commercial and industrial loans, which were up 7.9%
• $333 million from investment banking and debt placement fees in
2013, a 270% growth from 2008
• Card and payment services grew 20%
• mortgage servicing fees more than doubled
• Implement annualized cost savings of $241 million
• Efficiency ratio of 67.4% (fell short of expectation); poised to drive
further improvements in efficiency and productivity
Selected Financial Ratios-Major Ohio-based Banks
Regional Banks
Park National Corporation
First Financial Bancorp.
Fifth Third Bancorp
Huntington
LCNB Corp.
FirstMerit Corporation
KeyCorp
Farmers National Banc Corp.
Peoples Bancorp
United Bancorp
Ohio Valley Banc Corp.
LNB Bancorp
NB&T Financial Group
United Bancshares
First Citizens Banc Corp
SB Financial Group
Average
Median
KeyCorp Ranking
Market
Cap ($M)
1,186
1,042
19,916
8,333
164
3,568
12,772
141
275
46
92
107
65
55
70
40
2nd/16
P/E LTM
Forward P/E
FY 14
15.38
21.82
11.58
13.74
16.01
18.32
14.35
18.29
15.46
16.11
11.25
18.13
15.32
11.82
14.28
7.76
15.00
15.35
10th/16
15.94
16.04
13.15
13.89
14.68
14.00
14.02
16.82
13.33
n/a
n/a
14.02
n/a
n/a
9.81
n/a
14.15
14.02
6th/11
P/BV
Efficiency
Ratio
ROE
ROA
Loan Loss
Reserve/Loans
1.82
1.53
1.48
1.44
1.38
1.37
1.28
1.25
1.21
1.18
1.15
1.03
0.96
0.87
0.86
0.72
1.22
1.23
7th/16
62.72%
64.27%
62.78%
64.09%
63.10%
60.71%
67.85%
75.62%
70.31%
77.99%
68.14%
70.65%
75.66%
67.22%
82.26%
73.70%
69.19%
68.00%
10th/16
11.96%
6.89%
12.73%
10.80%
9.02%
7.63%
8.83%
6.66%
7.92%
7.02%
10.40%
5.62%
6.10%
7.32%
5.97%
9.52%
8.40%
7.78%
7th/16
1.15%
0.77%
1.48%
1.13%
0.93%
0.85%
1.02%
0.68%
0.91%
0.63%
1.04%
0.51%
0.64%
0.83%
0.53%
0.81%
0.87%
0.84%
5th/16
1.29%
1.58%
1.77%
1.49%
0.62%
0.99%
1.54%
1.20%
1.42%
0.94%
1.09%
1.93%
1.01%
1.36%
1.92%
1.45%
1.35%
1.39%
5th/16
Relative Valuation
Price Multiples
Price-to-earnings (P/E)
Price-to-book (P/B)
Price-to-sales (P/S)
KeyCorp (KEY)
14.35
1.26
3.19
Fifth Third Bancorp (FITB)
11.19
1.47
3.16
M&T Bank Corp. (MTB)
14.58
1.52
3.64
Huntington Bancshares (HBAN)
13.48
1.44
3.17
Regions Financial (RF)
13.99
0.99
2.99
First Financial Bancorp (FFBC)
21.26
1.51
3.52
FirstMerit (FMER)
17.24
1.32
3.63
Park National (PRK)
15.03
1.79
4.01
Target Multiple
15.25
1.43
3.45
Target Price
$15.03
$16.10
$15.27
6.3%
13.8%
8.0%
% chg from Current Price
DCF Valuation-KEY
KeyCorp DCF Projection
($ in millions)
Fiscal Year Ending in Dec. 31
2013
2014 E
2015 E
2016 E
2017 E
2018 E
2019 E
2020 E
2021 E
2022 E
2023 E
Total Interest Income
Provision for Loan and Lease
Losses
$2,620
$2,672
$2,726
$2,780
$2,836
$2,893
$2,951
$3,010
$3,070
$3,131
$3,194
$130
$214
$218
$222
$227
$231
$236
$241
$246
$250
$256
Total Noninterest Income
$1,734
$1,786
$1,840
$1,895
$1,952
$2,010
$2,070
$2,133
$2,197
$2,262
$2,330
Net Revenue
$4,224
$4,245
$4,347
$4,453
$4,561
$4,671
$4,785
$4,901
$5,021
$5,143
$5,269
Total Pre-tax Income
$1,136
$1,146
$1,174
$1,202
$1,231
$1,261
$1,292
$1,323
$1,356
$1,389
$1,423
Income Taxes
Income from Continuous
Operations
Income from Discontinued
Operations
$271
$321
$329
$337
$345
$353
$362
$371
$380
$389
$398
$865
$825
$845
$866
$887
$908
$930
$953
$976
$1,000
$1,024
$45
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Net Income
$910
$825
$845
$866
$887
$908
$930
$953
$976
$1,000
$1,024
Free Cash Flow
$910
% Growth
$825
$845
$866
$887
$908
$930
$953
$976
$1,000
$1,024
-9.3%
2.4%
2.4%
2.4%
2.4%
2.4%
2.4%
2.4%
2.4%
2.4%
DCF Valuation-KEY
KeyCorp-DCF Assumptions
Interest Income Growth Rate
Noninterest Income Growth Rate
Loan and Lease Losses % Interest Income
Pre-tax Income Margin
Cost of Capital
Terminal Growth Rate
Effective Tax Rate
KeyCorp-DCF Ouputs ($ in millions)
NPV of CFs
NPV of Terminal Value
Implied Equity Value
Terminal Value as % of Equity Value
Common Shares Outstanding
Implied Share Price
Current Share Price
Upside
Sensitivity Analysis-Implied Shared Price-KEY
2.00%
3.00%
8.00%
27%
10.42%
2.1%
28%
$5,454
$12,569
$18,023
70%
891
$20.23
$14.24
42%
Cost of Capital
Pre-tax Income Margin
$17.3
$24.8
$16.9
Terminal Growth Rate
$24.0
$19.9
$21.2
Noninterest Income Growth Rate
$20.1
$20.8
Interest Income Growth Rate
$20.2
$20.8
$15.0
$17.0
$19.0
$21.0
$23.0
$25.0
Target Price-KEY
30%
DCF Valuation
$20.23
70%
Relative Valuation
$15.51
KEY Historical Price vs. Target
Price
$20
Target Price: $16.92
$18
18.85% upside potential
$16
18.85% upside potential
Target price: $16.92
$14
$12
BUY
$10
$8
$6
$4
$2
$0
Jan-12
Jul-12
Feb-13
Aug-13
Mar-14
Stock Overview
• Stock price, close (03/31/2014): $47.57
• Dividend Yield: 0.01%
• Market Cap: 145B
• Beta: 2.28
Growth Drivers
• Improving macro-economic
• Declining unemployment rate
• Completing the repositioning actions
• Efficient resource allocations
• The largest card issuer with 140 million accounts and $150 billion card
loans with $46 bn retail services.
• Global presence and networks
Relative Valuation
Relative Valuation
DCF Valuation
Diluted EPS
Consensus
Guidance
Wtd # of shs (millions)
Basic
Diluted
Merchandise Inventory
% of sales
Other Receivable
Acct Payable
Chg in WC
Sales & Chg
Total Comps
Domestic
International
Gross Margin
Chg YoY
SG&A
Chg YoY
Other Op Exp
Chg YoY
5.91
6.00
5.74
5.76
5.38
5.01
($7.99)
$3.54
$3.63
$2.44
$4.42
3,038.8
3,073.8
2,928.7
2,966.3
2,905.8
2,943.3
2,848.3
2,888.7
545.0
559.4
?
3,073.8
3,073.8
3,073.8
405
0.50%
30,000
37.00%
1,135,124
1400.00%
32,176
394
0.50%
29,126
37.00%
1,102,062
1400.00%
60,710
371
0.50%
27,477
37.00%
1,039,681
1400.00%
69,651
417.0
0.61%
25,674.0
37.34%
968,273.0
1408.15%
34,553
441.0
0.74%
22,490.0
37.91%
930,560.0
1568.58%
70,037
567.0
0.85%
27,777.0
41.72%
865,936.0
1300.59%
25,568
1,731.0
2.82%
31,213.0
50.83%
844,968.0
1376.01%
11,328
3.00%
6.00%
8.00%
15.91%
-10.90%
8.42%
47.88%
100.00%
0.00%
51.00%
0.00%
17.00%
0.00%
100.00%
0.00%
51.00%
-0.20%
17.00%
0.00%
100.00%
0.00%
51.20%
-4.71%
17.00%
-2.94%
100.00%
0.00%
51.19%
-10.55%
19.94%
-4.95%
100.00%
0.00%
61.73%
6.92%
24.89%
1.66%
100.00%
0.00%
54.81%
-1.09%
23.22%
0.60%
100.00%
0.00%
55.91%
-29.10%
22.62%
-11.39%
1,573.0
3.79%
33,634.0
81.00%
835,903.0
2013.01%
800,696
100.00%
85.01%
34.01%
34.01%
DCF Valuation
Citigroup Inc. ( C )
Analyst: Yuxi Bi
14-3-31
Terminal Discount Rate =
Terminal FCF Growth =
Year
2013E
Revenue
74,263
% Growth
2014E
78,719
6.0%
Operating Income
23,616
Operating Margin
31.8%
Interest
Interest % of Sales
Taxes
32.0%
3.0%
29,202
32.0%
93,994
3.0%
30,078
32.0%
96,814
99,719
3.0%
30,981
3.0%
31,910
32.0%
32.0%
102,710
3.0%
32,867
32.0%
-
-
-
-
-
-
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
8.8
10.7
45.7
46.9
3,073.8
$
$
28,352
91,257
-
106,521
69,809
176,330
11.30%
Debt
Cash
Cash/share
32.0%
3.0%
2023E
0.0%
7,557
30.0%
17,633
17,633
6.7%
$
$
27,526
88,599
2022E
-
16,531
Current Price
Implied equity value/share
Upside/(Downside) to DCF
32.0%
3.0%
2021E
0.0%
% Growth
Shares Outstanding
26,724
86,018
2020E
-
6.7%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
32.0%
3.0%
2019E
0.0%
16,531
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
25,946
83,513
2018E
-
% Growth
Free Cash Flow
3.0%
2017E
0.0%
30.0%
Net Income
32.0%
81,080
2016E
-
7,085
Tax Rate
25,190
2015E
13.0%
3.0%
47.59
57.37
20.5%
1,674,249
741,855
241.35
7,784
30.0%
18,162
3.0%
18,162
3.0%
60%
40%
100%
8,017
30.0%
18,707
3.0%
18,707
3.0%
8,258
30.0%
19,268
3.0%
19,268
3.0%
8,505
30.0%
19,846
3.0%
19,846
3.0%
8,761
30.0%
20,441
3.0%
20,441
3.0%
9,023
30.0%
21,055
3.0%
21,055
3.0%
9,294
9,573
30.0%
21,686
30.0%
22,337
3.0%
21,686
3.0%
22,337
3.0%
3.0%
Terminal Value
Free Cash Yield
8.3
10.0
42.8
44.0
8.1
9.7
41.6
42.7
9,860
30.0%
23,007
3.0%
23,007
3.0%
236,973
9.71%
Terminal P/E
10.3
Terminal EV/EBITDA
35.6
Valuation
Recommendation:
BUY
Price Target:
$56.04
Current Price:
$47.59
Upside Potential:
17.7%
Recommendation Summary
SIM portfolio Financial Holdings: 15.24%
Current
Stock
Ticker Price
JP Morgan
JPM
$60.66
Capital One
COF
$76.78
KeyCorp
KEY
$14.24
CitiGroup
C
$47.59
Bank of America
BAC
$17.34
Wells Fargo & Company WFC 49.77%
Target
Price
$80.21
$89.75
$16.92
$56.04
$18.07
Upside
32.2%
16.89%
18.82%
17.76%
4.23%
Call
Buy
Buy
Buy
BUY
Hold
% of SIM
3.29%
0%
0%
4.03%
4.96%
2.97%