Financial Sector
Daniel Bush
Jacob Pottschmidt
David Spaw
Gregory SvetovSpring 2013
Executive Summary
•
Introduction
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Bank of America
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Wells Fargo
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JP Morgan
•
Lincoln National
Overview of the Financial
Sector
•
•
Includes stocks that provide
financial services to commercial
and retail customers
Majority of the sector includes
investment funds, brokerage
houses, banks, real estate and
insurance companies
Sector Industries &
Makeup
Industry Leaders by Market Cap
Sector Performance
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14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
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Performance 1 Month
Performance 3 Month
Performance YTD
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Sector Weight
•
Decision made to hold
current position
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Underweight by 86 BP
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Currently
Bank
of
text formatJP Morgan,
America,
Wells
Fargo,
Lincoln
 Second
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Level
National Corp
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Current Weight/Recommendations Third Outline
Bank of America: 4.93%
Sell 100bp Level
JP Morgan: 4.22%
Sell 50bp
 Fourth Outline
Wells Fargo: 2.58% Buy 150bp
Level
Lincoln National Corp: 3.52%
Hold
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Seventh
Bank of America
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Bank of America is a bank holding company and a financial holding company
The organization is made up of six segments

Consumer & Business Banking
Consumer Real Estate Services
Global Banking
Global Markets
Global Wealth & Investment Management
All Other
Nation’s second largest bank with assets of $2.2 trillion
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BANK of America
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Ticker: BAC
•
Dividend Yield: 0.33%
Beta: 1.78
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Stock
$11.94
textPrice:
format
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YTD: 29.36%
Industry:
Money
CenterLevel
Banks
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Market Cap: 129.52B
•
Current SIM Weight: 4.93%
Third$6.72-12.94
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52 WeekRange:
Level
Recommendation:
Sell 100 BP
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Wells Fargo
Wells Fargo is a nationwide, diversified,
community-based financial services
company
It is made up of three business segments
Community banking
Wholesale banking
Wealth, brokerage, and retirement
Number one U.S. Home lender
Originates about 1/3 home mortgages
First in the nation with 9000 stores
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Stock Overview
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Stock information (As of April 5, 2013)
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Ticker: WFC

Sector: Financial

Industry: Money center bank

Market cap: $196B
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
Current Price: $37.15
52 week range: 29.8-38.2

Recommendation: Buy

Analyst recommendation:

Strong Buy 16/38 ,
Moderate buy 5/38 , hold
16/38, sell 1/38
Positive Signs & Risks
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Positive
Negative
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Strong financial
performance: 19% growth
in net income and 6%
revenue growth
Recovering U.S. economy
Sensitive to interest rates
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Third
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Dodd Frank Act
uncertainty
Level
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Economy performing
poorly,
especially
housing market Level
and unemployment
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Litigation
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Little foreign exposure
~5%
One of the best capitalized
Super storm sandy
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DCF valuation
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Relative Valuation
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Overall valuation
10% of the price will come from DCF:
10%*Price=10%*implied equity value per share=0.1*40.6= $4.06
90% of the price will come from multiples:
90%*(20%*P/E+20%*P/S+30%*P/B+15%*P/EBITDA+15%*P/CF)=
.9*(.2*51.4+.2*48.05+.3*66.38+.15*33.27+.15*30.18)=
90%*49.32=$44.38
Price= $4.06+$44.38= $48.45.
Upside 30.4%
WFC versus other SIM
holdings
Recommendation
• Wells Fargo already represents 2.58% of SIM portfolio
• Based on the upcoming catalysts, record breaking financial
performances in 2012, and the fact that SIM holding are
less than they have represented in the past

Current price: 37.15
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Target Price 48.45
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BUY 150bp (2.58% of SIM to 4.08%)
JPMorgan Chase &
Co.
Ticker
Price
Market Cap
Sector
Industry
Beta
JPM
$48.58
$18.77B
Financials
Diverse Financial Services
1.63
Company Overview
•
•
•
•
Leading financial services firm and one of the largest
banking institutions in the US
Has $2.4 trillion in assets
Provides leading services in: investment banking,
financial transaction processing, asset management,
and private equity services
Firm is broken into 4 segments for reporting purposes:
Consumer & Community Banking, Corporate &
Investment Bank, Commercial Banking, and Asset
Management
Opportunities
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Strong 2012 performance
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Deposits continue to increase
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High production margins in Mortgage Banking
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Better understanding of regulatory climate
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Global economic growth
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Continued domestic economic improvement
Threats
•
•
Regulatory
•
Dodd Frank and other financial regulation could limit the
Firm’s ability pursue investments
•
Regulation could lead to a revaluation of current assets
•
Could lead to higher prices and lower demand for the
Firm’s services
•
High uncertainty
Economic
•
Continued low interest rates
Valuation
Absolute Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
B.
22.4
3.3
1.9
5.79
21.6
Median
Current
D.
E.
C.
6.4
1.2
.6
2.12
4.7
11.8
2.1
1.2
4.16
8.8
#Your Target
Multiple
*Your
Target E, S,
B, etc/Share
F.
9.0
1.9
1.0
4.21
6.8
10.0
1.9
1.0
4.13
8.0
Your Target
Price
(F x G)
G.
4.77
25.5
42
11.4
6.0
H.
47.7
48.45
42.0
47.08
48.0
Relative to S&P 500
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
6.9
1.7
.60
2.2
21.6
.49
.55
.30
1.0
4.7
.77
.72
.50
1.5
8.8
.57
.63
.4
1.4
8.5
Relative to Industry
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
1.6
1.3
3.1
2.2
1.1
.10
.15
.70
.7
.0
1.0
.97
1.2
1.1
.90
.75
.89
1.3
1.1
.80
DCF
Analyst: Jacob Pottschmidt
Date: 4/9/2013
Year
2012E
Revenue
97,031
% Grow th
28,917
Operating Margin
29.8%
Taxes
9,253
Tax Rate
32.0%
Net Income
21,284
% Grow th
99,000
29,000
29.3%
9,280
32.0%
21,500
1.0%
Free Cash Flow
21,284
% Grow th
21,500
1.0%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
114,642
66,155
180,797
11.34%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
8.8
8.5
14.2
13.9
Shares Outstanding
Debt
Cash
Cash/share
2013E
2.0%
Operating Income
Current Price
Implied equity value/share
Upside/(Downside) to DCF
Terminal Discount Rate =
Terminal FCF Growth =
3,856
$
$
48.66
46.89
-3.6%
275,660
53,343
3.00
2014E
100,000
1.0%
30,500
30.5%
9,760
32.0%
22,000
2.3%
22,000
2.3%
63%
37%
100%
2015E
101,500
1.5%
31,161
30.7%
10,034
32.2%
21,127
-4.0%
21,127
-4.0%
2016E
103,276
1.8%
31,912
30.9%
10,340
32.4%
21,573
2.1%
21,573
2.1%
14.50%
4.0%
2017E
105,342
2.0%
32,761
31.1%
10,680
32.6%
22,081
2.4%
22,081
2.4%
2018E
107,712
2.3%
33,714
31.3%
11,058
32.8%
22,656
2.6%
22,656
2.6%
2019E
110,405
2.5%
34,778
31.5%
11,477
33.0%
23,301
2.8%
23,301
2.8%
2020E
113,441
2.8%
35,961
31.7%
11,939
33.2%
24,022
3.1%
24,022
3.1%
2021E
116,561
2.8%
37,183
31.9%
12,345
33.2%
24,838
3.4%
24,838
3.4%
Terminal Value
Free Cash Yield
8.7
8.4
14.1
13.9
8.5
8.2
13.4
13.2
TERMINAL
2022E
120,640
3.5%
38,725
32.1%
12,857
33.2%
25,869
4.1%
25,869
4.1%
256,223
10.10%
Terminal P/E
9.9
Terminal EV/EBITDA
12.4
Recommendation
•
Currently
Ticker
JPM
•
% of Sim Portfolio Mrkt Value
4.22% $484,092
Recommendation
•
Sell 50bps
Lincoln National
Corp
•
Ticker: LNC
•
Dividend Yield: 1.60%

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edit the outline
Beta:
2.06
text format

Second
StockOutline
Price:Level
$31.21
Third Outline
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Industry:
Life Insurance
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YTD: 12.62%
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Company overview
Retirement Solutions
•
Annuities

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Insurance
text format
Second Outline Level
Life Insurance
Third Outline
Level
Group Protection
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Defined Contribution
dcf
Lincoln National Corp (LNC)
Analyst: David Spaw
Date: 4/8/2013
Year
Revenue
2012E
11,533
% Grow th
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
1,932
16.8%
17.0%
5.3%
2,207
17.2%
13,244
3.5%
1,854
14.0%
2016E
13,707
3.5%
1,919
14.0%

2017E
14,153
3.3%
1,981
14.0%
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2018E
14,577
3.0%

2,041
14.0%
2019E
15,015
2,102
2,165
14.0%
-
-
-
-
-
-
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
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618
661
706
593
614
634
653
673
32.0%
32.0%
32.0%
32.0%
32.0%
32.0%
32.0%
32.0%
1,404
6.8%
1,314
1,404
6.8%
7,169
3,411
10,580
14.80%
Shares Outstanding
288
$ 30.87
$ 36.79
19.2%
10,769
4,510
15.68
202,906
5.3%
1,501
6.9%
1,501
6.9%
68%
32%
100%
6.3
7.5
7.3
8.2
5.9
7.0
6.9
7.6
1,261
-16.0%
1,261
-16.0%
1,305
3.5%
1,305
3.5%
1,347
3.2%
1,347
3.2%
1,388
3.0%
1,388
3.0%
3.0%
TERMINAL
2021E
2022E
15,852
2.5%
16,248
2.5%
Second Outline Level
-
1,314
2020E
15,465
3.0%
0.0%
6.8
8.1
7.8
8.7
Debt
Cash
Cash/share
Total Assets
Debt/Assets
2,065
12,796
2015E
-
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
Current Price
Implied equity value/share
Upside/(Downside) to DCF
12,147
2014E
14.50%
2.5%
0.0%
% Grow th
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
2013E
5.3%
% Grow th
Free Cash Flow
Terminal Discount Rate =
Terminal FCF Growth =
1,429
14.0%
1,429
2,275
14.0%
-
-
-
0.0%
0.0%
0.0%
693
710
728
32.0%
32.0%
32.0%

3.0%
1,472
3.0%
14.0%
Third Outline
Level
1,472
3.0%
2,219
3.0%
1,509
1,547
Fourth Outline
Level
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Level
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Level
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2.5%
1,509
2.5%
2.5%
1,547
2.5%
Terminal Value
13,212
Free Cash Yield
11.71%
Terminal P/E
8.5
Terminal EV/EBITDA
8.6
Opportunities and
risk
Opportunities
•
Very strong stock
performance since
beginning of 2012
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Risks
text format
 Second
Outline Level
Continued
uncertainty
regarding
future
Third
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regulations
Level

Fourth Outline
Level will
Low interest rates
continue to compress
 Fifth
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margins
Level
 Sixth
Very little global Outline
diversification Level
 Seventh

•
•
Dividends expected to
continue to increase
Recent launches such
as Lincoln Alliance &
Lincoln Critical Illness
have high growth
Recommendation
•
Click to edit the outline
Hold current position of 12,400 shares
•
Second
Outline
Level
Unrealized gain of $125,261 (as of end
of last
month)
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Summary
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
3.52%
HOLD
Second Outline Level
3.52%

4.22%
Sell 50bp
Third Outline
Level
3.72%
Fourth Outline
4.08%
Level
 Fifth
3.93%
Outline
Level
15.25%
 Sixth
Outline
Level
 Seventh

2.58%
Buy 150bp
4.93%
Sell 100bp
15.25%
HOLD
Thank You!
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