Financial Sector
Luis Gordillo
Josh Pladers
Ross Klosterman
Agenda
 Sector Overview
 Business Analysis
 Economic Analysis
 Financial Analysis
 Valuation Analysis
 Recommendations
Sector Overview
What are the "Financials"
• Real Estate, Diversified Financials, Insurance, Banks
Company
Market Cap
Wells Fargo
158 Billion
JP Morgan
143 Billion
Berkshire Hathaway
111 Billion
Itau Unibanco Holdings
93.5 Billion
Citigroup
93.5 Billion
China Life Insurance Company
85.5 Billion
Royal Bank of Canada
76 Billion
SIM Portfolio Weights
Portfolio Holding Weights vs.
S&P 500
Sector Returns for 1, 3, and 12
Months
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
12-Month
3-Month
1-Month
Business Analysis
Porter's Five Forces
•
Supplier Power: Medium
o
•
Threat of New Substitutes: Medium
o
•
Capital requirements high. Approval needed by the Board of Governors of the
Federal Reserve. Heavy regulation and inspections affect activities.
Buyer Power: Low (individuals) – High (corporations)
o
•
Despite non-financial firms that now offer similar services, banks are still the
mainstream choice for larger offerings
Threat of New Entrants: Low
o
•
Banks are subject to the Federal Funds Rate. Account holder power will vary
depending on type of customer.
Individuals have high switching costs; larger consumers have much more
bargaining power over banks.
Degree of Rivalry: High
o
Competition intense among largest institutions.
are being absorbed by larger firms
Smaller and medium-sized banks
Trends and Developments
• Lending has been dismal by the big banks
o Yet still profitable
o Have cash reserves to deploy at some point
• FED announcing continued interest rate level
• Indecision in Europe
Forward Catalysts
• Unemployment decreasing faster than
expected
• 2012 Election Year
• Recent Housing Numbers
• Dodd-Frank costs just being realized
(Huntington)
• QE 3
• Euro-zone
• BASEL III capital requirements
Economic Analysis
Fed Funds Rate
2-year Treasuries
10-year Treasuries
Money Supply
Unemployment Rate
Consumer Confidence
Financial Analysis
Revenue Growth
Sector Revenue Performance
Earnings Growth
Sector Earnings Performance
Industry Revenue Analysis
Industry Earnings Analysis
Misc. Sector Ratios and
Relationships
Valuation Analysis
Price / Trailing Earnings
Price / Forward Earnings
Price / Book
Price / Sales
Price / Cash Flows
Financial Sector Valuation
Summary
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
135.2
20.1
2.7
2.7
140.7
8.1
8.8
.5
.6
7.2
Median
13.8
12.5
2.0
2.3
9.8
Current
10.2
11.3
1.0
1.4
9.8
.65
.63
.3
.9
.7
Median
.76
.78
.7
1.5
.9
Current
.77
.85
.5
1.1
1.1
Low
7.8
1.4
.9
1.8
13.4
Select Industry Valuation
Ratios
Diverse Financial Services
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
147.2
91.2
2.4
3.2
959.9
4.0
6.3
.3
.5
2.1
Median
12.8
11.6
.8
2.5
9.9
Current
5.2
8.7
.6
1.2
6.5
.33
.54
.2
.8
.2
Median
.73
.72
.4
1.7
.9
Current
.39
.65
.3
1.0
.7
Low
9.8
5.9
.8
2.1
85.7
Select Industry Valuation
Ratios
Diversified Banks
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
54.8
25.2
2.6
3.9
32.8
9.5
8.5
.7
.8
5.6
Median
13.3
12.2
2.0
3.2
10.1
Current
11.4
10.4
1.4
2.2
9.6
.61
.57
.5
1.2
.7
Median
.76
.75
.7
2.2
1.0
Current
.85
.79
.6
1.7
1.0
Low
4.6
1.6
.9
2.7
2.9
Select Industry Valuation
Ratios
Insurance – Life/Health
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
15.4
14.6
1.9
1.5
13.8
4.0
4.4
.5
.3
4.6
Median
12.6
11.9
1.4
1.0
10.2
Current
8.4
7.9
.9
.8
8.0
.38
.35
.3
.4
.6
Median
.68
.68
.5
.7
1.0
Current
.63
.59
.4
.6
.9
Low
.87
.90
.7
1.0
1.1
Technical Analysis
Recommendations
Positives:
• Discounted to overall
market
• Many toxic assets are
being written off
• Many have been
forced to diversify
business
Quarter Outlook – Hold
Negatives:
• Uncertainty!
o Europe
o Dodd-Frank costs still being
realized
• QE3?
• Fed rate staying
at/near 0 through 2014
Year Outlook – Buy
- Keep SIM position underweight
- At technical resistance in short term
Thanks for listening
• What questions do you have?