Financials Company Overview
Luis Gordillo
Josh Pladers
Ross Klosterman
Agenda
• Sector Recap
• JP Morgan Chase
• Lincoln National
• Bank of America
• Wells Fargo
• Health Care REIT Inc.
Sector Recap
Previous Recommendations:
• Quarter Outlook – Hold
Year Outlook – Buy
- Keep SIM position underweight
- At technical resistance in short term
• Since we last talked, sector stocks have
consolidated
• The following are recommendations based on class
decision to “Hold”
JP Morgan
Chase
Stock Overview
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•
•
•
•
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Ticker: JPM
Stock Price: $39.09
Market Cap: $148.5B
Sector: Financials
Industry: Diverse
Financial Services
Beta: 1.55
Dividend Yield: 1.0%
Company Overview
•
Leading global financial services firm with assets of $2.3 trillion
•
Operations in more than 60 countries
•
More than 240,000 employees
•
Provide services to millions of consumers, small businesses and many
of the world's most prominent corporate, institutional and
government clients
•
Leader in investment banking, financial services for consumers, small
business and commercial banking, financial transaction processing,
asset management and private equity
•
Stock is a component of the Dow Jones Industrial Average
Opportunities
•Provided $545 billion of credit to businesses in and raised $1.0 trillion of
capital for clients in 2011, up 28% and 23% respectively
•Improvement in loan demand and credit quality
•Maintained fortress balance sheet, ending the year with a strong Basel I
Tier 1 Common ratio of 10.0%
•Increased quarterly dividend to $.25 per share
•Very strong management
Investing in the Future
•
Consumer & Business Banking opened 260 new branches, added
3,800 salespeople in 2011
•
Global Corporate Bank expanded to 250 bankers, covering 3,500
corporate clients around the world
•
Opened more than 20 new offices outside the U.S. over the last two
years
•
Asset Management added 160 private bank client advisors in 2011
•
Added more than 17,000 jobs in the U.S. in 2011
Risks
•Increasing regulation
•Acquisitions during financial crisis
•$567 million pretax loss from debit valuation
adjustments in the Investment Bank
Financial Analysis
Valuation
Relative to S&P
500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
6.9
1.7
.6
2.2
2.1
.56
.48
.3
1.0
.6
.8
.73
.5
1.5
.9
.66
.61
.4
1.2
.7
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
1.8
1.3
3.4
2.2
4.3
.1
.15
.7
.6
.0
1.1
.98
1.3
1.0
.9
1.8
.97
1.5
1.3
1.1
Absolute
Valuation
High
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
22.4
3.3
1.9
5.79
21.4
Low
C.
6.4
1.2
.6
1.97
5.2
Median
D.
11.9
2.2
1.2
4.09
8.8
Current
E.
8.0
1.5
.8
4.30
6.6
#Your
*Your
Target
Target E, S,
Multiple B,
etc/Share
F.
9.5
2.0
1.0
4.20
7.5
G.
4.39
24.71
46.86
8.72
5.68
Your
Target
Price
(F x G)
H.
41.705
49.42
46.86
36.62
42.60
DCF
Recommendation
• Current SIM Market Value @ 1/31/2012: $477,400.00
(4.11%)
ADD: 70 basis points ($83,750 JPM)
Lincoln National
Corp
Stock Overview
•
Ticker: LNC
•
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Stock Price: $25.08
Sector: Financials
Industry: Life Insurance
Beta: 2.58
Dividend Yield: 1.30%
YTD: 29.3%
Company Overview
Businesses:
• Retirement Solutions
o
o
•
Annuities
Defined Contribution
Insurance Solutions
o
o
Life Insurance
Group Protection
Opportunities
• Increased dividend to $0.08 per share from $0.05
• Recent launches such as Lincoln Alliance and
Lincoln Critical Illness have high growth potential
• Aging population will increase customer base
Risks
• Highly cyclical stock with beta of 2.58
o Reached low of $4.80 during recession
• Low expected interest rates until 2013
• Earnings are expected to fall over the next year
• Highly concentrated in the United States with low
global diversification
Valuation
High
Forward P/E
P/B
P/S
P/CF
Forward P/E
P/B
P/S
P/CF
Forward P/E
P/B
P/S
P/CF
13.7
1.8
2.2
13.6
Absolute
Low
Median Current
1.8
10.4
6.3
0.2
1.2
0.6
0.2
1.4
0.7
2.0
9.6
6.0
Relative to Industry
High
Low
Median Current
1.1
0.4
0.9
0.8
1.2
0.4
0.8
0.6
1.7
0.5
1.2
1.0
1.5
0.4
0.9
0.8
Relative to S&P 500
High
Low
Median Current
0.8
0.1
0.6
0.5
0.6
0.2
0.4
0.3
1.4
0.2
1.0
0.6
1.2
0.2
0.9
0.6
Recommendation
• LIQUIDATE - 13,400 @ ~$25 = $335,000 and 12% gain
• Current SIM Market Value (1/31/2012): $288,636.00
(2.48%)
Bank of America
Stock Overview
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Ticker: BAC
Stock Price: $8.12
Sector: Financials
Industry: Banking
Beta: 2.24
Dividend Yield: 0.5%
YTD: 46.04%
Company Overview
• Segments:
Deposits
Global Card Services
Home Loans & Insurance
Global Commercial
Banking
o Global Banking & Markets
o Global Wealth &
Investment
o Management
o
o
o
o
Opportunities
• New BAC Plan: Will reduce expenses by $5 billion by
2013
o Expects to realize 20% of these savings in 2012
• Price to Earnings to Growth ratio of 0.7
• Heavily undervalued under current market
conditions with a Forward P/E of 7.7
Risks
• Strict regulation and higher Tier 1 capital
requirements
• Low interest rates will likely reduce Interest Revenue
until 2013
• New debit card rules will lower debit card fees
• Exposure to the European Debt Crisis
Valuation
Relative to
High
Industry
P/Trailing E
2.1
P/Forward E
2.1
P/B
5.1
P/S
1.4
P/CF
4.8
Relative to S&P
High
500
P/Trailing E
4.5
P/Forward E
5.8
P/B
0.9
P/S
2.6
P/CF
5.5
Absolute
High
Low
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
83
3.8
2.8
6.35
43.5
C.
6
0.3
0.1
0.57
2.7
Low
Median
Current
0.12
0.23
0.5
0.5
0
Low
0.92
0.94
1
1.1
1.1
Median
1.3
1.2
0.6
0.7
0.8
Current
0.43
0.47
0.1
0.4
0.4
Median
0.66
0.68
0.6
2.0
1
Current
#Your
Target
Multiple
D.
11
3
1.7
4.43
10.3
E.
7.7
0.8
0.3
3.47
4.7
F.
10
1
1
4
6
0.47
0.75
0.2
0.6
0.5
*Your
Target
E, S, B,
etc/Sha
re
G.
0.76
9.3
12.63
1.63
2
Your
Target
Price
(F x G)
H.
$7.60
$9.30
$12.63
$6.52
$12.00
DCF
Bank of America
Terminal Discount Rate =
Terminal FCF Growth =
Year
2011
Revenue
93,454
% Grow th
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
97,192
100,885
104,517
108,071
111,529
114,875
118,092
121,162
124,070
126,799
129,335
4.0%
Operating Income
(230)
Operating Margin
-0.2%
Taxes
(1,676)
Tax Rate
728.7%
Net Income
1,446
% Grow th
13,120
13.5%
5,117
39.0%
8,003
453.5%
Free Cash Flow
1,446
% Grow th
8,003
453.5%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
72,428
38,551
110,979
1.69%
65%
35%
100%
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
59.2
76.7
(1,838.7)
(1,949.1)
10.7
13.9
32.2
34.2
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
10,540
$
$
8.12
10.53
29.7%
14.0%
2.0%
3.8%
18,202
18.0%
7,099
39.0%
11,103
38.7%
11,103
38.7%
3.6%
20,903
20.0%
7,316
35.0%
13,587
22.4%
13,587
22.4%
3.4%
21,614
20.0%
7,565
35.0%
14,049
3.4%
14,049
3.4%
3.2%
22,306
20.0%
7,807
35.0%
14,499
3.2%
14,499
3.2%
3.0%
22,975
20.0%
8,041
35.0%
14,934
3.0%
14,934
3.0%
2.8%
23,618
20.0%
8,266
35.0%
15,352
2.8%
15,352
2.8%
2.6%
24,232
20.0%
8,481
35.0%
15,751
2.6%
15,751
2.6%
2.4%
24,814
20.0%
8,685
35.0%
16,129
2.4%
16,129
2.4%
Terminal Value
Free Cash Yield
7.7
10.0
23.2
24.6
2.2%
25,360
20.0%
8,876
35.0%
16,484
2.2%
16,484
2.2%
142,916
11.53%
Terminal P/E
8.5
Terminal EV/EBITDA
5.5x
2.0%
25,867
20.0%
9,053
35.0%
16,814
2.0%
16,814
2.0%
Recommendation
• ADD $167,500 or 1.45%
• Current SIM Market Value (1/31/2012): $142,600
(1.23%)
Wells Fargo
Stock/Company Overview
• Ticker: WFC
• Stock Price: $30.98
• Sector: Financials
• Industry: Banking
• Beta: 1.81
• Dividend Yield: 1.6%
•
Three business segments:
o
Community Banking; Wholesale Banking; and Wealth, Brokerage, and Retirement
Opportunities
• $11 billion acquisition of BNP Paribas energy trading
unit
• One of best capitalized banks -> Basel III
• Acquisition of Burdale Financial
• CFO: “greatly expand wealth and investment
management especially with a worldwide footprint”
• Company has finally put Wachovia behind them
Risks
• Volcker rule as currently written puts strain on
current Mortgage lending business practices
• As yet undetermined costs of Dodd-Frank in general
• Fed funds rate will keep interest returns minimized
over next couple of years
DCF
Recommendation
• Wells already represents ~5% of SIM portfolio
• Based on average upcoming catalysts, the price
action over the past 6 months, and large current
portfolio weight:
• HOLD
HealthCare
REIT Inc.
Stock Overview
• Ticker: HCN
• Market Cap: $10 billion
• Stock Price: $54.55
• Sector: Financials
• Industry: REIT
• Beta: .90
• Dividend Yield: 5.5%
Company Overview
• Primarily invests in senior living and health care
properties
• Senior living communities, medical office buildings,
inpatient and outpatient medical centers and life
science facilities.
• Conducts in-house research to make its
investments.
• Founded in 1970 and is based in Toledo, Ohio
Opportunities
• Just completed placement of $1.1 billion in stock
• Reported fourth quarter 2011 funds from operations
of 83 cents per share, compared with 61 cents in
the year-earlier quarter
• Senior citizen population growing at four times the
rate of the general population
• Real estate market provided serious buying
opportunities – double 2010 to 2011
Risks
• Trading near 52 week high
• If a properties fails to meet federal regulations,
regulatory agencies have the option to deny
Medicare or Medicaid reimbursements
• Receive a significant portion of their income from
these government sources
Valuation
•
P/E and EPS valuations for REITs are nearly worthless
•
900 + properties in 42 states makes HCN well diversified
•
Recurring FFO for the reported fiscal 2011 $3.41 per share,
compared to $3.08 in 2010
•
Occupancy at 93.4% during the year and a retention rate of
79.3%
•
For 2012, expect recurring FFO in the range of $3.68 – $3.78 per
share
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Dividends growing at ~4% per year
Recommendation
• Initiate a position with ~$100,000 representing ~1%
weight in SIM portfolio
Conclusion
JPM
o ADD: 70 basis points ($83,750 JPM) bringing total to 4.81%
• LNC
o LIQUIDATE: Eliminate 248 basis points bringing position to 0%
• BAC
o ADD: 145 basis points bringing position to 2.68%
• WFC
o HOLD: Leave position at 4.45%
• HCN
o ADD: Initiate position with 100 basis points
•