Financial Sector
August 9, 2011
Phillip Needham
Antonio Olmos
Henry On
Rob Phillips
Agenda
g
• Sell MetLife
• Buy more Lincoln National, Wells Fargo, and JP Morgan Chase
Financial Sector
Financial Sector
MET‐ Economic Factors
No meaningful
g difference from industry
y
Financial Sector
Industry Choices
Industry Choices
• Already exposed to Asset Management, y p
g
,
Consumer Finance, Brokerage, Investment and Commercial Banking with JPM
• Thrifts are too small
Thrifts are too small
• REITs are not appropriate
• We considered Reinsurance –
We considered Reinsurance – not enough choices
not enough choices
• Sticking with Diversified Financial Services (JPM), Diversified Banks (WFC) and Life Insurance (LNC) (
)
(
)
– dropping Casualty Insurance (MET)
Financial Sector
MetLife – Summary
MetLife Current weight: 3.29%
Expected return: 11.9%
Expected return: 11.9%
Recommended weight: 0%
R
Recommendation: Sell
d ti
S ll
Financial Sector
MetLife ‐‐ Background
MetLife Overview
•
•
•
•
Largest Life Insurer
International exposure
Dabbles in diversified banking
Earnings quality problems
Segments
•
•
•
•
•
Life
Retirement
Property/Casualty
Corporate
Benefits
Corporate Benefits
Banking
Financial Sector
Key Stats
•
•
•
•
Current Price: 32.49
C
t P i 32 49
52 Week Range: 31.91 – 48.72
Dividend Yield: 2%
M k C
Market Cap: 34.35 B
34 35 B
2nd Q 2011 (compared to 2010)
• Earnings
Earnings down 21% to $1.13/share
down 21% to $1 13/share
• Revenues up 33% • Annuity sales up 45% on reduced margins
MetLife – Price Comparison
MetLife Price Comparison
Financial Sector
MetLife‐‐ Opportunities
MetLife
• Sell volatile banking business
Sell volatile banking business
• Strong brand, broker network
Financial Sector
MetLife – Risks
MetLife • Low interest rates
Low interest rates
– Limits revenues made from investments
• Low
Low GDP growth and high unemployment GDP growth and high unemployment
lowers demand
• New regulations will hinder future revenues
• Wild earnings fluctuations from derivatives
Financial Sector
MetLife (MET)
Analyst:Phillip Needham
Date:6/20/11
Terminal
Discount Rate =
14.0%
Terminal FCF
Growth =
3 0%
3.0%
Year
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
Revenue
63,867
69,637
75,774
81,078
85,943
90,240
93,850
96,665
99,565
102,552
105,629
9.0%
8.8%
7.0%
6.0%
5.0%
4.0%
3.0%
3.0%
3.0%
3.0%
5,246
5,909
7,053
7,702
8,165
8,573
8,916
9,183
9,459
9,742
10,035
8.2%
8.5%
9.3%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
9.5%
1,706
1,922
2,294
2,505
2,655
2,788
2,900
2,987
3,076
3,168
3,264
32.5%
32.5%
32.5%
32.5%
32.5%
32.5%
32.5%
32.5%
32.5%
32.5%
32.5%
3,540
3,987
4,759
5,197
5,509
5,785
6,016
6,197
6,383
6,574
6,771
12.6%
19.4%
9.2%
6.0%
5.0%
4.0%
3.0%
3.0%
3.0%
3.0%
70.79
122
79.74
122
95.18
122
103.95
122
110.19
122
115.69
122
120.32
122
123.93
122
127.65
122
131.48
122
135.42
122
3,347
3,785
4,542
4,971
5,277
5,547
5,774
5,951
6,133
6,321
6,514
13.1%
20.0%
9.5%
6.1%
5.1%
4.1%
3.1%
3.1%
3.1%
3.1%
Terminal Value
60,993
Free Cash Yield
10.68%
Terminal P/E
9.0
Terminal
EV/EBITDA
5.0
% Growth
Operating Income
Operating Margin
Taxes
Tax Rate
Net Income
% Growth
Less: Non-controlling interest
Less: Preferred stock dividends
Free Cash Flow
% Growth
NPV of Cash Flows
27,035
62%
NPV of terminal value
Projected Equity Value
16,452
43,488
38%
100%
Free Cash Flow Yield
8.61%
Current P/E (Forward)
Projected P/E
11.6
13.0
10.3
11.5
8.6
9.6
Current EV/EBITDA
Projected EV/EBITDA
5.4
6.3
4.8
5.6
4.0
4.7
Shares Outstanding
Current Price
Implied equity value/share
Upside/(Downside) to DCF
1,069
$
$36.35
$40.68
11.9%
Financial Sector
Lincoln National – Summary
Lincoln National Current weight: 1.96%
Expected return: 34.76%
Expected return: 34.76%
Recommended weight: 3.96%
R
Recommendation: Buy
d ti
B
Financial Sector
Lincoln National ‐‐ Background
Lincoln National Key Stats
Overview
•
•
Holding company located in Radnor, PA
Industry: Life Insurance
Business
Segments
Retirement Solutions
Annuities
Insurance SSolutions
l i
Life Insurance
Defined Contribution
Group Protection
Financial Sector
•
•
•
•
Current Price: 23.53
52 Week Range: 20.65 – 32.68
Dividend Yield: .8%
Market Cap: 7.4 B
2nd Q 2011 (compared to 2010)
• Annuity deposits up 4%
• Life Insurance sales up 12%
• Defined Contribution operating margins increase to 23%
• EPS $1.01/share > $0.94/share estimate
Lincoln National – Price Comparison
Lincoln National Price Comparison
Financial Sector
LNC ‐ Economic Factors
R = -.51
Financial Sector
R = .17
Lincoln National ‐‐ Opportunities
Lincoln National • Aging
Aging demographics will increase demand
demographics will increase demand
• Focuses on customer service and product and distribution consistency
distribution consistency
• Strong balance sheet
– Repositioned to safer investment grade assets
Financial Sector
Lincoln National – Risks
Lincoln National • Low interest rates
Low interest rates
– Limits revenues made from investments
• Low
Low GDP growth and high unemployment GDP growth and high unemployment
lowers demand
• New regulations will hinder future revenues
Financial Sector
Lincoln National – Valuations
Lincoln National Financial Sector
Life/Health Insurance Industry
High
Low
P/T ili E
P/Trailing E
16
4
12 8
12.8
78
7.8
10.9
P/Forward E
14.6
4.4
12.2
7.2
2
0.9
P/B
2.1
0.5
1.4
0.8
06
0.6
23
2.3
13
1.3
P/S
1.5
0.3
1.1
0.7
140.7
7.2
9.8
8.9
P/CF
13.8
4.6
10.5
7.6
High
Low
Median
Current
Relative to SP500
Hi h
High
L
Low
P/Trailing E
7.8
0.65
0.76
0.73
P/Trailing E
0.87
0.38
0.68
0.61
P/Forward E
1.4
0.6
0.78
0.87
P/Forward E
0.9
0.35
0.69
0.58
P/B
0.9
0.3
0.7
0.5
P/B
0
7
0.7
0
3
0.3
05
0.5
0
4
0.4
P/S
1.9
0.9
1.6
1.1
P/CF
13.4
0.7
0.9
1
P/S
P/CF
1
1.1
0.4
0.6
0.7
1
0.6
0.9
Absolute Basis
High
Low
Median
Current
P/Trailing E
135.2
9.4
13.9
9.4
P/Forward E
20.1
10.6
12.6
P/B
3.2
0.5
P/S
3
P/CF
Relative to SP500
Relative to SP500
Financial Sector
Absolute Basis
Median Current
M di
Median
C
Current
Lincoln National ‐ Valuations
Lincoln National Lincoln Financial Corp. (LNC)
Absolute Basis
High
Low
Median
Current
Relative to Industry
High
Low
P/Trailing E
16.9
2
11.8
6.3
P/Trailing E
1.3
0.42
0.9
0.81
P/Forward E
13.7
1.8
10.9
5.9
P/Forward E
1.1
0.4
0.88
0.81
P/B
2
0.2
1.3
0.5
P/B
1.2
0.4
0.9
0.6
P/S
19
1.9
02
0.2
14
1.4
07
0.7
P/S
/
1.7
0.5
1.2
0.9
P/CF
14.2
2
9.9
6.5
P/CF
1.5
0.4
0.9
0.9
Relative to SP500
Relative to SP500
High
Low
Median
Current
P/Trailing E
0.86
0.17
0.65
0.49
P/Forward E
0.83
0.14
0.62
0.47
P/B
0.6
0.2
0.4
0.3
P/S
1.3
0.2
1
0.6
P/CF
1.3
0.2
0.9
0.8
Financial Sector
Median Current
Lincoln Financial Corporation (LNC)
Analyst:Henry On
Date:7/3/2011
Year
Revenue
% Growth
Operating Income
Operating Margin
Interest and Other
Interest % of Sales
Terminal Discount Rate = 13.00%
Terminal FCF Growth = 2.75%
Current Price $ 23.53 Implied equity value/share $ 32.52 Upside/(Downside) to DCF 38.2%
2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
2021E
11,370 12,306 13,397 14,000 14,560 14,997 15,634 16,181 16,667 17,125 17,596 8.2%
8.9%
4.5%
4.0%
3.0%
4.3%
3.5%
3.0%
2.8%
2.75%
1,705 1,784 1,407 1,540 1,456 1,500 1,563 1,618 1,667 1,712 1,760 15.0% 14.5% 10.5% 11.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%
10.0%
0.0%
0.0%
0.0%
0.0%
Taxes
Tax Rate
409 428 338 385 364 375 391 405 417 428 24.0% 24.0% 24.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
440 25.0%
Net Income
% Growth
1,296 1,356 1,069 1,155 4.6% ‐21.2%
8.0%
Financial Sector
0.0%
0.0%
0.0%
0.0%
0.0%
1,092 1,125 1,173 ‐5.5%
3.0%
4.3%
0.0%
0.0%
1,214 1,250 1,284 3.5%
3.0%
2.8%
1,320 2.8%
Lincoln National – Final Valuation
Lincoln National Final Valuation
Absolute Valuation
A.
P/Forward E
P/S
/S
P/B
P/EBITDA
P/CF
#Your *Your Target Your Target Price High
Low
Median Current Target E, S, B, Multiple etc/Share
(F x G)
B.
C.
D.
E.
F.
G.
H.
13.9
1.8
11
7.5
4.06
30.45
5.9
1.9
9
0.2
0
1.4
0.7
0
0.9
0
9
35.53
35
53
31.98
3
98
2
0.2
1.3
0.5
0.7
40.43
28.30
35.51
1.66
7.02
4.99
6
4.97
29.82
14.2
2.4
10
6.5
8.5
4
34
Average Price Targets =
Average Price Targets = 30 91
30.91
DCF =
32.52
Target Price (50% DCF and 50% Average Price Targets) = 31.71
Current
Price
Current Price =
Target Price =
Upside/Downside =
Financial Sector
23
53
23.53
31.71
34.76%
Lincoln National – Summary
Lincoln National Current weight: 1.96%
Expected return: 34.76%
Expected return: 34.76%
Recommended weight: 3.96% (Up 2.0%)
R
Recommendation: Buy
d ti
B
Financial Sector
Wells Fargo – Summary
Wells Fargo Current weight: 3.94%
Expected return: 26.77%
Expected return: 26.77%
Recommended weight: 4.59%
R
Recommendation: Buy
d ti
B
Financial Sector
Wells Fargo ‐‐ Background
Wells Fargo • Diversified
Diversified financial services
financial services
• Banking, investments, mortgage banking, investment banking retail banking brokerage
investment banking, retail banking, brokerage, and consumer finance.
• Three business segments:
Th
b i
• Community Banking
l l B ki
• Wh
Wholesale Banking
• Wealth, Brokerage and Retirement
Financial Sector
Wells Fargo – Price Comparison
Wells Fargo Price Comparison
Financial Sector
WFC‐ Economic Factors
R = .87
R = -.90
Financial Sector
R = .52
R = -.41
Wells Fargo ‐‐ Opportunities
• Strong growth across franchise
– Average checking and savings deposits up 10 percent from a year ago
– Despite slowly recovering economy, loan commitments to small businesses increased 13% from last year
small businesses increased 13% from last year
• Improved credit quality
– Net charge‐offs declining significantly
g
g g
y
• Wachovia integration
• Cost cutting
Financial Sector
Wells Fargo – Risks
Wells Fargo • If businesses tighten borrowing
If businesses tighten borrowing
• Interest rate uncertainty
Interest rate uncertainty
• Ongoing regulation interpretations
O
i
l i i
i
Financial Sector
Analyst:
Da te: 7/31/2011
Ye a r
2011E
89,684
Revenue
2012E
93,258
% Grow th
4.0%
Ope ra ting Income
27,171
Operating Margin
30.3%
8,966
Ta x es
Tax Rate
Non Controlling Interests
Net Income
28,258
30.3%
9,325
30,976
32.3%
10,222
Projected EV/EBITDA
Sha re s Outsta nding
8,482
31,460
30.0%
10,382
106,963
2.0%
34,228
32.0%
11,295
109,102
111,284
2.0%
36,004
2.0%
38,949
33.0%
11,881
35.0%
12,853
113,510
2.0%
39,728
35.0%
13,110
115,780
2.0%
40,523
35.0%
13,373
1 400
1,400
1 400
1,400
1 400
1,400
1 400
1,400
1 400
1,400
1 400
1,400
1 400
1,400
1 400
1,400
1 400
1,400
1 400
1,400
1 400
1,400
18,633
16,322
20,454
9.8%
17,917
9.8%
39%
163,255
100%
7.1
6.5
8.8
8.0
4.9
4.7
4.3
6 0
6.0
5 8
5.8
5 3
5.3
23.0%
Debt
156
Cash
173
15,872
-11.4%
18,621
2.8%
16,311
2.8%
22,478
20.7%
19,691
20.7%
24,333
8.3%
21,315
8.3%
25,522
27,496
4.9%
22,357
7.7%
24,086
4.9%
7.7%
28,018
1.9%
24,544
1.9%
Fre e Ca sh Yield
9.1
Upside/(Dow nside ) to DCF
-11.4%
Te rmina l Va lue
7.4
25.21
18,119
28,550
1.9%
25,010
1.9%
61%
63,170
31.02
De bt/MV
25.0%
2.0%
2021E
33.0%
$
W orking Ca pita l % of Grow
8,235
25,702
104,865
2020E
33.0%
Implie d equity va lue /share $
Ca sh/sha re
25.0%
3.0%
2019E
33.0%
5,263
Total Asse t
24,954
102,809
2018E
33.0%
11.82%
Curre nt EV/EBITDA
4.0%
2017E
33.0%
100,085
Projected P/E
99,815
2016E
33.0%
4.1%
Curre nt P/E
Curre nt Price
2.9%
2015E
33.0%
15,684
Fre e Ca sh Flow Yie ld
95,976
2014E
33.0%
% Grow th
Projecte d Equity Va lue
2013E
33.0%
4.1%
NPV of te rminal va lue
3.0%
33.0%
17,905
NPV of Cash Flow s
14.0%
Te rmina l FCF Grow th =
33.0%
% Grow th
Fre e Ca sh Flow
Te rminal Discount Rate =
0.03
1,258
12.4%
20%
Financial Sector
234,184
10.68%
Te rminal P/E
8.2
Te rminal EV/EBITDA
5.8
Wells Fargo – Final Valuation
Wells Fargo Final Valuation
Absolute
Valuation
High
Low
Median
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
24 1
24.1
4.4
3.3
10.92
13.1
C.
93
9.3
.9
.8
4.13
5.1
D.
13 2
13.2
3.4
2.7
6.1
10.0
Valuation: 31.87 X 90% = 26.68
DCF
02 X 10% = 3
1
DCF: 31
31.02
3.1
Target Price: 31.79
Financial Sector
Current
E.
99.7
7
1.7
1.3
5.28
9.3
#Your
Target
Multiple
F.
99.9
9
1.9
1.7
5.9
9.6
*Your
Target E,
S, B,
etc/Share
G.
33
3.3
16.8
21.07
5.19
2.95
Your
Target
Price
(F x G)
H.
32 67
32.67
31.92
35.819
30.621
28.32
Target Price: 31.79
C
i
25
21
Currentt P
Price:
25.21
Upside: 26.1%
Wells Fargo – Summary
Wells Fargo Current weight: 3.94%
Expected return: 26.77%
Expected return: 26.77%
Recommended weight: 4.59% (Up 0.65%)
R
Recommendation: Buy
d ti
B
Financial Sector
JP Morgan Chase– Summary
JP Morgan Chase
Current weight: 3.99%
Expected return: 23.13%
Expected return: 23.13%
Recommended weight: 4.63% (up 0.64%)
R
Recommendation: Buy
d ti
B
Financial Sector
JP Morgan Chase ‐‐ Background
JP Morgan Chase • Top Financial holding companies
p
g
p
• Organized into six segments
–
–
–
–
–
–
•
Investment Bank (IB)
Retail Financial Services (RFS)
Retail Financial Services (RFS)
Card Services (CS)
Commercial Banking (CB)
Treasury & Security (T&S)
Asset Management (AM)
Sound Leadership: Jamie Dimon
Financial Sector
2010 Revenues
9%
IB
7%
25%
7%
6%
16%
RFS
CS
CB
30%
T&S
AM
JP Morgan Chase – Price Comparison
JP Morgan Chase Price Comparison
Financial Sector
JPM ‐ Economic Factors
R = .84
R = -.95
Financial Sector
R = .34
R = -.17
JP Morgan Chase ‐‐ Opportunities
JP Morgan Chase •
•
•
•
Expanding commodities business
Expanding
commodities business
Increasing branch openings from 120 to 200
G
Growing Chase Private Services group
i Ch
i
S i
Further expansion of of international wholesale business
Financial Sector
JP Morgan Chase – Risks
JP Morgan Chase • Stock market sentiment‐ change activity of companies moving g
y
p
g
forward with IPO (40% of JPM earnings from Investment Banking)
• Mortgage related litigation and mortgage related issues. M t
l t d liti ti
d
t
l t di
(2010 annual loss of $4B)
• Interest rate risk‐ interest rates may rise and put pressure on y
p p
spreads on how banks make money
• Consumer sentiment‐ saving vs. borrowing (can lead to lower lloan balances)
b l
)
Financial Sector
JP Morgan Chase – DCF
JP Morgan Chase Financial Sector
JP Morgan Chase – Final Valuation
JP Morgan Chase Final Valuation
Valuation: 45.21 X 50% = 22.61
DCF
38 X 50% = 23
69
DCF: 47
47.38
23.69
Target Price: 46.30
Financial Sector
Target Price: 46.30
C
i
37
60
Currentt P
Price:
37.60
Upside: 23.13%
Overall Summary
Overall Summary
•
•
•
•
MetLife: Dump all
MetLife:
Dump all
Lincoln Financial: Increase 2.0%
Wells Fargo: Increase 0.65%
ll
06 %
JP Morgan Chase: Increase 0.64%
Financial Sector
What Questions Do You Have?
Financial Sector