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
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
• Sticking with Diversified Financial Services (JPM), Diversified Banks (WFC) and Life Insurance (LNC) (
)
(
)
– dropping Casualty Insurance (MET)
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
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
/
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
0.2
1.4
0.7
0.9
35.53
31.98
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
Current Price =
Price
Target Price =
Upside/Downside =
Financial Sector
23
23.53
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
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
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