Financial Sector
Finance 724/824, Spring 2011
Lauren Kirk, Krystal Patel, Bryan McElwain, Matt McHenry, Chris Koenig
Table of Contents
Financial Sector
2
Section 1
Overview of Sector
Section 2
Business Analysis
Section 3
Economic Analysis
Section 4
Financial Analysis
Section 5
Valuation Analysis
Section 6
Recommendation
Overview of Financial Sector
A category of stocks containing firms that provide
financial services to commercial and retail customers.
This sector includes banks, investment funds, insurance
companies and real estate.
3
Overview of Financial Sector
•
Financial Sector is 3rd largest
at 17% of overall market
Basic Materials
3% 2%
6%
Consumer Goods
23%
9%
Financial
Technology
11%
Industrial Goods
18%
12%
Healthcare
Services
17%
Utilities
Conglomerates
4
Overview of Financial Sector
•
Financial Sector is 2nd
largest at 15.47% of S&P
•
Consumer Discretionary
Market Cap: $1922.61B
2.98%
Consumer Staples
3.21%
10.60%
3.66%
Energy
Financials
10.42%
18.07%
Health Care
Industrials
Information Technology
13.09%
Materials
Telecom Services
Utitlies
11.23%
15.47%
11.27%
5
Financial Sector
Top Industries
Top 10 Industries
make up 94% of
Financial Sector
Money Center Banks
make up 52% of
entire Financial
Sector
Money Center Banks
2%
3%
2%
2%
Regional - Midwest Banks
3%
Asset Management
5%
Foreign Regional Banks
5%
Property & Casualty
Insurance
5%
Life Insurance
52%
REIT - Diversified
15%
Investment Brokerage National
Insurance Brokers
Real Estate Development
6
Top Players in Financial Sector
Operating
Company
7
Ticker Market Cap ($B)
EPS
P/E
NP margin
Margin
ROE
JP Morgan
JPM
181.63
4.5
10.12
16.91%
42.10%
9.69%
Wells Fargo
WFC
153.53
2.42
11.99
14.86%
22.30%
10.53%
Citigroup Inc
C
132.78
0.31
14.64
12.65%
15.22%
6.67%
Bank of America
BAC
125
-0.44
-
-2.03%
-1.20%
-1.77%
Goldman Sachs
GS
78.93
9.11
16.65
18.17%
28.05%
11.50%
American Express Co
AXP
58.93
3.59
13.65
13.42%
19.72%
26.15%
American Intl Group Inc
AIG
56.13
14.11
2.21
15.62%
23.20%
30.11%
US Bancorp
USB
49.52
1.94
13.28
18.20%
23.41%
12.80%
Metlife Inc
MET
49.19
3.17
14.69
5.27%
7.51%
6.51%
Morgan Stanley
MS
40.48
1.76
14.87
14.36%
16.31%
7.97%
BlackRock Inc
The Bank of
BLK
37.59
11.27
17.4
23.80%
34.81%
8.06%
New York Mellon
BK
35.74
2.13
13.5
19.08%
26.62%
8.43%
Simon Property Group
SPG
33.62
2.08
54.99
19.04%
35.01%
13.27%
PNC Finl Services Group
PNC
32.64
5.97
10.4
19.16%
25.73%
8.77%
Prudential Financial Inc
PRU
30.89
5.75
11.02
8.10%
11.51%
9.39%
Lincoln National Corp
LNC
9.86
2.56
12.18
9.14%
14.65%
6.60%
CIT Group Inc.
CIT
8.5
2.18
19.45
8.19%
12.07%
5.97%
SIM Class Financial Sector
Quantity
Security
Ticker
GIC Sector
Unit Cost
Total Cost
Market
Price
Market Value
Gain
30,000
Wells Fargo & Company
WFC
Financials
30.23
$906,804.72
31.71
$951,300.00
$44,495.28
21,000
JPMorgan Chase & Co
JPM
Financials
41.18
$864,859.08
46.10
$968,100.00
$103,240.92
17,400
CIT Group Inc.
CIT
Financials
43.29
$753,162.48
42.55
$740,370.00
-$12,792.48
15,700
Lincoln National Corporation
LNC
Financials
25.06
$393,463.98
30.04
$471,628.00
$78,164.02
$3,131,398.00
$213,107.74
$2,918,290.26
*MetLife currently not in SIM Portfolio
•As
of 3/31, we have
$213,107 in gains
•2
of the four financial stocks
are in the top 10 holdings of
the portfolio
Quick Facts
S&P Weight: 15.47%
SIM Weight: 14.19%
SIM relative to S&P: -1.29%
Top 10 Holdings
Ticker
Security
CVX
Chevron Corp.
$1,074,900
4.87%
AAPL
Apple Inc.
$1,045,523
4.74%
WMT
Wal-Mart Stores Inc.
$972,034
4.41%
JPM
JPMorgan Chase & Co
$968,100
4.39%
GD
General Dynamics Corp.
$957,000
4.34%
WFC
Wells Fargo & Company
$951,300
4.31%
NIHD
NII Holdings Inc.
$941,742
4.27%
RIG
Transocean LTD
$904,220
4.10%
FLS
Flowserve Corp.
$901,600
4.09%
HPQ
Hewlett Packard Co.
$889,049
4.03%
$9,605,467
43.53%
Grand Total
8
Mkt. Value
% Mkt. Value
Sector Performance
Sector
Last 12 months
Last 3 months
Last 1 month
Energy (XOM.S)
28.68
11.29
2.40
Material (DD.S)
33.66
10.30
6.26
Industrials (GE.S)
28.17
7.59
5.20
Consumer Discretionary (TGT.S)
32.88
9.18
8.26
Consumer Staples (PG.S)
24.73
11.86
8.26
Healthcare (MRK.S)
22.20
13.14
9.48
Financials (JPM.S)
10.26
5.07
2.96
Information Technology (MSFT.S)
25.22
5.69
4.39
Telecom (VZ.S)
29.93
7.73
4.64
Utilities (EXC.S)
15.65
7.10
6.67
Morningstar.com
9
External Factors
Political
Dodd-Frank Legislation
Reform Consumer Protection Act
Economic
Unemployment rate
2-year treasury note rate
Velocity of money supply
Federal funds rate
Personal savings rate
10
Porter’s 5 Forces
•
•
•
•
Maturity Phase
Barriers to entry high
•
High Capital Requirements
•
Regulations
Competition and Consolidation
•
Bank of America/Merrill Lynch
•
JP Morgan buys failed WaMu
Buyer Power
•
•
Supplier Power
•
•
11
Commodity for general customers
Federal Reserve
Substitution
•
Savings, Credit Cards, Investing, Insurance
•
Commodity for general customers
Economic Analysis
12
Economic Analysis of Financial Sector
•
Correlation with Economic Indicators
FEDERAL FUNDS RATE AND FINANCIALS
•STRONG CORRELATION W/ FED FUNDS RATE
•Cut from 1.0% to .25% in 2008
• Influences short-term interest rates,
deposits, bank loans, credit card interest
rates, and adjustable-rate mortgages
13
EMPLOYMENT AND FINANCIALS
•STRONG CORRELATION WITH EMPLOYMENT
•Hit high of 10.2% in Oct ‘09
Economic Analysis of Financial Sector
•
Correlation with Economic Indicators
2 YEAR TREASURY AND FINANCIALS
•STRONG CORRELATION W/ TREASURIES
•Interest rates tied to treasuries
*data as of April 27, 2011
14
10 YEAR TREASURY YIELD AND FINANCIALS
Economic Analysis of Financial Sector
•
Correlation with Economic Indicators
HOUSING STARTS AND FINANCIALS
Number of new houses on which
construction has been started
•2005: 2,068,300 homes
•2010: 586,900 homes
15
CONSUMER CONFIDENCE AND FINANCIALS
Increasing
•Now at 65.4
•Depends on labor market,
global economy, etc.
Financial Analysis
16
Financial Sector Revenues
•21%
drop in 2008
•Downward
that point
•
17
slope since
Earnings per Share
growth rates:
•5 yr at -52%
•3 yr at 50%
•Current Yr at 14%
•Long term at 7%
Sector Net Profit Margin Relative to S&P
Net Profit
18
High
2.3
Low
-0.2
Median
2.1
Current
1.3
Financial Sector - Industry Revenues
Revenues
Industry
Money Center Banks
Regional Banks
Asset Management
Property & Casualty
Insurance
Life Insurance
REIT - Diversified
Investment Brokerage National
Insurance Brokers
Real Estate Development
19
Historical Growth Rates
Last 12
10 yr 5 yr
3 yr
Months
1%
-5%
-5%
-22%
2%
-5% -12%
-17%
8%
-3% -13%
19%
Expected Growth Rate
Current Q
Current Yr Next Yr
(March)
('11)
('12)
-24%
-10%
5%
-9%
-10%
3%
20%
20%
9%
3%
1%
0%
-11%
3%
7%
2%
5%
-
3%
-
-3%
-10%
14%
0%
3%
-4%
4%
-2%
5%
-2%
1%
-19%
-2%
-2%
-12%
4%
8%
4%
-
-7%
-
-5%
-23%
-7%
7%
-15%
38%
-9%
33%
1%
10%
Financial Sector - Industry EPS
ESP
Industry
Historical Growth Rates
Last 12
10 yr 5 yr 3 yr Months
Expected Growth Rate
Current Q Current Yr Next Year
Future
(March)
('11)
('12)
Growth Rate
Money Center Banks -14%
-
156%
235%
-1%
21%
30%
5%
Regional Banks
-18%
-
-
170%
-
104%
42%
6%
Asset Management
Property & Casualty
Insurance
5%
-4% -12%
15%
15%
14%
17%
11%
8%
-8%
-2%
-37%
-14%
0%
11%
9%
Life Insurance
8%
-2%
-3%
21%
9%
10%
12%
12%
REIT - Diversified
Investment Brokerage
-9%
- National
-
-15%
8%
6%
1%
2%
5%
-
387%
14%
-73%
6%
31%
12%
-10%
-
227%
-32%
16%
-14%
14%
11%
-
-
-15%
-1%
-1%
14%
16%
7%
Insurance Brokers
Real Estate
Development
20
Valuation Analysis
21
Financial Sector Valuation
Trailing P/E
*10 year time period
22
Financial Sector Valuation
Forward P/E
*10 year time period
23
Financial Sector Valuation
P/B
*10 year time period
24
Financial Sector Valuation
P/S
*10 year time period
25
Financial Sector Valuation
•Overall
in sector and
industries, current
valuations are below
the median
26
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
135.2
20.1
3.2
3.1
140.7
Low
10.5
10.6
.5
.6
7.2
Median
14.0
12.7
2.0
2.4
9.9
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
7.8
1.4
.9
1.9
13.4
Low
.65
.60
.3
.9
.7
Median
.77
.77
.7
1.6
.9
Current
13.8
12.2
1.1
1.5
10.8
Current
.89
.87
.5
1.1
1.1
*10 year time period
Industry Valuation
Relative to S&P 500
Insurance/Life Insurance
Absolute
Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
17.2
15.0
2.2
1.5
13.8
4.0
4.4
.5
.3
4.6
13.1
12.4
1.5
1.1
10.7
9.8
8.9
1.0
.9
9.3
Relative to
SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
.87
.90
.7
1.0
1.1
.38
.35
.3
.4
.6
.69
.70
.5
.7
1.0
.64
.64
.4
.7
.9
Relative to
SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
2.9
2.9
2.0
6.9
2.6
.90
.90
.5
2.4
.7
1.3
1.2
.9
4.2
1.5
1.2
1.2
.7
2.9
1.5
Mortgage Investment
Absolute
Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
54.3
39.7
5.7
9.2
27.9
10.4
11.9
.7
1.9
6.7
22.7
18.1
2.3
6.4
14.6
18.7
16.3
1.5
3.8
14.6
*10 year time period
27
Industry Valuation
Relative to S&P 500
Money Center Banks
28
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
54.8
25.2
2.8
3.9
32.8
Low
9.5
10.0
0.7
0.8
5.6
Median
13.7
12.4
2.1
3.3
10.3
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
4.6
1.6
0.9
2.7
2.9
Low
0.61
0.52
0.5
1.2
0.7
Median
0.74
0.75
0.7
2.2
1.0
Current
13.3
11.0
1.4
2.0
11.4
Current
0.88
0.80
0.6
1.5
1.2
*10 year time period
Recommendations
29
Recommendations
•
Pros
•
•
•
Cons
Cyclicality
•
Signals of future
rebound (net
profit)
•
•
•
•
30
Government intervention
•
Sector underperformance
•
Cyclicality: currently in
down cycle
Dodd/Frank
Uncertainty about
regulation
Low lending demand for
retail and commercial
business lines
Hold underweight position for SIM relative to S&P
•
Time horizon is one quarter (short-term)
•
Apprehensive about uncertainty in market
QUESTIONS?
31