By Jacob Siegmund
Marc Richcreek
Robert Smith
Vinay Mohan
Stocks Overview
Portfolio/Stock
S&P500 Financials
Weight
16.13%
SIM Financials
11.74% (4.39%)
Goldman Sachs
2.74%
Lincoln National Corporation
2.93%
JPMorgan Chase & Co.
3.18%
Wells Fargo & Company
2.89%
Last Class Recommendation
Increase weight by 300 bps
Goldman Sachs
 Industry – Investment






Banking and Brokerage
SIM Weight – 2.74%
Market Cap - $84.42B
Current Price – $165.12
52-week high – $186.41
52-week low – $129.50
P/E ratio – 12.53
 Competitors
 JP Morgan Chase Co.
 Morgan Stanley
 Citigroup
 Lines of Business
 Investment Banking
 Institutional Client
Services
 Investment & lending
 Investment
Management
Opportunities and Risks
 Opportunities
 Leader in Investment Banking, ranked 1st in 2010
 M&A activity picking up economy rebounds
 Manages capital conservatively
 Tier 1 capital ratio under Basel 1 – 15.7% as of September 2010, up from
15.2% as of June 2010
 Risks
 Reputation Risk




S.E.C. Lawsuit
Gender Discrimination Lawsuit
Asset Management Headache – Subpar returns
Institutional and individual investors pulling out
 Regulation Risk
 Frank & Dodd
 Basel III
 Strict limits on proprietary trading by banks
Target Price & Recommendation
Absolute
Valuation
High
A.
Low
B.
Median
C.
Current
D.
#Your
Target
Multiple
E.
*Your
Target E, S,
B, etc/Share
Your Target
Price
(F x G)
G.
H.
F.
P/Forward E
21.5
7.5
11.5
9.4
11.5
13.63
P/S
2.3
0.4
1.4
2.1
2.1
82.00
172.2
P/B
3.3
0.7
2.1
1.2
2.1
128.36
269.56
P/EBITDA
19.39
1.69
7.58
5.84
7.5
22.5
169.11
P/CF
17.2
3.9
11.4
8.7
11.5
16.4
188.60
156.75




Multiples Average Target Price – $171.61
DCF Target Price – $193.34
Final Target Price – (40%DCF + 60%multiples) = $180.34
Limited upside potential of 9%
 Recommendation – Sell entire position = 274 bps
Lincoln National Corp. (LNC)
Overview
 Lincoln National (Holding Company)
 Headquartered in Radnor, Pennsylvania
Business Units
-Retirement Solutions Annuities
-Retirement Solutions Defined Contribution
-Insurance Solutions Life Insurance
-Insurance Solutions Group Protection
 Key Stats
P/E Ratio: 12.42
•Current Price: $31.58
•52 Week High: $33.55
•52 Week Low: $20.65
•Dividend Yield: $.20/0.60%
•Market Cap: $9.99B
Analysts projections
•Number of Brokers: 16
•High Target Price: $41.00
•Mean Target Price: $34.56
•Low Target Price: $26.00
Opportunities and Risks
Strengths and Opportunities
 A strong balance sheet
 Large group in the population looking for retirement and
financial services
Weaknesses and Risks:
 Low interest rate
-lower reinvestment of insurance premiums
-smaller interest margins
-guaranteed annuities
 New regulation in financial services affecting the value of
assets
Target Price & Recommendation
Absolute
Valuation
High
A.
Low
B.
Median
C.
Current
D.
#Your
Target
Multiple
E.
F.
*Your
Target E,
S, B,
etc/Share
G.
Your
Target
Price
(F x G)
H.
P/Forward E 13.9
1.8
11.3
7.9
10.2
3.04
31.008
P/S
1.9
0.2
1.4
0.9
1.15
34.34
39.491
P/B
2
0.2
1.3
0.7
1.2
41.5
49.8
P/EBITDA
35.51
1.66
7.19
5.72
6.8
5.082
34.5576
P/CF
14.2
2.4
10
8.6
9.2
3.38
31.096
 Ignore price to book because it is not very accurate
 Target Price= Average of P/Forward E, P/S, P/EBITDA, P/CF
=$34.03
 Sell 100 basis points due to limited upside
Wells Fargo (WFC)
The Bull Case
Bearish Points
 Strong Balance Sheet and
 Regulation looms large
Capital Levels
 Meets likely Basel III
requirements
 Wachovia acquisition better
than expected
 Improving credit demand and
performance
 Executing well on strategy
 Gaining market and wallet
share
 Relatively cheap
 Mortgage fiasco and potential
litigation risk
 CFO departure
 Possible double dip in
Housing Market
 Struggling economic
conditions
Market & Wallet Share
U.S. Market
Share %
1Q09
2010
Share of Peers %
1Q09
3Q10
Mortgage
Originations
22.8
25.1
Trust and
investment fees
15.0
18.0
Mortgage
servicing
16.1
17.2
Insurance fees
23.0
25.0
Average deposits
18.2
18.4
Private student
lending
16.0
25.0
Average loans
19.1
19.4
Indirect auto
lending
4.3
5.4
Loan
syndications
4.8
Retail Bank Cross-sell
7
9.7
6
5.91
5
Asset based
lending
11.3
14.6
Municipal bond
issuance
2.1
3.4
Retirement
services
3.1
3.7
4
4.85
6.14
5.11
5.47
5.7
4Q09
3
Source: Wells Fargo 4Q10 Quarterly Supplement
4Q10
2
1
0
East
West
Combined
Credit Metrics
Provision Expense ($
billions)
Nonperforminf Assets ($
billions)
7.00
40
6.00
1.00
5.00
4.00
35
-
0.70
30
-
1.30
-
-
6.3
4.2
5.1
27.3
27.8
28.3
1Q10
2Q10
3Q10
6.2
3.2
25
2.6
3.00
2.00
0.50
4.39
5.11
5.41
20
5.33
4.49
4.10
3.26
3.84
1.00
2.5
15
10
2.1
20.9
24.4
26.2
15.8
-
(0.50) (0.65) (0.85)
(1.00)
1Q09 2Q09 3Q09 4Q09
1Q10
2Q10
3Q10
4Q10
(2.00)
Net Chare-offs
Credit Rederve Build
Source: Wells Fargo 4Q10 Quarterly Supplement
Reserve Release
5
10.5
0
1Q09
2Q09
3Q09
Nonperforming loans
4Q09
4Q10
REO/Foreclosed assets/Other
Strong Buy
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
B.
24.1
5.4
3.7
10.92
15.5
Median
Current
D.
E.
C.
9.3
0.9
0.8
4.13
5.1
13.4
3.4
2.7
6.14
10.0
11.4
2.0
1.5
6.14
11.5
#Your Target
Multiple
F.
14.0
3.0
2.2
7.0
10.0
•Valuation
•Relatively low for most metrics
•Generally trades at a premium to Industry
•Combined DCF† and multiple values price target: $48
•Recommendation
•Current price: $32.40 -implied upside about 48%
•Increase position in WFC by 140 bps
†See appendix for WFC DCF
*Your Target
E, S, B,
etc/Share
G.
2.77
16.36
23.85
6.50
6.12
Your Target
Price
(F x G)
H.
38.78
49.08
52.47
45.5
61.20
J.P. Morgan (JPM)
Strengths
Fortress Balance Sheet
-Basel I Tier 1 Common of 9.8%
-Estimated Basel III Tier 1 Common of 7.0%, meeting 2019 requirements
-Credit reserves at $33B; loan loss coverage ratio at 4.5% of total loans
Excellent Management
-Jamie Dimon regarded as the best in the industry
-Intense focus on risk control, pre and post crisis
Potential Challenges
Regulation
-Frank & Dodd
-Basel III
Future Loan Losses
-Appear to have adequate coverage to withstand substantial losses
-Loan Loss Reserves have
peaked
-Adequate reserves to absorb
future losses
-Reserves/Total Loans lower than
industry average
-Reserves/Non-Performing Loans
higher than industry average
Data source: JPMorgan Investor Relations
Five Year Performance
JPMorgan
Bank of America
Citigroup
Source : Bloomberg
J.P. Morgan (JPM)
Absolute
Valuation
High
A.
Low
B.
Median
C.
Current
D.
E.
#Your
Target
Multiple
F.
*Your
Your Target
Target E, S, Price
B, etc/Share (F x G)
G.
H.
P/Forward E
22.4
8.7
12.1
9.6
12.3
5.11
$62.85
P/S
3.4
1.2
2.3
1.7
2.4
25.1
$60.2
P/B
2.6
0.6
1.3
1.1
1.5
44.2
$66.30
P/EBITDA
5.79
1.97
3.88
5.6
4
10.30
$41.20
P/CF
29.9
6.1
9.5
9.1
10.2
5.11
$52.12
-Generally cheap on an absolute multiples basis
-DCF, while not necessarily predictive for a financial stock,
returns a value near $77 per share
-Expected range of $58-$65 (25%-39% upside), recommend
adding 140 bps
CIT Group (CIT)
The Business
 Corporate Finance
 Lending, leasing, financial and advisory
Bankruptcy
 Relied on short-term
services to small business and middle
market
 Trade Finance
 Factoring, credit protection, accounts
receivable management, asset-based
lending


 Transportation Finance
 Railcar and aircraft lessor
 Vendor Finance

 Global leasing, financing solutions
 Consumer Finance
 Student loans
 Portfolio being run off


funding and
securitizations
TARP: received $2.3 Billion
11/1/09 repackaged
Chapter 11
12/10/09 emerged from
bankruptcy
Shed $10.4B debt
Refinanced $23.2B
CIT Group (CIT)
The Opportunity
 Strong capital position post bankruptcy
 Major player in Middle Market Finance
 Commercial and Middle Markets
strengthening
 Improving fundamentals
 Large, growing earnings potential
 Not fully recognized by the Street
 Positive business catalysts
 Recent credit offerings well received
 Book Value calculated at Fair Value post
bankruptcy, limits downside
 Wildcard: Potential acquisition target
Risks
 Reputation post





bankruptcy
Competition
Balance sheet still
shrinking
Below investment grade
credit rating
High funding costs
Regulatory hurdles
Absolute
Valuation
Valuation
High
High PB
Predecessor
Low P
Low PB
Median P
Median PB Current
#Your
Target
Multiple
Target E, S, Target Price
B, etc/Share
P/Forward E
23.5
30.4
3.9
17
10.2
21.5
23.1
20
2.03
40.6
P/S
P/B
P/EBITDA
2.9
1.7
2.99
9
5.9
3.2
0
0
0.04
3.6
0.7
1.83
1.5
1.4
2.19
6.1
0.9
2.69
3.6
1
1.83
3.6
1.5
2.5
12.35
44.48
6.5
44.46
66.72
16.25
P/CF
21.3
157.3
0.5
7.3
4.8
18
7.3
10
5.92
59.2
Start Position
 Current price: $43.32
 Book Value: $44.48
 1.4-1.5x BV: $62-67 target
 Potential normalized earnings: $4-6
 12-14x PE: $48-84 target
 DCF Target price: $61.00†
 Target: $64
 Buy 394 bps
†See Appendix for CIT Group DCF
Recommendation Summary
Stock
Recommendation
Goldman Sachs
Sell entire position – 274 bps
0%
Lincoln National Corporation
Sell 100 bps
1.93
JPMorgan Chase & Co.
Buy 140 bps
4.58
Wells Fargo & Company
Buy 140 bps
4.29
CIT Group
Buy 394 bps
3.94
Total Portfolio Weight
Final Weight
14.74
What questions
do you have?
Lincoln Financial Corp (LNC)
Analyst: Jacob Siegmund
Date: 3/1/2011
Year
2010E
Revenue
10,850
2011E
11,713
% Growth
2012E
12,694
8.0%
Operating Income
1,714
Operating Margin
2,015
15.8%
Interest and Other
228
Interest % of Sales
234
416
Tax Rate
2.0%
499
Prefered Dividends
Dividend % of Revenue
168
Net Income/ Free Cash Flow
931
1,182
% Growth
1,321
26.9%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
7,374
47%
8,478
15,853
53%
100%
Free Cash Flow Yield
9.29%
Current P/E
Projected P/E
10.8
17.0
8.5
13.4
7.6
12.0
Current EV/EBITDA
Projected EV/EBITDA
6.6
10.0
5.7
8.6
5.1
7.8
Shares Outstanding
Implied equity value/share
Upside/(Downside) to DCF
Debt
Cash
Cash/share
316
$
$
31.72
50.17
58.2%
5,400
4,025
12.74
114.00
0.8%
1,312
11.8%
557
104.73
0.8%
1,292
-0.7%
556
94.26
0.7%
1,328
-1.5%
584
98.97
1,337
2.8%
667
90.50
28.0%
94.12
0.5%
1,558
0.5%
1,620
5.0%
5.7%
Terminal
Value
24,074
Free Cash
Yield
6.73%
Terminal P/E
14.9
Terminal
EV/EBITDA
1.6%
28.0%
0.6%
1,474
5.0%
301
641
103.92
14.3%
1.6%
28.0%
0.6%
1,403
0.6%
2,682
290
613
4.0%
14.3%
1.6%
28.0%
0.6%
18,824
2,579
277
2020E
4.5%
14.3%
1.6%
28.0%
18,100
2,468
264
2019E
5.0%
14.3%
1.6%
28.0%
17,320
2,351
251
2018E
5.0%
14.3%
1.7%
28.0%
16,496
2,239
254
2017E
5.0%
15.0%
1.8%
547
108.05
15,710
2,244
256
2016E
5.0%
15.5%
28.0%
0.8%
14,962
5.5%
1.9%
552
100
0.9%
2015E
2,209
257
28.0%
100
1.5%
2014E
16.5%
2.0%
28.0%
4.0%
14,249
2,229
553
28.0%
Terminal FCF
Growth =
6.4%
17.5%
248
2.1%
Taxes
13,507
2,221
11.0%
2013E
8.4%
17.2%
Terminal
Discount Rate
=
9.5
4.0%
Wells Fargo (WFC)
DCF
Terminal
Discount
Rate =
Terminal
FCF Growth
=
Analyst: Robert Smith
2/28/2011
Year
2010
2011E
2012E
2013E
2014E
10.5%
3.5%
2015E
2016E
2017E
2018E
2019E
2020E
130,004
4.0%
Revenue
% Growth
85,210
85,813
0.7%
90,131
5.0%
95,539
100,794
105,834
110,596
115,573
120,196
125,004
6.0%
5.5%
5.0%
4.5%
4.5%
4.0%
4.0%
Operating Income
Operating Margin
19,001
22.3%
23,510
27.4%
29,319
32.5%
31,528
33.0%
33,262
33.0%
34,396
32.5%
35,391
32.0%
36,406
31.5%
37,261
31.0%
38,126
30.5%
39,001
30.0%
6,338
33.4%
7,758
33.0%
9,675
33.0%
10,404
33.0%
10,976
33.0%
11,351
33.0%
11,679
33.0%
12,014
33.0%
12,296
33.0%
12,582
33.0%
12,870
33.0%
Noncontroling Interests
Interest % of sales
301
0.35%
325
0.38%
351
0.39%
372
0.39%
393
0.39%
423
0.40%
442
0.40%
462
0.40%
481
0.40%
500
0.40%
520
0.40%
Preferred Dividends
Dividends % of Sales
730
0.86%
767
0.89%
805
0.89%
860
0.90%
927
0.92%
995
0.94%
1,062
0.96%
1,133
0.98%
1,202
1.00%
1,250
1.00%
1,300
1.00%
14,660
26.0%
18,488
26.1%
19,892
7.6%
20,966
5.4%
21,627
3.2%
22,208
2.7%
22,797
2.7%
23,282
2.1%
23,794
2.2%
24,311
2.2%
Taxes
Tax rate
Net Income
% Growth
NPV of Net Income
NPV of Terminal Value
Projected Equity Value
Net Income Yield
Current P/E
Projected P/E
11,632
$114,035
46%
132,440
$246,475
54%
100%
Terminal
Value
Net Income
Yield
6.82%
15
12
9
21
17
13
Termianl P/E
359,452
6.76%
14.79
14.4
Shares Outstanding
5263.1
Current Price
Implied equity vale/share
Upside/(Downside) to DCF
32.4
$46.83
44.5%
Short-term borrowings
Long-term debt
Cash and due from banks
Per share
55,401
156,983
16,044
3.05
10-year
median
trailing P/E
JPMorgan DCF
Year
Revenue
2010E
170,949
% Growth
Operating Income
Operating Margin
Provisions for Credit Losses
Interest and Other
Interest % of Sales
Taxes
Tax Rate
Net Income
105,949
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
110,709
2012E
181,060
2.1%
114,030
2013E
187,397
3.5%
118,060
2014E
193,956
3.5%
122,192
2015E
201,714
4.0%
123,046
2016E
209,783
4.0%
126,919
2017E
218,174
4.0%
130,905
2018E
226,465
135,879
62.4%
63.0%
63.0%
63.0%
61.0%
60.5%
60.0%
60.0%
17,000
12,000
7,000
7,000
6,000
5,000
5,000
5,000
5,000
63,569
37.2%
7,614
29.0%
17,766
17,766
66,425
37.5%
9,685
30.0%
22,598
68,418
37.8%
11,584
30.0%
27,028
70,813
37.8%
12,074
30.0%
28,173
73,291
37.8%
12,870
30.0%
30,031
76,223
37.8%
12,547
30.0%
29,276
79,272
37.8%
12,794
30.0%
29,853
82,443
37.8%
13,039
30.0%
30,423
85,575
37.8%
13,591
30.0%
31,712
27.2%
19.6%
4.2%
6.6%
-2.5%
2.0%
1.9%
4.2%
22,598
27,028
28,173
30,031
29,276
29,853
30,423
31,712
27.2%
19.6%
4.2%
6.6%
-2.5%
2.0%
1.9%
4.2%
11.5
9.1
7.6
19.0
14.9
12.5
8.2
7.9
7.7
9.5
9.1
8.8
2019E 2020E
234,844
3.8%
62.0%
% Growth
Current P/E
177,359
3.7%
% Growth
Free Cash Flow
2011E
243,533
3.7%
140,906
3.7%
146,120
60.0% 60.0%
5,000
88,742
5,000
92,025
37.8% 37.8%
14,149
14,728
30.0% 30.0%
33,015
34,366
4.1%
4.1%
33,015 34,366
4.1%
4.1%
Terminal Value 510,587
Free Cash
Yield 6.73%
10-year
Shares Outstanding
4,394
Current Price
$ 46.68
Implied equity value/share
Upside/(Downside) to DCF
$ 76.73
64.4%
Terminal P/E
Terminal
EV/EBITDA8.1
14.9 16.0
9.6
CIT Group (CIT)
DCF
Terminal
Discount
Rate =
Terminal
FCF Growth
=
Analyst: Robert Smith
2/26/2011
Year
Revenue
% Growth
2010
2,255
11.0%
4.0%
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2,470
9.5%
2,900
17.4%
3,248
12.0%
3,605
11.0%
3,966
10.0%
4,323
9.0%
4,669
8.0%
4,995
7.0%
5,295
6.0%
5,560
5.0%
Operating Income
Operating Margin
535
23.7%
740
30.0%
1,160
40.0%
1,250
38.5%
1,352
37.5%
1,448
36.5%
1,556
36.0%
1,657
35.5%
1,748
35.0%
1,853
35.0%
1,946
35.0%
Taxes
Tax rate
134
25.0%
185
25.0%
290
25.0%
375
30.0%
406
30.0%
434
30.0%
467
30.0%
497
30.0%
525
30.0%
556
30.0%
584
30.0%
4
0.18%
4
0.16%
4
0.14%
4
0.14%
5
0.14%
5
0.14%
6
0.14%
6
0.14%
7
0.14%
7
0.14%
8
0.14%
551
38.7%
866
57.2%
871
0.6%
941
8.1%
1,008
7.1%
1,083
7.5%
1,154
6.5%
1,217
5.5%
1,290
6.0%
1,354
5.0%
Noncontroling Interests
Interest % of sales
Net Income
% Growth
NPV of Net Income
NPV of Terminal Value
Projected Equity Value
Net Income Yield
Current P/E
Projected P/E
Shares Outstanding
Current Price
Implied equity vale/share
Upside/(Downside) to DCF
397
$5,222
42%
7,087
$12,309
58%
100%
Terminal
Value
Net Income
Yield
4.55%
22
16
10
31
22
14
200.905
43.49
$61.27
40.9%
Termianl P/E
20,124
6.73%
14.86