FIN824 ‐ Summer 2010
Irwan Jo, Paul Kanning, Harsha Kolli
FINANCIAL SECTOR
Agenda
ƒ Sector Analysis
ƒ Economic Analysis
ƒ Financial Analysis
ƒ Valuation Analysis
ƒ Technical Analysis
ƒ Recommendation
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Sector: SIM vs. S&P500
ƒ Relative Underweight
à
à
à
à
Financials
IT
Materials
Energy
ƒ Relative Overweight
à
à
à
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
Health Care
Industrials
Cash
3
Sector: Size & Composition
SIM Holdings
Firm
Ticker
Market Value
% (SIM)
Goldman Sachs Group Inc. Hudson City Bancorp Inc. Progressive Corp. GS HCBK PGR $879,300.00 $740,544.00 $577,710.00 4.8% 4.1% 3.2%
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Sector: Returns
Sector
Adjusted Market Cap ($Million)
Adjusted Market Cap (%)
Index Level
Performance Energy
1,092,808.17
11%
Materials
355,976.48
Industrials
QTD
YTD
406.57
8.89%
‐5.44%
4%
194.85
12.98%
‐2.48%
1,071,573.10
11%
265.46
11.4%
9.25%
Cons Disc
1,035,893.70
10%
252.17
9.78%
7.27%
Cons Staples
1,149,847.63
11%
280.96
6.98%
2.43%
Health Care
1,147,774.76
11%
334.69
2.39%
‐7.6%
Financials
1,648,598.01
16%
198.98
7.19%
2.68%
Info Tech
1,915,317.25
19%
361.51
9.57%
‐2.48%
Telecom Svc
301,861.77
3%
109.98
7.78%
‐4.06%
Utilities
371,809.70
4%
155.84
8.65%
‐1.36%
Sector 1 Year 3 Year
5 Year
‐.13%
‐11.01%
1.71%
Materials
11.64%
‐11.65%
.64%
Industrials
24.57%
‐12.4%
‐2.68%
Cons Disc
26.11%
‐9.53%
‐2.39%
Cons Staples
10.27%
‐1.93%
2.29%
Health Care
6.67%
‐7.2%
‐1.91%
Financials
15.47%
‐27.41%
‐14.08%
Info Tech
14.71%
‐5.28%
1.27%
Telecom Svc
‐2.05%
‐16.65%
‐3.37%
Energy
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Sector: Findings
ƒ Financial sector is mature & cyclical
ƒ Key drivers:
à Regulations
‚ Derivatives exchange
‚ Consumer protection agency
‚ Fee controls
à Interest rates
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Economic: Consumer Spending & GDP
Consumer Spending
ƒ
ƒ
Correlation of 0.77 over past 10 years
“U.S.: Risks gathering around the consumer from weak jobs and fading fiscal stimulus. Consumption growth forecasts reduced to +2.5% from +3% for 2010/2011.” ‐ Friday, July 23, 2010, Decision GDP
ƒ
ƒ
Correlation of 0.44 over past 10 years
“The Advance Real GDP report for Q2 to show recovery slowing, with growth easing towards 2 ¼% ‐ 2 1/2%.” ‐ Friday, July 23, 2010, Decision Economics
Economics
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Economic: Interest Rates
ƒ
ƒ
ƒ
Correlation of 0.74 over past 10 years
Fed Funds Rate targeted to stay between 0 and 25 basis points in near term
Slow economic recovery and remaining economic threats point to continued low Fed Funds Rate over next year
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Financial: Sector Revenue & Earnings
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Analysis Summary
Economic:
• General economics indicators are downward trending, flat at best
• Financial sector has strong‐to‐
medium strong correlation to key indicators
Valuation:
Technical:
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Financial Sector Valuation
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
135.2
21.6
3.4
3.6
140.7
High
7.8
1.4
.9
1.9
13.4
Low
10.5
10.6
.5
.6
7.2
Low
.56
.6
.3
.9
.7
Median
14.7
12.7
2.1
2.4
10.1
Median
.76
.76
.7
1.6
.9
Current
15.3
12.6
1.1
1.3
10.1
Current
1.0
.93
.5
1.1
1.1
à P/E Ratios: Both absolute basis and relative to S&P 500 are relatively expensive
à P/B and P/S are both relatively lower than 10 year average
à There are some opportunities to gain some conservative returns in sales moving forward.
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Industry Valuation – Relative to S&P500
Investment Bank and Brokerage
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
151.5
70.5
6.0
3.9
29.8
Low
8.4
8.5
0.5
1.0
6.8
Median
14.4
12.1
2.1
2.4
10.1
Current
9.6
9.9
1.1
1.5
7.7
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
8.7
5.9
1.2
3.1
2.8
Low
0.52
0.56
0.3
1.1
0.7
Median
0.76
0.75
0.7
1.6
0.9
Current
0.65
0.74
0.6
1.3
0.9
Thrift and Mortgage Finance
Absolute Basis
High
Low
P/Trailing E
19.4
9.0
P/Forward E
70.5
8.5
P/B
4.0
0.1
P/S
8.9
0.3
P/CF
324.4
3.6
Asset Management
Absolute Basis
High
Low
P/Trailing E
26.5
8.6
P/Forward E
19.8
9.7
P/B
7.5
0.9
P/S
5.9
1.3
P/CF
22.3
7.6
Median
11.0
11.5
1.9
3.9
5.6
Current
17.0
15.9
1.1
4.8
14.5
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.2
5.1
1.2
5.1
29.0
Low
0.44
0.45
0.1
0.4
0.2
Median
0.61
0.71
0.6
2.6
0.5
Current
1.1
1.1
0.5
4.2
1.6
Median
18.6
16.7
3.0
3.6
13.6
Current
13.2
12.6
1.4
2.6
9.2
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.2
1.4
1.6
3.4
1.5
Low
0.74
0.85
0.7
1.8
0.9
Median
1.0
1.0
1.0
2.5
1.2
Current
0.89
0.94
0.7
2.3
1.0
Property and Casualty Insurance
Absolute Basis
High
Low
P/Trailing E
47.0
7.2
P/Forward E
24.4
5.8
P/B
1.9
0.7
P/S
1.6
0.6
P/CF
29.9
3.8
Median
12.3
9.9
1.5
1.3
9.8
Current
8.8
12.8
1.2
0.9
9.7
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.9
1.1
0.6
1.1
2.3
Low
0.45
0.48
0.2
0.4
0.5
Median
0.68
0.61
0.5
0.9
0.9
Current
0.57
0.92
0.6
0.8
1.1
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Industry Valuation – Relative to Sector
Investment Bank and Brokerage
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
151.5
70.5
6.0
3.9
29.8
Low
8.4
8.5
0.5
1.0
6.8
Median
14.4
12.1
2.1
2.4
10.1
Current
9.6
9.9
1.1
1.5
7.7
Relative to Sector
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
4.6
4.9
1.8
2.6
1.3
Low
0.6
0.5
0.8
0.7
0.2
Median
1.0
1.0
1.0
1.0
1.0
Current
0.6
0.8
1.0
1.2
0.8
Thrift and Mortgage Finance
Absolute Basis
High
Low
P/Trailing E
19.4
9.0
P/Forward E
70.5
8.5
P/B
4.0
0.1
P/S
8.9
0.3
P/CF
324.4
3.6
Asset Management
Absolute Basis
High
Low
P/Trailing E
26.5
8.6
P/Forward E
19.8
9.7
P/B
7.5
0.9
P/S
5.9
1.3
P/CF
22.3
7.6
Median
11.0
11.5
1.9
3.9
5.6
Current
17.0
15.9
1.1
4.8
14.5
Relative to Sector
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.5
6.7
1.6
4.1
6.9
Low
0.5
0.7
0.1
0.3
0.1
Median
0.8
0.9
1.0
1.6
0.6
Current
1.1
1.2
1.0
3.7
1.4
Median
18.6
16.7
3.0
3.6
13.6
Current
13.2
12.6
1.4
2.6
9.2
Relative to Sector
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
1.8
1.5
2.2
2.3
2.0
Low
0.1
0.7
1.3
1.3
1.1
Median
1.3
1.4
1.5
1.7
1.4
Current
0.9
1.0
1.3
2.0
0.9
Property and Casualty Insurance
Absolute Basis
High
Low
P/Trailing E
47.0
7.2
P/Forward E
24.4
5.8
P/B
1.9
0.7
P/S
1.6
0.6
P/CF
29.9
3.8
Median
12.3
9.9
1.5
1.3
9.8
Current
8.8
12.8
1.2
0.9
9.7
Relative to Sector
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
2.6
1.6
1.4
1.0
2.3
Low
0.1
0.4
0.4
0.3
0.0
Median
0.9
0.8
0.8
0.6
1.1
Current
0.6
1.0
1.1
0.7
0.9
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Industry Valuation ‐ Assessment à Inv. Bank& Brokerage and Asset Management are both sold relatively undervalued
à Thrift &Mortgage Fin is currently sold relatively overvalued
à Property & Casualty Ins is currently sold relatively inline
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Analysis Summary
Economic:
• General economics indicators are downward trending, flat at best
• Financial sector has strong‐to‐
medium strong correlation to key indicators
Valuation:
• Opportunity to catch the upward tide in Investment Banking & Asset Management
• Opportunity to re‐evaluate positions in Thrift & Mortgage Fin industry
Technical:
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Technical Analysis ‐ Price Action
ƒ Several crossovers in 10 years timeline
16
Technical Analysis ‐ Price Action
ƒ 200 /50 Moving Average lines crossed again on 7/2/10 signaling a downward trend
17
Technical Analysis ‐ Price Action
ƒ 3 test of resistance instances over the last 3 months.
18
Analysis Summary
Economic:
• General economics indicators are downward trending, flat at best
• Financial sector has strong‐to‐
medium strong correlation to key indicators
Valuation:
• Opportunity to catch the upward tide in Investment Banking & Asset Management
• Opportunity to re‐evaluate positions in Thrift & Mortgage Fin industry
Technical:
• 200 / 50 moving average recently crossed – signals downward movement in Financial Sector
• Tests of resistance over the past 3 months will continue over short‐term to push price upward
• Conflicting signals ‐‐ uncertainties in the market
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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Recommendations
ƒ Financial sector needs to remain underweight due to downward trend.
à Financial regulatory reform passed on 7/16/2010 will change companies’ business model.
à Consumer Spending, Interest rate and GDP are forecasted on a downward trend
ƒ Reevaluate Financial sector on industry level
à Keep Financial Sector stocks with growth opportunity and re‐evaluate overvalued positions
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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ƒ Questions?
ƒ Comments?
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
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