FIN824 ‐ Summer 2010
Irwan Jo, Paul Kanning, Harsha Kolli
FINANCIAL SECTOR RECOMMENDATIONS
Agenda
ƒ Sector Recap
ƒ Recommendations
ƒ Valuation Analysis
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
2
SIM is underweight relative to S&P500
• Economics indicators are generally flat in sector
• Sector has strong‐to‐medium strong correlation to key indicators
• Catch the upward tide in Investment Banking & Asset Management industries
• Re‐evaluate positions in Thrift & Mortgage industry
SIM Holdings
Firm
Ticker
Market Value
% (SIM)
Goldman Sachs Group Inc. Hudson City Bancorp Inc. Progressive Corp. GS HCBK PGR $904,920.00 $756,378.00 $577,416.00 4.94% 4.13% 3.15%
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
3
IB & Asset Industries are stronger relative to the 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
4
IB & Asset Industries are stronger relative to the 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
5
Overall Recommendations
à July 27: Originally recommended to hold current weight for Financial Sector
à Today: New recommendation is to add 182 bps for sector (remaining ~218 bps underweight relative to the S&P500)
à Specific stock recommendations:
à Hold current position of Goldman Sachs (GS) 506 bps
à Sell all Progressive (PGR) *
(318) bps
à Sell all Hudson City Bank (HCBK) *
(400) bps
à Buy Lincoln National (LNC) *
475 bps
à Buy Transatlantic Holdings (TRH) *
425 bps
* Analysis on following slides
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
6
GS & LAZ
ƒ Goldman Sachs – Hold current position
à Good industry, P/B valuation, & current‐vs.‐target price ratio
ƒ Lazard – Do not buy
à Although team has supported Lazard through the quarter, the combination of company & market factors has reduced the firm’s attractiveness:
‚ New target price of $38.21 due to 8/3 share dilution actions
‚ At current price of $32.32, investment now yields ~18.2% return
7
Recommendation 1: Progressive
P/B – Relative to S&P & Industry (PC Insurance)
8
Recommendation 1: Progressive
ROE – Relative to S&P & Industry (PC Insurance)
9
Recommendation 1: Progressive
Valuation
UnderValued /Overvalued
27%
‐29%
‐23%
0%
‐20%
Relative to
Industry
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
Low
Median
Current
39.4
2.7
2.9
1.5
3.1
0.5
0.82
1.2
0.7
0.7
1.1
1.4
2.2
1
1.5
1.4
1
1.7
1
1.2
Stock Price
Absolute
Valuation
19.65
High
Low
Median
Current
#Your Target
Multiple
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
56.5
2
4.8
842.66
81.5
C.
8.6
0.6
1.8
5.34
8.1
D.
13.8
1.4
3.2
9.29
13.4
E.
13.2
0.9
2.1
7.46
11.6
F.
13.8
1.4
3.2
9.29
13.4
*Your Target E, Your Target Price
S, B, etc/Share
(F x G)
G.
H.
1.48
20.42
17.98
25.17
9.36
29.94
2.63
24.47
1.69
22.70
24.54
Average Target Price
~25% Upside
Conclusion ... Sell all 318 bps
10
Recommendation 2: Hudson City Bank
P/B – Relative to S&P & Industry (Thrift)
11
Recommendation 2: Hudson City Bank
ROE – Relative to S&P & Industry (Thrift)
12
Recommendation 2: Hudson City Bank
Valuation
Relative to Industry
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
3.1
2.5
19.5
33.4
6.6
0.65
0.26
0.7
1
0.1
2.3
1.1
1.3
3.6
0.8
0.68
0.7
1.1
1
0.7
Stock Price
Absolute Valuation
12.14
High
Low
Median
Current
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
24.2
15.7
5.3
12.1
28.4
C.
9.8
4.6
1.1
2.86
10
D.
19.8
12.7
1.5
7.17
24.1
E.
11.2
4.6
1.2
2.89
10
UnderValued /Overvalued
‐70%
‐36%
‐15%
‐72%
‐13%
#Your Target *Your Target E, S, B, Your Target
Multiple
etc/Share
Price
(F x G)
F.
G.
H.
19.8
1.13
22.4
12.7
2.61
33.1
1.5
10.1
15.2
7.17
4.2
30.1
24.1
1.2
29.3
26.01
Average Target Price
Conclusion ... Sell all 400 bps
13
Recommendation 3: Transatlantic Holdings
P/B – Relative to S&P & Industry (Reinsurance)
14
Recommendation 3: Transatlantic Holdings
ROE – Relative to S&P & Industry (Reinsurance)
15
Recommendation 3: Transatlantic Holdings
Valuation
Relative to Industry
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
1.7
31.6
1.9
2.2
12.7
0.19
0.52
0.7
0.5
0.4
1
1.3
1.1
1
1.4
1
1
0.9
1
0.9
Stock Price
Absolute Valuation
48.19
High
Low
Median
Current
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
407.1
2.5
2.6
76.91
353.7
C.
4.6
0.5
0.6
4.1
2.8
D.
11.3
1.1
1.6
13.1
15.7
E.
7.2
0.7
0.8
5.75
8
UnderValued
/Overvalued
0%
-23%
-18%
0%
-36%
#Your Target *Your Target Your Target
Multiple
E, S, B,
Price
etc/Share
(F x G)
F.
G.
H.
11.3
6.69
75.6
1.1
68.84
75.7
1.6
60.24
96.4
13.1
8.38
109.8
15.7
6.02
94.6
Average
90.42
Target Price ~88% Upside
Conclusion ... Buy 475 bps
16
Recommendation 4: Lincoln National
P/B – Relative to S&P & Industry (LH Insurance)
17
Recommendation 4: Lincoln National
ROE – Relative to S&P & Industry (LH Insurance)
18
Recommendation 4: Lincoln National
Valuation
Relative to Industry
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
1.2
0.99
1
1.5
1.2
0.42
0.4
0.4
0.5
0.5
0.89
0.85
0.8
1.2
0.9
0.74
0.75
0.6
0.8
0.8
Stock Price
Absolute Valuation
24.69
High
Low
Median
Current
#Your Target
Multiple
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
13.2
1.9
1.7
26.32
14.2
C.
1.8
0.2
0.2
1.66
2.4
D.
9.5
1.4
1.3
7.19
10.1
E.
6.9
0.8
0.6
6.7
7.2
F.
9.5
1.4
1.3
7.19
10.1
UnderValued
/Overvalued
-17%
-12%
-25%
-33%
-11%
*Your Target E, S, Your Target
B, etc/Share
Price
(F x G)
G.
H.
3.44
32.7
31.79
44.5
41.15
53.5
3.69
26.5
3.43
34.6
Average Target
38.36
Price
~55% Upside
Conclusion ... Buy 425 bps
19
Conclusion
1600
1400
Basis Points
1200
1000
800
600
400
200
0
Current
Sell PGR
Sell HCBK
Buy LNC
Buy TRH
Proposed
20
ƒ Questions?
ƒ Comments?
FIN824 – Financial Sector Presentation (Jo, Kannning, Kolli)
21