Financials
David Kaplan, Nikhil Ketkar,
Jonathan Khoury, Steve Kuljko
Agenda
• Sector Recap
• Recommendations
• Business/Financial Analysis & Valuation:
Hudson City Bank
• Business/Financial Analysis & Valuation: JP
Morgan Chase and Co.
• Review of Recommendations
Recap: SIM v. S&P 500 Weightings
Sector
S&P 500 Weight
SIM Weight
+/-
10.11%
9.53%
-0.58%
Consumer Staples
11.26
11.77
0.51
Energy
10.88
10.10
-0.78
Financials
16.50
11.93
-4.57
Health Care
12.15
15.27
3.11
Industrials
10.50
13.03
2.53
Information Technology
18.87
19.87
1.00
Materials
3.48
1.80
-1.67
Telecommunications
2.81
3.62
0.82
Utilities
3.44
1.88
-1.57
Consumer Discretionary
Previous Recommendations
• Overweight in Financials: sell Financials and
move investment to more reliable sectors
– Technical analysis suggested we were overvalued
– Worries prevalent about interest rate increases
– Political Reform and its negative impact on the
financial sector
Class Consensus: Remain at current underweight level
Company Recommendations
• Position Alterations:
•
•
•
•
J.P. Morgan: Sell all (172 basis points)
Progressive: Hold (299 basis points)
Goldman Sachs: Hold (441 basis points)
HCBK: Buy (increase by 172 basis points)
Recommendation 1
JP Morgan Chase (Sell)
• Stock Price: $39.84
• Market Cap: $154.7B
• Outstanding diluted shares: 3.98B
• Beta: 1.16
• Lines of Business:
– Investment Banking: 26% of sales
– Retail Financial Services: 30%
– Card Services: 19%
– Commercial Banking: 5%
– Treasury and Security Services: 7%
– Asset Management: 7%
– Corporate/Private Equity: 6%
JPM v. S&P 500 (1 year)
JPM v. S&P 500 (6 months)
JPM return vs. FS returns
Time
JPM
Financial Sector
1 month
-12.59%
-7.29%
3 months
-0.56%
4.62%
1 year
14.03%
31.19%
Background Information
Earnings
Revenues
JPM DCF
JPM Valuation
Risks to JPM
• Headline risk
– SEC currently conducting criminal investigation against
JPM, C, GS and others
• Interest Rate risk
– Rates currently at all time lows, will increase
– Increased interest rates will hurt investment banking
business and margins in the market
• Regulation
– Volcker Rule
– No longer too big to fail
– Moody’s will downgrade debt ratings if the regulation
passes
Recommendation 2
• HCBK (Buy)
– Strong Buy 28% Upside
– Target Price: $16.50
– Buy 170 Basis Points, currently 2.4% of SIM
– Increase Holding to 4.1%
– Use HCBK as a hedge against regulation
Background Information: 1
•
•
•
•
•
•
•
Current Price: $13.00
Dividend Yield: 4.6%
Dividend Growth 5 Yr: 19.79%
Market Cap: 6.8 Billion
Shares Outstanding: 470 M
Beta Vs. S&P: 0.95
Industry: Thrift & Savings
Background Information: 2
Earnings
Revenues
Income Statement: Graph
Discounted Cash Flow Model
Year
2010E
2011E
Net Interest Income
1,271,185 1,420,361 1,467,610 1,526,314
% Growth
2012E
2013E
2014E
2015E
2016E
2017E
2018E
1,587,367 1,650,861 1,716,896 1,785,571 1,856,994
2019E
2020E
1,912,704 1,970,085
11.7%
3.3%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
3.0%
3.0%
Subtractions
676,196
753,495
779,872
811,067
843,509
877,250
912,340
948,833
986,787
1,016,390
1,046,882
% of Revenues
46.8%
47.0%
46.9%
46.9%
46.9%
46.9%
46.9%
46.9%
46.9%
46.9%
46.9%
594,989
666,866
687,738
715,247
743,857
773,611
804,556
836,738
870,208
896,314
923,203
12.1%
3.1%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
3.0%
3.0%
Free Cash Flow
% Growth
Terminal Discount Rate
Terminal FCF Growth
11.3%
3.0%
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
4,467,400
3,968,994
53%
47%
8,436,394
9.07%
100%
Terminal Value
Free Cash Yield
Terminal P/E
Current P/E
Projected P/E
Shares Outstanding
$
Implied equity value/share $
Current Price
Upside/(Downside) to DCF
11,526,054
8.01%
5.9
5.2
6.6
4.6
5.9
4.5
5.7
492,751
13.31
17.12
28.6%
Strong
Buy
Sensitivity Analysis
Implied equity value per share
Discount rate
17.12
8%
9%
10%
11%
12%
13%
14%
15%
Growth rate
$
0% 21.379541 18.83825383 16.814378 15.166174 13.799198 12.648107
11.6662649 10.819499
1% 23.053203 20.03636887
17.69724
15.832014
14.311037
13.047904
11.9828237 11.073111
2% 25.284752
21.5768025
18.800818
16.645819
14.925244
13.520391
12.3521424 11.36574
28.40892
23.630714
20.219703
17.663075
15.675941
14.087375
12.7886099 11.707141
3%
4% 33.095173
26.5061901
22.11155
18.970975
16.614312
14.780355
13.3123709
12.110614
5% 40.905594 30.81940426 24.760136 20.714842
17.82079
15.646581
13.9525232
12.594782
Valuation: Relative Multiples
Relative to Industry High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
3.4
3.3
19.5
33.4
6.6
0.65
0.26
0.3
0.9
0.1
2.1
2.2
1.1
3.4
4.2
0.68
0.67
1.1
1.0
0.7
Relative to S&P 500 High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
0.53
0.49
0.2
3.1
0.7
1.4
1.2
0.7
8.9
2.3
0.73
0.79
0.6
4.7
1.1
2.0
1.7
1.8
14.0
2.9
Valuation: Absolute Multiples
Absolute
Valuation
High
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
B.
31.6
19.4
5.7
15.46
33.5
Low
C.
9.8
4.3
1.1
2.86
10.9
Median
Current
D.
19.4
12.9
1.8
10.13
23.6
E.
12.2
6.0
1.4
3.28
12.1
#Your
Target
Multiple
F.
15
7
1.6
5.4
18
*Your
Target
E, S, B,
etc/Sha
re
Your
Target
Price
(F x G)
G.
1.35
2.97
10.32
4.40
1.20
H.
20.25
20.8
16.51
23.6
21.6
The Price-to-Book
1.6x
Risks
• Interest rates
•Negatively correlated with
interest rates
•Interest rates will increase
soon
• Economic risks
•10% Unemployment
•High national debt
Questions?
Sell: JPM
Buy: HCBK
Recommendation 1: GS
•Market Cap: $77.14 B
•Outstanding diluted shares: 538.6 M
•Stock Price: $143.23
•Beta: 1.40
•Lines of Businesses:
•Investment Banking
(10.62% of total sales)
•Trading and Principal Investments
(76.1% of total sales)
•Asset Management and Securities Services (13.30% of total sales)
•Competitors:
•JP Morgan Chase Co.
•Morgan Stanley
•Citigroup
Price Movement: GS
Sales of GS
2012E
2011E
2010E
2009
2008
2007
2006
2005
3599
Investment Banking
% sales increase
Principal and Trading
% sales increase
Asset Managament and security services
% sales increase
Operating Revenues
5265.774833 5015.02365
5%
3%
32445.5565
30322.95
7%
5%
4489.685025
4275.8905
5%
3%
$ 42,201.02 $ 39,613.86 $
4868.955
4797
5179
7555
5613
2%
-7%
-31%
35%
56%
28879
28879
8095
29714
24027
0%
257%
-73%
24%
55%
4151.35
4090
4672
4731
4527
2%
-12%
-1%
5%
47%
37,899.31 37768.49 17944.96 42000.58 34168.11
Interest revenue
% increase
Interest Expense
% increase
Net Interest Income
as a percent f sales
Net Total Revenue including income
16695.90978 15178.0998
10%
7%
7665.84
7098
8%
4%
$ 9,030.07 $ 8,080.10 $
0.13
0.13
$ 51,231.09 $ 47,693.96 $
14185.14
13907
35633
45968
35186
21250
2%
-61%
-22%
31%
66%
6825
6500
31357
41981
31688
18153
5%
-79%
-25%
32%
75%
7,360.14
7407
4276
3987
3498
3097
0.13 0.163961 0.192431 0.086697 0.092869 0.122712
45,259.45 45175.49 22220.96 45987.58 37666.11
25238
•This quarter was a PERFECT trading quarter. Not one day did GS
sustain a loss
•0% increase for principal and trading reflects the rest of the year
being tough in light of the SEC and regulation
15452
3090
22141
DCF for GS
Goldman Sachs (GS)
Analyst: David Kaplan
4/18/2010
(in Millions)
Year
Revenue
Terminal Discount Rate =
Terminal FCF Growth =
2010E
45,314
% Grow th
Operating Income
11,672
Operating Margin
25.8%
Interest Income
7,360
Interest % of Sales
16.2%
Taxes
6,661
Tax Rate
35.0%
Net Income
10,558
% Grow th
2011E
47,762
2012E
51,315
2013E
53,881
2014E
56,305
2015E
58,557
2016E
60,607
2017E
62,425
2018E
64,298
2019E
66,227
2020E
68,214
5.4%
7.4%
5.0%
4.5%
4.0%
3.5%
3.0%
3.0%
3.0%
3.0%
12,458
26.1%
8,080
16.9%
7,188
35.0%
11,917
12.9%
Add Depreciation/Amort
% of Sales
NPV of Cash Flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
Current P/E
Projected P/E
Current EV/EBITDA
Projected EV/EBITDA
1,786
18.0%
3.0%
1,822
3.9%
3.8%
66,666
22,750
89,416
14.08%
7.1
8.5
19.3
20.3
75%
25%
100%
6.3
7.5
18.2
19.2
14,318
27.9%
9,030
17.6%
8,405
36.0%
13,403
12.5%
1,858
3.6%
14,548
27.0%
9,429
17.5%
8,632
36.0%
15,345
14.5%
1,832
3.4%
14,921
26.5%
9,572
17.0%
8,817
36.0%
15,675
2.2%
1,802
3.2%
15,518
26.5%
9,662
16.5%
9,316
37.0%
15,863
1.2%
1,815
3.1%
15,758
26.0%
9,697
16.0%
9,418
37.0%
16,037
1.1%
1,818
3.0%
16,231
26.0%
9,988
16.0%
9,701
37.0%
16,518
3.0%
1,873
3.0%
16,074
25.0%
10,288
16.0%
10,018
38.0%
16,345
-1.0%
1,929
3.0%
16,557
25.0%
10,596
16.0%
10,318
38.0%
16,835
3.0%
1,987
3.0%
17,053
25.0%
10,914
16.0%
10,628
38.0%
17,340
3.0%
2,046
3.0%
Shares Outstanding527
Terminal Value
Current Price $ 142.32
Implied equity$ value/share
169.70
5.6
6.7
16.0
16.9
Debt
Cash
Cash/share
222,601
38,291
72.67
Free Cash Yield
Terminal P/E
Terminal EV/EBITDA
•Higher terminal Discount rate for headline risk still doesn’t take
the upside away… 20% upside from the current price with 18%
discount rate
119,067
14.56%
6.9
15.9
Valuation of GS
Relative to Industry
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
1.2
1.1
1.5
1.2
1.8
.13
.13
.8
.3
.2
.96
.93
1.0
.6
1.1
.44
.86
1.0
.9
.7
Relative to S&P 500
High
Low
Median
Current
P/Trailing E
P/Forward E
P/B
P/S
P/CF
2.1
1.4
1.1
2.1
1.7
.33
.51
.4
.5
.5
.70
.72
.7
1.1
1.0
.34
.52
.5
1.3
.6
Absolute
Valuation
A.
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
Low
B.
21.5
3.6
5.7
4.01
21.3
Median
Current
D.
E.
C.
7.5
.4
.7
.52
3.9
12.2
1.7
2.1
2.38
11.9
7.5
1.6
1.1
2.86
5.3
#Your Target
Multiple
F.
8.0
1.7
1.1
2.86
5.0
*Your
Target E, S,
B,
etc/Share
G.
18.36
81.00
150.00
50.08
27.02
Your Target
Price
(F x G)
H.
146.88
138.00
165.00
143.23
135.12
Risks to recommendation
• Headline risk
– Damaged reputation from S.E.C charges
– Material fines and business reduction
• Interest Rate risk
– currently low, will increase…
– Increased interest rates will hurt margins for
trading, lower volume, less activity
• Regulation
– Material effects of financial reform on GS business
Analysis: PGR
Analysis: PGR
Qualitative Assessment: PGR
• Price target: $22 (8.10%)
• Limited volatility in relation to other financial
stocks (product offering…)
• Acquisition of market share promising
• April EPS consistent with April ‘09, revenues
up to $1.47bn vs $1.41bn