FIN824 The Stock Market
Financials Sector
Kyle M. Ward-Dahl
Marsel J. Tadger
Ke Wang
Adam J. Wilson
2/2/2010
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Index & SIM Weights
Financials
12/31/2009
1/31/2010
S&P 500
14.38%
14.71%
SIM
11.10%
11.37%
+/-
-3.28%
-3.34%
• Growth in S&P 500’s financials sector
• Increasing underweighting of SIM
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Size and Composition
• Market Cap: 1.6 Trillion
• 14.71% of S&P 500
• Industries
–
–
–
–
–
–
Banks
Consumer Finance
Diverse Financial Service
Insurance
Multi-sector Holdings
Real Estate Investment Trust
2/2/2010
Largest Companies (Market Cap in Billions)
• American Express (AXP)
$44.8
• Bank of American (BAC)
$150.8
• Berkshire Hathaway (BRK) $234.6
• Citigroup (C)
$93.8
• Goldman Sachs (GS)
$76.5
• Bank of NY Mellon (BK)
$35
• JP Morgan Chase & Co (JPM) $153.4
• Morgan Stanley (MS)
$36.4
• U.S. Bancorp (USB)
$48
• Wells Fargo (WFC)
$145.3
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Sector Performance
• Revenue increased by 8% in latest Qtr
• Earnings per share increased by 256% in latest Qtr and 644% in latest 12 months
• A strong rebound in terms of earnings per share
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Business Analysis
• This sector is in the mature stage of its life cycle
• Financials are cyclical
• Influenced by economic conditions and conditions in financial markets
• Regulations are also an important factor
• Interest rate rise has negative impact
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Financial Analysis
• L-T Future Growth Rate for
Earning per share is 8%
• Sector Sales are still
extremely down from precrises numbers possibly
indicating upside
• Compared with historic
numbers, margins are still
low in the sector
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Valuation Analysis - P/B
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Valuation Analysis - P/E
P/Trailing E
2/2/2010
P/Forward E
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Valuation Analysis - P/S & P/CF
P/S
2/2/2010
P/CF
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Valuation Summary
• Current P/E and P/CF ratios are way higher than the median
• Current P/B and P/S ratios are much lower than median
• For financial institutions, P/B is important because most assets and
liabilities are valued at market values.
• From this perspective, the sector is cheaper than usual
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
135.2
21.6
3.4
3.6
140.7
Low
10.5
10.6
0.5
0.6
7.2
Median
14.6
12.7
2.1
2.5
10.2
Current
33.2
18.5
1.1
1.3
19.0
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
High
7.8
1.4
0.9
1.9
13.4
Low
0.51
0.53
0.3
0.9
0.6
Median
0.75
0.76
0.7
1.6
0.9
Current
1.8
1.3
0.5
1.1
1.9
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GDP Forecast
Nominal GDP (Expected)
$18,000
$17,000
$16,000
$15,000
Nominal GDP (Expected)
$14,000
$13,000
$12,000
2009
2010
2011
2012
2013
2014
% Change in GDP
5.0%
4.0%
3.0%
2.0%
1.0%
% Change in GDP
0.0%
-1.0%
-2.0%
-3.0%
2009
2/2/2010
2010
2011
2012
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2013
2014
11
Opportunities & Risks
• Upside
– GDP growth
– Sales & earnings growth
– Market rebound
• Downside
– Liability tax bill
– Interest rate rise
– Uncertainties such as other regulations
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Recommendations
• The conditions in financials sector has improved and sales &
earnings are growing. The percentage of this sector in S&P500
also grew by about 0.4%. All these signals demonstrate the
market rebound.
• Future growth is also expected in the sector and the whole
market as well, showing the increasing confidence of investors
and analysts.
• However, the uncertainties and risks are not negligible.
• We recommend to buy 200 basis points to bring SIM
weighting relative to S&P500 to 13.10%. As a result, SIM will
be underweight in this sector by 1.61%. Thus, SIM can gain
from the growth of financials sector and also avoid risks to
certain extent.
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Q&A
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