Xavier Student Investment Fund
Xavier Student Equity Investment Fund
Initial Portfolio
February 24, 2009
March 2009
XAVIER STUDENT EQUITY INVESTMENT FUND
XSEIF INVESTMENT FUND GUIDELINES
The Xavier Student Equity Investment Fund manages Xavier’s endowment as a tactical index
fund using strong sector and company fundamental analysis. The fund uses the S&P 500 index as
its benchmark and uses the following investment guidelines:
1. The stocks selected are based on sector analysis. Stocks in a sector expected to be strong have
a greater allocation than that sector’s allocation to the index. The overweighting or
underweighting of sectors relative to the index takes into consideration current and expected
economic conditions and that sector’s expected performance in the expected economic state.
2. Sectors are identified by the S&P 500 Global Industry Classification Standard (GICS).
3. The proportion of a sector’s allocation is limited to a range equal to plus or minus 50% of the
sector’s allocation to the index. Based on the January 29, 2009 S&P 500 stock values, the
percentage of market capitalization for GIC sectors and their allocation ranges are:
Sector
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Service
Utilities
% of Market Capitalization
8.60
13.70
13.70
10.70
15.20
10.40
16.80
3.10
3.60
4.30
Lower %
4.30
6.85
6.85
5.35
7.60
5.20
8.40
1.55
1.80
2.15
Upper %
12.90
20.55
20.55
16.05
22.80
15.60
25.20
4.65
5.40
6.45
4. Sector allocation decisions are based on the following types of analysis:
 Macroanalysis of the sectors to determine how the sectors relate to the business cycle
and what factors drive the industry.
 Strategic rotation analysis to determine how different sectors perform in different
stages of a business cycle.
 Economic analysis of structural changes to determine when the economy is
experiencing major changes (e.g., globalization, downsizing, and political changes)
and the implications they hold for the sector.
 Macroeconomic analysis to determine the current and forecasted economic conditions.
5. Stocks selected in different sectors are those that are considered to have good fundamentals.
Among the quantitative and qualitative factors that are considered in determining a stock’s
fundamental value are:
 Relative valuations (price-to-earnings, price-to-book, and price-to-sale)
 Expected earnings and sales growth
 Sustainable growth
 Fundamental risk factors: liquidity risk, business risk, financial risk, exchange-rate
risk, and external liquidity risk
 SWOT
2
6. Stocks are selected based on technical or efficient market considerations when such
opportunities are believed to exist.
7. Based on market expectations, consideration is given to the proportions of the fund allocated
to value, growth, and blend stocks.
8. Stocks in the portfolio can be selected outside the index’s (S&P 500) universe provided they
meet the index’s features of market capitalization and marketability. To narrow the list of
thousands of stocks to a manageable list, possible stocks are:
 All S&P 500 stocks
 Stocks identified through sector analysis
 Stocks identified through screening based on finding value, growth, or blend features
 Stocks identified through screening based on overall fund features (e.g., conservative
portfolio features).
9. Sector ETFs are included in the fund. The sectors’ allocation decision to hold some of its
allocation in ETFs are based on:
 The fundamentals of stocks in the sector and whether they can outperform the sector
ETF
 The composition of the ETF
 Strategic considerations (e.g., future sector or economic information)
10. Preferred stock can be included in the fund provided the common stock of the company meets
the index’s features of market capitalization and marketability.
11. The cash position of the fund can be no more than 10%.
12. No more than 8% of the market value of the portfolio may be invested in any single security.
13. The portfolio may not have fewer than 25 holdings.
INITIAL PORTFOLIO
Economic Climate
In June 2008, the subprime mortgage meltdown that began in August 2007 had developed
into a global credit crisis. This crisis gained steam throughout the first half of 2008 with the
substantial asset value write downs by many global financial institutions, and a subsequent panic
by these firms to raise billions of dollars in new capital from a variety of sources to repair their
balance sheets. In an effort to stabilize financial markets, the Federal Reserve cut interest rates
from 4.25% at the start of 2008 to 2.00% by June 2008. Central banks around the world took
similar actions by also cutting rates. The Federal Reserve also took action by pumping billions of
dollars into the banking system via new lending programs like the Term Auction Facility (TAF),
Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF).
By September 2008, the subprime mortgage meltdown had developed into a global credit crisis,
culminating in a dramatic 10-day period from September 7 to September 17:
3
 The trillion dollar mortgage giants Fannie Mae and Freddie Mac were placed into
conservatorship by the Treasury;
 Merrill Lynch was hastily acquired by Bank of America;
 Lehman Brothers filed for the largest bankruptcy in American history ($600 billion);
 American International Group (AIG) received an emergency $85 billion lifeline from the
Federal Reserve as it teetered on the brink of insolvency;
 Washington Mutual was seized by the FDIC and its deposits were sold to JP Morgan Chase;
 The $700 billion Emergency Economic Stabilization Act (EESA) was passed by Congress
and signed by President Bush.
During this period, the U.S. Federal Reserve took extraordinary emergency steps by
guaranteeing money market funds, backstopping commercial paper programs, coordinating a
global interest rate cut with other central banks, making loans to institutions collateralized by
mortgage-backed and asset-backed securities, and purchasing such securities as part of their open
market operation. Similarly, the Treasury structured the Troubled Asset Relief Program (TARP)
to shore up U.S. bank balance sheets with capital injections. The impact of these unprecedented
liquidity measures undertaken by the Federal Reserve was to increase the Fed’s balance sheet
from $850 billion in October to $2.2 trillion in November and to lower rates from their already
existing low levels. In fact, short-term Treasury rates were at one point at negative levels. Since
the new Obama Administration took office, the Fed and the Treasury have extended their
monetary and fiscal policy actions. In March, the Fed indicated that they plan to purchase $500
billion of mortgage- backed securities and $100 billion in debt from FNMA, FHMC, and GNMA.
The Obama stimulus plan is expected to increase the deficit to over $1.7 trillion.
The global financial crisis has been accompanied by unprecedented declines in oil prices.
From August to November, the price of oil went from a high of $147.96 per barrel to the mid $50
range, and in March it was trading in the low $40 range. The announced cutbacks by OPEC and
Russia have recently, though, led to fears of oil prices increasing in the future. The trends in the
financial markets and energy prices have been, in turn, accompanied by declining trends in
economic indicators that point to an extended U.S. and global recession. In the U.S., retail sales
data showed declines in July through March. There also has been a continuation of declining real
estate values, a widening of credit spreads, slowdowns in the construction, auto, housing,
manufacturing, and consumer cyclical sectors, and an accelerated increase in the unemployment
rate.
In these difficult economic times, most economists are predicting that even if the financial
crisis subsided, the U.S. and global economies will get worse. Amongst economists, the most
optimistic scenario sees a U.S. recession lasting into early 2010 and with unemployment reaching
10%. Many economists see the economic recovery coming in the form of the current monetary
and fiscal policy stimulants in the U.S., Europe, and China, and by the decrease in energy prices.
Over the long run, the economic recovery, though, is expected to be constrained by anticipated
high rates of inflation and interest rates resulting from the unprecedented debt and monetary
expansion. See Exhibit 1 for a summary of the most recent economic and market trends.
4
Exhibit 1: Current Economic Trends
5
Crude Oil
6
Sector Trends
According to the recent Federal Reserve Beige Book Report (March 2009), the current
economic slowdown is broad based, affecting most sectors. For the last quarter, the Fed reported
that the markets for residential real estate were particularly stagnant with the demand for
commercial real estate weakening significantly. Consumer spending also was sluggish with the
Federal Reserve reporting that the purchases of luxury goods and other big ticket items to be
especially slow. The sale of new automobiles and light trucks also remained stagnant, and very
sharp declines were also reported in the manufacturing sector, with declines in computer,
semiconductor, and IT manufacturing. However, the Federal Reserve did report relatively
stronger sales in discount chain stores, grocery stores, and pharmaceuticals.
The current economic slowdown has led to consumers focusing on food, staples, and other
necessities, while reducing their spending on discretionary items. These trends auger for a
continued decline in those consumer cyclical industries in which sales depend on the
discretionary income of domestic and foreign consumers.
Although the economic recession has adversely impacted consumer spending, automobiles,
and manufacturing, the consumer non-cyclical sector has been less affected by the downturn.
Amongst the industries in that sector that could be potentially strong in this economic climate are
beverage, biotechnology, cosmetic and personal care, health care products, and pharmaceuticals.
Notable trends in these industries include the global increase in alcoholic consumption, the
growth of beverage consumption in China (China has recently overtaken the United States in
market volume), the increases in the global sales of soft drinks, new product innovations in
biotechnology, and the potential for international expansion in cosmetic and personal care
products.
Consumer Non-Cyclical Trends
Biotechnology:
 Continues to be a growing industry
 Opportunities for new product innovations with a strong pipeline
 Typically a necessity, consumers will continue to need medicine and food
 Strong financial projections
Cosmetics/Personal Care:
 Strong potential for international expansion
 High level of diversification and barriers to entry
 Good entry point into traditionally expensive market
 Historically safe-haven during an economic downturn
 Provides basic necessities for everyday living
 Products play a defensive role when consumer spending declines
Health Care-Products :
 Advances in the industry create large growth potential
 Long duration of competitive advantages (patents)
 Strong entry point given weak overall market conditions
 Products will continue to be demanded from the health industry
 Increasing demand due to an aging global population, especially in the long-term
Pharmaceuticals:
 Most leading drug makers collaborate with biotechnology firms to develop therapies based on
DNA technology, antibodies, and genomics research
 Joint efforts expected to yield new therapies for a variety of diseases and medical conditions
(Oncology has benefited from these scientific advances and is now the fastest-growth
segment of the drug industry in terms of sales)
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Advances in the industry create large growth potential
Long duration of competitive advantage (patents)
Strong entry point given weak overall market conditions
Products will continue to be demanded from the health industry
Previous industry leaders losing patents, potential for generic drug companies to develop
further
Strong propensity for consumers to seek cost effective solutions, supporting the trend toward
generics
Smaller companies have new drugs with expanding markets and impressive growth in sales
and earnings
Loss of product approval from FDA or similar international regulatory bodies negatively
affect the companies
The technology sector also tends to be cyclical with sales highly correlated to economic
factors such as GDP, non-residential investments in equipment and software, and the strength of
the dollar. A number of firms in the tech sector, though, are cash rich and many have highly
diversified international revenue streams which will help the sector weather the U.S. economic
slowdown. As of recently, the Federal Reserve reported stable demand of IT services from
companies that aim to reduce costs through technology.
Technology Sector Trends
Semiconductors:
 Industry is cyclical and highly correlated to GDP.
 A strong dollar has a negative impact on the industry due to the substantial foreign exposure.
 Asian demand is increasing and revenue growth is expected to increase by 5-7% compared to
3.2% in 2007.
Computers:
 PC industry expects unit growth near 11% for 2008 (even with 6% decline in average system
price the industry expects). Estimates are even higher in ’09 at an expected sales increase of
14%.
 The Vista and Leopard transitions are still underway creating PC demand for consumers and
businesses.
 Key variables to the hardware industry are oil prices, affecting both inputs and demand, and
degree of uncertainty in markets, which lead to lower consumer demand.
Software:
 Purchases of new software are expected to decline due to the overall economic condition as
well as the financial services industry is the largest demand base.
 Renewal rates on licenses are expected to remain high due to company dependency on
software. This will benefit companies that have strong recurring revenues and already wide
customer bases.
 The ongoing conversion to Vista is a positive impact on this industry and looks good.
Basic Metals such as iron and steel, forest product, and mining are also expected to see sales
declines. However, sectors that depend on consumer non-cyclical are expected to have moderate
sales growth. For example, agricultural chemical products such as fertilizer or potash and
healthcare chemical products are expected to be strong given the increasing demand for
agriculture and healthcare products. Similarly, large government infrastructure expenditures may
also positively impact firms in the iron/steel industry, partially offsetting expected declines in
auto sales.
8
Metal Sector Trends
Chemicals:
 Increased planted acreage, and increasing demand for crop (partially due to ethanol
production), there has been increasing demand for agricultural chemical products such as
fertilizer or potash.
 Recent falling grain prices post an uncertainty for the near future, long-term growth remains
strong.
 U.S. and some foreign governments provide subsidies for farmers: France: $313M, Russia:
$1.75B (proposed), and China’s state reserve are buying 1.5M metric ton of domestic
soybean to boost farming income.
Forest Products & Paper:
 Containerboard inventories recently reached their lowest level since 1980 indicate a possible
growth for producers.
 Demand for wood products declined due to the declining housing market.
Iron/Steel:
 Proposed bailout plan in China focusing on affordable housing, rural roads, and railroad.
 Increased M&A activity in Iron/Steel industry due to high cash positions of many firms.
Finally, the economic slowdown is expected to slow utility sales and to decrease energy
consumption. The U.S. Energy Department expects U.S. consumption of petroleum to drop next
year more severely than any time since 1980. The department's Energy Information
Administration projects 2009 petroleum consumption to decrease by 250,000 barrels per day, or
1.3%. The outlook for alternative energy depends on continued public support and public policy
initiatives.
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Energy Sector Trends
The U.S. Energy Department expects U.S. consumption of petroleum to drop next year.
Global oil demand is expected to remain flat in 2009.
The outlook for alternative energy is neutral to positive
Continual emphasis on support for alternative energy through public policy implementation is
expected.
Tightening of credit markets may adversely affect investments in alternative energy
companies
Equity Market
The extraordinary turmoil in the credit markets and the slowdown in the overall economy have
led to a precipitous decline in equity values. After an impressive rise in the S&P 500 index from
1,000 in 2003 to just over 1,500 at the end of 2007, the market began to fall during the first nine
months of 2008, decreasing 13% from 1,500 to just below 1,300, and then decreasing an
astonishing 30% in October when it went from 1,300 to 900. After trading around 900 from
October to January, the market experienced another significant drop at the beginning of 2009,
with the S&P 500 falling 25% from its 937 level reached on January 2nd to a 700 level on March
9
3rd. Since March 3rd, the market has rebounded, increasing by 18% from its 700 bottom on March
3rd to 823 on March 26th.
Equally as striking as the declines in the market have been the recent increases in volatility.
For the period from end of 2003 to the end of 2007, the historical and implied volatilities of the
S&P 500 had been relatively stable, fluctuating within a range between 10% and 20% variability
for the implied volatility and 5% and 10% for the historical volatility. In October 2008, the
implied volatility increase from 20% to over 50% and the historical volatility went from 17% to
27% (see Figure 1). During this period, there was also a rise in investor liquidity in the financial
markets as investors moved to Treasuries and higher quality corporate bonds that were considered
liquid. This flight to safety widened credit spreads and put investors in a position to move back to
equity once there were clearer signs of an economic recovery.
As a leading indicator of the economy, the dramatic declines in the market, combined with
the increases in volatility, reflects an equity market in which investors are trying to find the
bottom. The precipitous drop in the market since October 2008, in turn, has also created potential
buying opportunities of the stocks of companies that are still considered strong. The recent
upward trend in the market in March, in turn, provided an early signal that the market may have
finally found its bottom.
Figure 1: S&P 500 Price and Volatility Trends
Initial Portfolio
In January, XSEIF received $500,000 for its initial investment. The fund managers waited until
February 24, 2009 to invest the funds. At that time the market had fallen 21% from its 937 level
on January 2nd to 731. XSEIF made its initial investment of the $500,000 in a tactical index
portfolio, with an initial cash position of approximately 5%.
10
Given the uncertainty over the duration of the recession, the XSEIF initial portfolio is set up
as a conservative portfolio with overweighting to the healthcare, consumer staples,
telecommunications, and utilities sectors, underweighting to the consumer cyclical, basic
materials, energy, and financials sectors, and approximately equal weighting to the industrials and
technology sectors.
The stocks and ETF selections in each sector reflect a strategy aimed at taking advantage of
the number of large-cap to mid-cap stocks in relatively stable to strong sectors that are considered
underpriced – many of which are trading at their five-year lows. Exhibit 2 shows the breakdown
of the initial portfolio in terms of the sector allocations and the allocations and attributes of stocks
and ETFs as of March 26, 2009. More extensive points on each of the initial holdings are
presented in the Appendix.
As shown in Figure 2, the initial portfolio has a beta of 0.910 and an alpha of 0.032 based on
the regression period from November 2005 to March 2009. Consistent with a beta less than one,
the portfolio is positioned to underperform the market under a bull market scenario and to
outperform under a bear market case. The portfolio’s relative historical performance to the market
can be seen in Figure 3 where the total returns of the portfolio and the S&P 500 are shown from
February 2006 to February 2009. As shown, the returns of the portfolio are greater than the index
returns. The portfolio’s alpha of .032, in turn, suggests that the portfolio is structured to earn a
small abnormal return from its security selection and sector allocation.
Performance: February 24, 2009 – March 26, 2009
Since the initial investment on February 24, 2009, the market decreased by 4.3% in early March.
The market rebounded with the total returns (from February 24th) on the S&P 500 equaling 6% on
March 10 and approximately 7% on March 23, and then finishing the period with a return of 2%
(see Exhibit 3). After the portfolio decreased by 4% in early March, its total returns were 4.5%
on March 10th and 6% on March 23rd ; it finished the period with a return of 2%, matching the
index’s return. The portfolio’s total return trend for the month showed lower returns than the
market when the market was increasing and lower negative returns when the market was
decreasing. This trend reflects the portfolio’s beta of .910 and the under-allocation of the portfolio
to the banking and financial sector, which were among the biggest gainers when the market was
increasing. On February 25th, the fund managers voted to increase the portfolio’s financial sector
allocation by buying shares in Bank of America and Cullen/Frost Bankers.1
For the period from February 24th to March 26th, the best performing stocks of the fund were
Aflac (24.94%), Coach (24.67%), Jacobs Engineering (20.39%), iShares Financial ETF (17.5%),
Vanguard Financial ETF (15.56%), and Qualcomm (14.95%). The poorest performing stocks
were Celgene (-12.64%), Stryker (-10.85%), Raytheon (-10.77%), and Brown-Forman (-5.63%).
Exhibit 4 lists the returns for each stock in the portfolio over different periods.
1
These trades were executed on March 30, 2009; they are not part of portfolio discussed in this
report.
11
Exhibit 2: Initial Portfolio Sector & Stock Features
Name
COACH INC
NIKE INC -CL B
BROWN-FORMAN CORP-CLASS B
PEPSICO INC
CVS CAREMARK CORP
PROCTER & GAMBLE CO/THE
KELLOGG CO
WAL-MART STORES INC
BP PLC-SPONS ADR
MARATHON OIL CORP
EXXON MOBIL CORP
PEABODY ENERGY CORP
TRANSOCEAN LTD
CHUBB CORP
AFLAC INC
VANGUARD FINANCIALS ETF
ISHARES DJ US REGIONAL BANKS
JOHNSON & JOHNSON
BECTON DICKINSON AND CO
TEVA PHARMACEUTICAL-SP ADR
GENENTECH INC
STRYKER CORP
CELGENE CORP
EMERSON ELECTRIC CO
RAYTHEON COMPANY
WASTE MANAGEMENT INC
JACOBS ENGINEERING GROUP INC
COGNIZANT TECH SOLUTIONS-A
JUNIPER NETWORKS INC
VISA INC-CLASS A SHARES
QUALCOMM INC
INTL BUSINESS MACHINES CORP
MICROSOFT CORP
MONSANTO CO
NUCOR CORP
SIGMA-ALDRICH
AT&T INC
FRANCE TELECOM SA-SPONS ADR
WINDSTREAM CORP
DOMINION RESOURCES INC/VA
P G & E CORP
DUKE ENERGY CORP
Ticker
3/26/09 Last Price
AVERAGE:
39.49
AVERAGE:
31.20
Consumer Discretionary
COH
16.80
NKE
45.59
AVERAGE:
31.20
Consumer Staples
BF/B
39.76
PEP
51.53
CVS
28.41
PG
46.95
K
37.17
WMT
51.08
AVERAGE:
42.48
Energy
BP
41.19
MRO
26.45
XOM
69.41
BTU
28.19
RIG
63.66
AVERAGE:
45.78
Financials
CB
40.52
AFL
21.14
VFH
18.97
IAT
16.05
AVERAGE:
24.17
Health Care
JNJ
52.41
BDX
66.05
TEVA
45.30
DNA
94.66
SYK
32.87
CELG
46.21
AVERAGE:
56.25
Industrials
EMR
28.45
RTN
35.99
WMI
25.73
JEC
39.10
AVERAGE:
32.32
Information Technology
CTSH
20.36
JNPR
15.99
V
53.48
QCOM
38.00
IBM
98.30
MSFT
17.93
AVERAGE:
40.68
Materials
MON
83.44
NUE
40.03
SIAL
37.61
AVERAGE:
53.69
Telecommunication Services
T
26.25
FTE
23.29
WIN
8.31
AVERAGE:
19.28
Utilities
D
31.68
PCG
40.29
DUK
14.14
AVERAGE:
28.70
12
Current Position
172.62
0.00
Portfolio Value
6934.70
0.00
Portfolio Weight
2.38
0.00
250.00
350.00
300.00
4200.00
15956.50
10078.25
2.31
1.21
1.76
300.00
350.00
500.00
500.00
500.00
250.00
400.00
11928.00
18035.50
14205.00
23475.00
18585.00
12770.00
10937.25
4.78
8.85
4.88
4.03
3.65
2.56
3.76
300.00
400.00
200.00
350.00
150.00
280.00
12357.00
10580.00
13882.00
9866.50
9549.00
5581.40
2.77
2.15
2.77
1.88
1.86
2.29
100.00
150.00
800.00
600.00
412.50
4052.00
3171.00
15176.00
9630.00
8007.25
0.81
0.60
3.08
1.96
1.61
350.00
100.00
250.00
100.00
250.00
400.00
241.67
18343.50
6605.00
11325.00
9466.00
8217.50
18484.00
12073.50
6.30
2.27
3.89
13.00
1.70
3.61
5.13
350.00
350.00
350.00
350.00
350.00
9957.50
12596.50
9005.50
13685.00
11311.13
3.42
4.32
1.81
2.91
3.12
400.00
550.00
150.00
1200.00
150.00
1200.00
608.33
8144.00
8794.50
8022.00
45600.00
14745.00
21516.00
17803.58
2.80
3.02
2.75
15.66
2.88
4.39
5.25
100.00
100.00
100.00
100.00
8344.00
4003.00
3761.00
5369.33
1.70
0.80
0.77
1.09
450.00
250.00
300.00
333.33
11812.50
5822.50
2493.00
6709.33
2.30
1.17
0.49
1.32
200.00
250.00
450.00
300.00
6336.00
10072.50
6363.00
7590.50
1.23
1.96
1.26
1.48
Exhibit 2: Initial Portfolio Sector & Stock Features, Continued
3/26/09 Last
Ticker
Price
AVERAGE:
39.49
AVERAGE:
31.20
Consumer Discretionary
COACH INC
COH
16.80
NIKE INC -CL B
NKE
45.59
AVERAGE:
31.20
Consumer Staples
BROWN-FORMAN CORP-CLASS
BF/B
B
39.76
PEPSICO INC
PEP
51.53
CVS CAREMARK CORP CVS
28.41
PROCTER & GAMBLE CO/THE
PG
46.95
KELLOGG CO
K
37.17
WAL-MART STORES INC WMT
51.08
AVERAGE:
42.48
Energy
BP PLC-SPONS ADR BP
41.19
MARATHON OIL CORP MRO
26.45
EXXON MOBIL CORP XOM
69.41
PEABODY ENERGY CORPBTU
28.19
TRANSOCEAN LTD RIG
63.66
AVERAGE:
45.78
Financials
CHUBB CORP
CB
40.52
AFLAC INC
AFL
21.14
VANGUARD FINANCIALS ETF
VFH
18.97
ISHARES DJ US REGIONAL BANKS
IAT
16.05
AVERAGE:
24.17
Health Care
JOHNSON & JOHNSON JNJ
52.41
BECTON DICKINSON AND CO
BDX
66.05
TEVA PHARMACEUTICAL-SP ADR
TEVA
45.30
GENENTECH INC
DNA
94.66
STRYKER CORP
SYK
32.87
CELGENE CORP
CELG
46.21
AVERAGE:
56.25
Industrials
EMERSON ELECTRIC CO EMR
28.45
RAYTHEON COMPANY RTN
35.99
WASTE MANAGEMENT INCWMI
25.73
JACOBS ENGINEERING GROUPJEC
INC
39.10
AVERAGE:
32.32
Information Technology
COGNIZANT TECH SOLUTIONS-A
CTSH
20.36
JUNIPER NETWORKS INC JNPR
15.99
VISA INC-CLASS A SHARESV
53.48
QUALCOMM INC
QCOM
38.00
INTL BUSINESS MACHINES CORP
IBM
98.30
MICROSOFT CORP MSFT
17.93
AVERAGE:
40.68
Materials
MONSANTO CO
MON
83.44
NUCOR CORP
NUE
40.03
SIGMA-ALDRICH
SIAL
37.61
AVERAGE:
53.69
Telecommunication Services
AT&T INC
T
26.25
FRANCE TELECOM SA-SPONS ADR
FTE
23.29
WINDSTREAM CORP WIN
8.31
AVERAGE:
19.28
Utilities
DOMINION RESOURCES INC/VA
D
31.68
P G & E CORP
PCG
40.29
DUKE ENERGY CORP DUK
14.14
AVERAGE:
28.70
Name
Price
Tot Debt
Earnings Best Est
Estimated
to
Dividend
Ratio
P/E Next
EPS Last BEst Est Common
Yield
(P/E)
Year BEst P/CF BEst P/Bk Year
ROE
Equity
2.36
12.44
11.16
-2.95
3.77
10.02
113.22
1.16
10.06
11.16
8.16
2.14
2.83
20.70
4.09
52 Week High
66.80
54.12
52 Week
Low
31.25
24.83
Current
Ratio
-2.87
37.64
70.60
54.12
11.41
38.24
24.83
0.00
2.31
1.16
8.12
11.99
10.06
9.81
12.52
11.16
8.16
-8.16
-2.14
2.14
2.063
3.591
2.83
-20.7
20.70
0.19
7.99
4.09
3.07
2.66
2.87
63.02
75.25
44.29
73.57
58.51
63.85
63.08
34.97
45.39
23.19
43.93
35.64
46.25
38.23
2.43
3.02
0.90
2.51
2.89
2.02
2.30
13.02
14.08
11.60
12.65
12.19
14.94
13.08
14.12
12.89
9.77
11.50
11.12
13.17
12.10
12.29
10.63
8.70
9.18
9.02
9.58
9.90
3.35
7.04
1.16
2.36
8.64
-4.51
3.501
3.655
2.441
3.498
3.011
3.382
3.25
--8.4
---8.40
58.32
68.19
34.19
53.82
376.8
64.67
109.33
1.48
1.23
1.23
0.79
0.71
0.88
1.05
77.69
55.75
96.12
88.69
163.00
96.25
33.70
19.34
56.51
16.00
41.95
33.50
-3.51
1.94
1.05
0.00
1.63
-4.01
8.22
8.15
4.43
6.20
7.39
6.98
11.31
7.71
4.88
7.65
5.29
3.71
9.54
5.75
3.56
5.57
1.22
0.87
3.27
-1.15
1.63
8.622
5.946
8.442
3.196
14.153
8.07
1.15
3.93
11.83
-6.35
5.82
-33.56
8.34
108.69
85.85
59.11
-1.08
1.47
1.06
1.98
1.40
69.39
68.81
52.00
56.33
61.63
33.47
10.83
13.07
10.86
17.06
2.59
2.09
--2.34
7.29
5.30
--6.30
7.73
3.99
--5.86
------
1.04
1.38
--1.21
5.501
4.015
--4.76
15.233
26.767
--21.00
29.59
25.92
--27.76
------
72.76
89.99
48.74
99.14
69.00
77.39
76.17
46.25
58.14
35.89
66.80
30.82
39.32
46.20
3.07
1.73
-0.00
1.00
0.00
1.16
11.52
14.17
-29.86
11.61
33.73
20.18
10.72
12.13
10.66
21.61
9.42
15.72
13.38
9.53
8.89
12.95
---10.46
2.95
-2.12
---2.53
4.526
4.455
2.824
3.43
2.826
1.552
3.27
--15.81
---15.81
27.88
23.39
-18.05
0.38
0
13.94
1.65
2.55
-3.25
3.41
5.39
3.25
58.72
67.37
39.25
98.31
65.91
24.39
33.20
22.10
26.00
26.42
3.36
2.19
3.26
0.00
2.20
9.33
8.84
11.59
11.08
10.21
11.65
7.24
11.31
10.84
10.26
7.10
6.32
5.78
9.41
7.15
2.53
1.59
-1.96
2.02
3.097
4.039
2.213
3.352
3.18
5
4.51
-4.42
4.64
49.58
25.41
141.07
2.52
54.65
1.42
1.44
0.77
1.74
1.34
37.10
29.49
89.84
56.88
130.93
32.10
62.72
14.38
12.43
41.78
28.16
69.50
14.87
30.19
0.00
0.00
0.40
1.80
2.26
2.47
1.16
14.14
15.38
21.39
18.01
10.97
9.49
14.90
11.80
15.29
16.77
17.72
9.96
9.30
13.47
11.25
12.16
17.25
19.66
7.41
8.03
12.63
2.93
1.43
1.88
3.37
4.21
4.57
3.07
1.474
1.177
2.222
2.165
8.703
1.883
2.94
22.2
5.3
8.667
15.4
--12.89
0
0
0.48
0
251.93
0
42.07
3.79
2.67
1.56
5.12
1.15
1.45
2.62
145.80
82.98
63.04
97.27
63.47
25.25
31.45
40.06
-4.13
1.23
2.68
20.35
6.36
14.14
13.62
15.38
11.10
12.81
13.10
-14.88
10.82
12.85
-1.62
-1.62
3.598
5.759
2.618
3.99
-15.7
-15.70
19.37
41.31
52.85
37.84
1.71
3.45
1.65
2.27
40.70
35.70
15.00
30.47
20.90
20.62
6.28
15.93
5.65
-10.87
8.26
9.31
-7.91
8.61
10.76
7.92
9.22
9.30
4.81
6.01
3.72
4.84
1.59
-15.11
8.35
2.824
2.65
1.035
2.17
9.827
--9.83
77.83
-2133.37
1105.60
0.53
-1.07
0.80
48.50
42.98
19.20
36.89
27.15
26.67
11.72
21.85
4.41
4.03
6.00
4.81
10.03
13.66
11.59
11.76
9.53
11.83
10.77
10.71
5.42
4.80
5.36
5.19
1.66
1.47
0.82
1.32
3.123
2.922
1.202
2.42
4.57
2.59
1.99
3.05
172.97
125.74
68.8
122.50
0.98
0.84
1.21
1.01
Figure 2: Portfolio Regressions
Initial Portfolio
Figure 3: Portfolio and Index Comparative Returns
14
Exhibit 3: Comparative Returns, February 24, 2009 – March 26, 2009
Comparative Returns
Exhibit 4: Rolling Stock Returns: February 24, 2009 – March 26, 2009
Securities
AFL EQUITY
BDX EQUITY
BF/B EQUITY
BP EQUITY
BTU EQUITY
CB EQUITY
CELG EQUITY
COH EQUITY
CTSH EQUITY
CVS EQUITY
D EQUITY
DNA EQUITY
DUK EQUITY
EMR EQUITY
FTE EQUITY
IAT EQUITY
IBM EQUITY
JEC EQUITY
JNJ EQUITY
JNPR EQUITY
K EQUITY
MON EQUITY
MRO EQUITY
MSFT EQUITY
NKE EQUITY
NUE EQUITY
PCG EQUITY
PEP EQUITY
PG EQUITY
QCOM EQUITY
RIG EQUITY
RTN EQUITY
SIAL EQUITY
SYK EQUITY
T EQUITY
TEVA EQUITY
V EQUITY
VFH EQUITY
WIN EQUITY
WMI EQUITY
WMT EQUITY
XOM EQUITY
SPX INDEX
Name
AFLAC INC
BECTON DICKINSON AND CO
BROWN-FORMAN CORP-CLASS B
BP PLC-SPONS ADR
PEABODY ENERGY CORP
CHUBB CORP
CELGENE CORP
COACH INC
COGNIZANT TECH SOLUTIONS-A
CVS CAREMARK CORP
DOMINION RESOURCES INC/VA
GENENTECH INC
DUKE ENERGY CORP
EMERSON ELECTRIC CO
FRANCE TELECOM SA-SPONS ADR
ISHARES DJ US REGIONAL BANKS
INTL BUSINESS MACHINES CORP
JACOBS ENGINEERING GROUP INC
JOHNSON & JOHNSON
JUNIPER NETWORKS INC
KELLOGG CO
MONSANTO CO
MARATHON OIL CORP
MICROSOFT CORP
NIKE INC -CL B
NUCOR CORP
P G & E CORP
PEPSICO INC
PROCTER & GAMBLE CO/THE
QUALCOMM INC
TRANSOCEAN LTD
RAYTHEON COMPANY
SIGMA-ALDRICH
STRYKER CORP
AT&T INC
TEVA PHARMACEUTICAL-SP ADR
VISA INC-CLASS A SHARES
VANGUARD FINANCIALS ETF
WINDSTREAM CORP
WASTE MANAGEMENT INC
WAL-MART STORES INC
EXXON MOBIL CORP
S&P 500 INDEX
Week To Date Month To Date
3/29/2009
3/29/2009
(Roll)
(Roll)
Cumulative
Cumulative
Security
Security
7.780%
5.622%
1.014%
3.832%
-2.163%
2.285%
1.142%
16.301%
-1.997%
5.882%
0.258%
0.492%
8.060%
-0.878%
8.821%
1.773%
10.748%
2.245%
4.838%
1.263%
7.330%
12.479%
6.272%
4.043%
9.127%
1.527%
4.738%
6.537%
5.073%
3.069%
11.457%
7.992%
8.944%
2.645%
2.730%
3.274%
10.699%
3.375%
3.146%
6.009%
5.886%
6.213%
16
18.198%
10.762%
-8.971%
6.648%
10.815%
7.513%
2.929%
25.036%
9.348%
9.790%
2.949%
11.011%
6.088%
8.262%
0.535%
10.373%
2.304%
22.466%
5.660%
11.330%
-5.216%
13.072%
17.361%
12.260%
13.492%
21.516%
2.616%
9.800%
0.830%
16.482%
2.828%
-1.426%
8.628%
2.020%
9.382%
1.301%
-4.338%
17.702%
10.858%
-2.885%
7.376%
3.063%
11.217%
Year To Date
3/29/2009
(Roll)
Cumulative
Security
-56.195%
0.235%
-24.016%
-10.668%
15.532%
-17.700%
-16.715%
-15.840%
11.406%
-1.386%
-12.077%
14.546%
-3.331%
-20.096%
-19.594%
-32.061%
12.452%
-14.096%
-10.957%
-9.652%
-15.137%
22.929%
0.705%
-6.069%
-7.582%
-11.494%
1.318%
-3.491%
-20.887%
9.192%
30.074%
-22.806%
-7.812%
-14.018%
-7.397%
6.412%
3.629%
-25.260%
-10.109%
-20.878%
-5.687%
-11.902%
-9.001%
12 Month
3/29/2009
(Roll)
Annualized
Security
-68.337%
-20.472%
-25.116%
-27.114%
-48.431%
-13.629%
-22.544%
-40.137%
-31.049%
-30.214%
-19.952%
18.713%
-14.760%
-41.580%
-25.995%
-51.977%
-16.253%
-44.230%
-15.206%
-34.897%
-27.626%
-23.890%
-39.527%
-33.632%
-27.576%
-39.200%
10.883%
-24.620%
-28.233%
-1.451%
-54.192%
-37.953%
-32.955%
-46.411%
-27.180%
-0.721%
-13.096%
-56.127%
-24.107%
-20.635%
2.723%
-16.228%
-36.328%
2/24/2009
3/26/2009
Cumulative
Security
Currency
24.519%
-2.956%
-5.368%
4.118%
14.345%
4.087%
-12.010%
24.457%
14.624%
6.083%
1.101%
11.050%
1.048%
2.001%
6.687%
17.992%
14.329%
20.361%
-3.007%
9.431%
-4.339%
13.230%
14.233%
9.668%
11.546%
8.848%
9.929%
3.782%
-2.029%
15.183%
10.026%
-10.611%
8.906%
-10.705%
13.333%
0.728%
-1.508%
14.982%
11.008%
-5.211%
6.105%
-1.193%
7.971%
APPENDIX
TECHNOLOGY
Qualcomm - QCOM
Beta: 0.87
Price: 34.55
Hi: 56.88
Lo: 28.16
Description:
Qualcomm develops and delivers digital wireless communications products and service
based on the company’s CDMA digital technology. The company’s business areas
include integrated CDMA chipsets and systems software, technology licensing, e-mail
software for Windows and Macintosh platforms, and satellite systems.
Strengths:
 Growing adoption and demand for 3G handsets are continuing to help Qualcomm’s
revenues.
 Qualcomm has secured contracts with major internet providers including AT&T and
Verizon, as well as the top 5 laptop producers.
o Qualcomm will supply these companies with new Gobi chip that provides access
to the mobile internet networks.
 Healthy balance sheet with high cash levels and little debt.
 Qualcomm secured new contract with China Mobile to supply 3G phones
 Altman’s Zscore of 9.36
Potential Risks/Sell Considerations:
 Weakened outlooks for top customers Samsung and LG has hurt stock price recently.
 Potential loss of revenue from financial services customer base.
Financial Ratios:
 Qualcomm has maintained very stable Gross Margins of around 70%.
o This compares to a peer average of around 55%.
o The company has, however, experienced slightly diminishing operating margins
due to incremental increases in SG&A expenses.
 Current retention ratio of 73% gives this stock a 1.75% dividend yield.
 Superior liquidity ratios to peers due low debt levels, shorter average collection period,
and higher cash ratios.
 Qualcomm does have a lower sustainable growth rate than its peers at around 17%.
Our Projections:
 We projected Qualcomm’s FY08 EPS to be $2.01; This estimate is inline with
Bloomberg estimates just above the mean. Announced EPS of $2.22 for FY08.
o Based on a 15% increase in sales. FY08 actual 25%
 Qualcomm saw their quarter ended June 08 jump 19% YoY.
o Assumptions also included slightly higher SG&A expenses, following the recent
trend, as well as using the historical average tax rate.
 The FCFF model projected an estimated stock price of $44.36, a 28% premium to the
current price of $34.55
o Same assumptions of 15% sales growth, 31% EBIT margins, and historical tax
rate %.
17
International Business Machines - IBM
Beta: 0.95
Price: 91.65
Hi: 130.93
Lo: 69.50
Description:
IBM is the world’s largest provider of advanced information processing technology and
communication systems. IBM offers its products through its global sales and distributions
organization, as well as through a variety of third party distributors and retailers.
Strengths:




IBM has solid annuity base through software and service contracts which provide
stability and that offsets the volatility in servers and storage sales.
 There is a strong demand in developed and emerging markets as
customers look for was to increase efficiency and move into high-end
systems to save money on hardware and power consumption.
Diversified revenue streams with roughly 60% of revenue coming from overseas.
Balance sheet currently holds $15 billion in cash.
Low beta for a technology company at .94 versus the S&P 500.
Potential Risks/Sell Considerations:



A continued rally in the dollar could slow exports, thus diminishing IBM’s
overseas revenue.
o 7 of the 12 Percentage points in top line growth in the first half of 2008
was due to the decline in the dollar.
Raising more debt would greatly increase financial risk
o Already has $24 billion debt outstanding with a D/E ratio of 123.9
Financial services accounted for 28% of company’s 3Q08 revenues
Our Projections:

By means of the multiplier evaluation spreadsheet, we project IBM’s EPS to be
$9.27.
o Assumptions include sales growth of 5%; comparable to IBM’s sales
growth over the past 12 months
o $9.27 is above the mean of the Wall Street estimates.
18
Microsoft - MSFT
Beta: 0.82
Price: 17.10
Hi: 33.25
Lo: 16.75
Description:
Microsoft Corporation develops, manufactures, licenses, sells, and supports software
products. The company offers operating system software, server application software,
business and consumer applications software, software development tools, and internet
and intranet software. Microsoft also develops the MSN network of Internet products
and services.
Strengths:




Dominant market share gives Microsoft the protection of high barriers to entry.
Strong financials with $10 billion in cash and no debt outstanding.
Currently trading at the lower end of its 52 week trading range of $16.75-$33.25
Altman’s Z score 6.77
Potential Risks/Sell Considerations:



If shown as unable to compete with the emerging SaaS (Software-as-a-service)
which are changing in the software industry such as development, delivery,
revenue models.
Increasing competition from Google in its selling of applications similar to
Microsoft Office
Continuing to lose market share mostly to Apple
Financial Ratios:



Microsoft has high margins compared to peers.
o Gross profit margins are at 80.80% far superior to its peers
o Operating Profit Margin is 37.23% which is significantly higher than its
peers at 24.27%
Strong Return on Equity is at 52.48%, 25 % points higher than its peers.
Very high sustainable growth rate at 40.37%
Our Projections:


Through the EPS evaluation spreadsheet, we project their FY 2009 EPS to be
$2.14.
o This earnings per share is based on assumptions of an 5% increase in
sales.
 This sales projection is half of the sales growth Microsoft saw in
the 2002 recessionary environment.
o Our $2.14 estimate is moderately higher than Wall Street estimates.
Through the FCFF model we projected an estimated price per share of $28.35
o Assumed the same 5% sales growth and historical averages on EBIT
Margin.
19
Cognizant Technology Solutions Corporation - CTSH
Beta: 1.24
Price: 18.41
Hi: 37.10
Lo: 14.38
Description:
Cognizant Technology Solutions Corporation delivers full life cycle solutions to complex
applications development, maintenance, and re-engineering problems through its onsite/off-shore model. The company’s core competencies include data warehousing, web
enabling, Internet, object-oriented development and legacy platforms.
Strengths:
 U.S. based management team while offshore model provides cost savings.
o Customer centric focus provides competitive advantage
 Strong revenue growth at over 50% annual averages for the last five years.
o Recurring sales from current customers account for the growth and stability in
revenue over the past few years
o Stable operating margin at 19-20% even in the face of heightened competition,
wage increases and currency fluctuations.
 Cognizant is geographically diversified, has a wide array of service offerings, and
supplies companies in nearly every industry
o This will shield the company from feeling the full effects of a global economic
downturn.
 Recessionary environments have proven to increase outsourcing needs of companies as
they as pressured to reduce costs.
 Currently has no outstanding debt
 Altman Z Score of 14.41
Potential Risks/Sell Considerations:
 Continued appreciation of the Indian Rupee.
o Will cause wage inflation and possibly weaken India’s position as the favored
nation for off shoring services.
 Potential loss of contracts/revenue from financial services customer base.
Financial Ratios:
 Cognizant has great liquidity ratios as they have no debt outstanding.
o Significantly higher cash ratio.
 Higher operating margins than its peers at nearly 18%.
 Gross profit margin of 44% is lower than peers due to rising SG&A costs.
Our Projections:
 Through the EPS evaluation spreadsheet, we project their FY 2008 EPS to be $1.57.
o This earnings per share is based on assumptions of a 25% increase in sales, 7
percentage points lower than company guidance and projections.
 25% growth is half of what the company has been averaging in the past 5
years
o Our $1.57 per share estimate is above any estimate given on Bloomberg (ranging
from $1.42 to $1.50.
20
CONSUMER STAPLES
Procter & Gamble Co. – PG
Beta: 0.68
Price: $53.05
Hi: $73.57
Lo: $53.05
Description:
Procter & Gamble provides branded consumer goods products worldwide. The company sells its
products in over 180 countries through various outlets ranging from mass merchandisers to
salons.
Strengths:
 Strong company that has historically been a defensive holding during economic decline
as well as a quality holding in normal economic conditions.
 Recent downward trend of market has pushed PG price very near its 52-week low, an
attractive buy price for a quality stock such as PG.
 Recent decline in commodity prices benefits PG.
 Strong Altman-Z of 9.45, signifying a low risk of bankruptcy.
 Healthy dividend of $1.55 and a 5-yr dividend growth rate of 12.4%
 Company refocus on core products while selling non-core brands (i.e. Folgers, which will
save over $400 million in overhead costs)
 Analyst Recs.: 10 Buys, 11 Holds
o Target Price: 68.67
Potential Risks/Sell Considerations:
 In response to last year’s dramatic increase in commodities, PG raised prices on a variety
of its products.
o This may potentially backfire as consumers are looking to spend less.
o However, the Company should see a higher profit margin from these products as
commodities have decreased in recent months.
 A rise, again, in commodity prices may cause a review of this holding. However, due to
pro-active steps taken by the consumer goods giant last year to fight these rising costs, a
similar increase in costs may be cushioned by the rise in product pricing.
 Review at an increase in price of 20% ($65) or a decline of 10% ($50).
Financial Ratios:
 Total Debt/Total Capital is generally lower among its comparable peers at 37.93%.
 Profit Margin also outweighed the industry peer group with 15.20% v. 10.86%.
Our Projections:
 We recommend PG due to their attractive price and historic stability.
 Using the Free Cash Flow model a price of $59.10 was generated.
o Assumptions include:
 -2.0% Sales Growth v. 7.57% Historically and 9.19% in 2008.
21
PepsiCo. – PEP
Beta: 0.73
Price: $50.00
Hi: $75.25
Lo: $43.78
Description:
Pepsi is a global leader in the snack and beverage industry. The Company manufactures markets
and sells a range of salty, convenient, sweet and grain-based snacks along with carbonated and
non-carbonated beverages. PepsiCo is organized into four business segments: Frito-Lay North
America, PepsiCo Beverages North America, PepsiCo International, and Quaker Foods North
America.
Strengths:
 Currently PEP is trading near its 52-week low and lower than our initial suggested buy
price of $57.48
 Healthy annual dividend of $1.72 per share
 Strong Altman-Z of 5.82, signifying a low risk of bankruptcy.
 Cost cutting procedures introduced in 2008 is expected to reap $1.2 billion in savings to
be realized over the next three years. $350-400 million is expected to be realized in 2009.
 Company has been openly embracing the ‘green’ trend which, in the long term, should be
cost effective and ahead of regulatory changes. Accompanying this are changes in
designs of containers which should reduce packaging costs.
 PEP also has planned to reduce it water and energy usage by 20% and fuel usage by 25%
by the year 2015.
 Strong entry point with traditionally high seasonality with a low stock price at the start of
the year.
 Analyst Recs.: 12 Buys, 4 Holds
o Target Price: 64.82
Potential Risks/Sell Criteria:
 Surge in sugar, aluminum, and/or transportation costs.
 Decline in soft-drink sales volume.
 Reassess with a 30% increase ($65) in price or 20% drop ($40).
Financial Ratios:
 PEP ROE is 35.28% compared to the Bloomberg Peers ROE of 11.65%.
 Total Debt/Total Capital is 32.53% v. 41.76% among industry peer average.
 Profit Margin also outweighed the industry peer group with 14.02% v. 8.87%.
Our Projections:
 We recommend PEP due to their large and increasing global market share and stable
brand-name.
 Using the Free Cash Flow model a price of $58.12 was generated.
o Assumptions include:
 5% Sales Growth v. 8.38% Historically and 12.34% in 2007
22
Brown-Forman – BF-A
Beta: 0.83
Price: $47.21
Hi: $63.02
Lo: $40.46
Description:
Brown-Forman Corporation manufactures, bottles, imports, exports, and markets a wide variety
of alcoholic beverage brands. The Company's products include branded whiskey, vodka, wines,
tequila, bourbon, and gin.
The U.S. Company sells spirits and wines either through wholesale distributors or directly to state
governments in those states that control alcohol sales.
Buy Criteria/Strengths:
 The company started a $250 million common share repurchase program to begin in 2009
and be processed throughout the year.
 $326 million in cash and cash equivalents.
 Historic stability through past recessions.
o Strong brand-name recognition that creates stable consumer sales.
 Healthy annual dividend of $1.15, after a recent increase of 6%.
 Altman-Z score of 5.65 signifying a low risk of bankruptcy.
 Diversified portfolio of products within spirits subsector.
 Current price is very close to the 52 week low of $40.46.
 Divesture in non-growth product segments with renewed focus on key products and
generating shareholder wealth.
 Projected sales growth strong during recessionary times.
 Increase in profit forecasts for 2009.
 Maintaining sales growth while competitors are seeing declines in sales.
 Analyst Recs.: 2 Buys, 2 Holds, 2 Sells
o Target Price: 48.20
Potential Risk/Sell Considerations:
 Rise in distribution costs.
 Withdrawal from foreign markets.
 Reassess with a large decline in volume sales.
 Review at an increase in price of 20% ($54) or a decline of 10% ($40).
Financial Ratios:
 Profit Margin is 19.41% v. 14.43% among industry peers.
 ROE is 25.47% v. 14.18% among peers.
 BF.B is also trading at a lower P/E, around 15.17 v. 18.74 in peer group.
 Cash holdings of $326.8 million v. a peer average of $115.4 million.
 Debt/Equity, at 66.18%, is slightly higher than the industry average of 60.42
Our Projections:
 We recommend BF.B due to their attractive price and recent performance among peers.
 Using the Free Cash Flow model a price of $ 51.75 was generated.
o Assumptions include:
 0% Sales Growth v. 5.44% Historically and 16.4%in 2008.
 With 2% sales, which would be similar to that of the recessionary
period of 2001, a price of $61.87 was generated.
23
Kellogg – K
Beta: 0.71
Price: $44.93
Hi: $58.51
Lo: $40.32
Description:
Kellogg Co. is a large-cap growth, leading producer of ready-to-eat cereal and has expanded its
operations to include convenience food products such as Pop-Tarts toaster pastries, Eggo frozen
waffles, Nutri-Grain cereal bars, and Rice Krispies Treats squares. The company also recently
expanded into cookies, crackers and other convenience food products under brand names such as
Keebler, Cheez-It, Murray and Famous Amos, and manufactures private label cookies, crackers
and other products.
Buy Criteria/Strengths:
 The company started a $500 million common share repurchase program to begin in late
2008 and be processed throughout the following 12 months. This was set after K’s initial
$650 million repurchase program for 2008 was complete.
 Recent acquisition of Keebler Foods Co. extends Kellogg’s portfolio to include cookies
and other convenience food products.
 As recent the beginning of November, insiders were buying K over $50.
 Q3 2008 net income increased by 12% over 2007. Q3 2008 EPS was $0.89 vs. $0.76 Q3
2007. Updated earnings are set to release 2/5/2009.
 Diversified portfolio of products as well as a global reach.
 Current price is very close to the 52 week low of $40.32. Recent earnings reports have
been positive, and the company's outlook remains healthy.
 Analyst Recs.: 16 Buys, 5 Holds
o Target Price: 53.62
Potential Risk/Sell Considerations:
 A rise in commodity prices may cause a review of this holding.
 Reassess with continued increase in consumer purchasing of private label products.
 Review at an increase in price of 20% ($52) or a decline of 10% ($40).
Financial Ratios:
 Total Debt/Total Capital is generally lower among its comparable peers at 15.09% v.
19.59%.
 Profit Margin also outweighed the industry peer group with 10.4% v. 7.97%.
 ROE is greater than industry peers at 44.67% v. 33.21%.
 Trading at a discounted P/E of 15.18 compared to its 5-year average of 18.77.
Our Projections:
 We recommend K due to their attractive price and historic stability in recessionary times.
 Using the model a price of $56.74 was generated.
o Assumptions include:
 1% Sales Growth v. 6.03% Historically and 10% in 2008.
24
Visa – V
Beta: N/A
Price: $49.13
Hi: $89.84
Lo: $41.78
Description:
Visa manages a group of global payment card brands, which it licenses to financial institutions
that issue cards to their customers. The firm acts as the payment processor by facilitating the
authorization, clearing, and settlement of transactions on its proprietary networks. Visa maintains
the largest card scheme in the world.
Strengths:
 Built around transactions fees, VISA is able to steer clear of the risk associated with
consumer debt and their chances of default.
 Recently, profits were reported at a 35% increase.
 Expansions into international markets show strong potential with double-digit growth
since the Company’s IPO.
 Appealing entry point with room for price appreciation.
 Cash and cash equivalents at $ 4.98 Billion.
 High barriers to entry.
 Unlikely the necessity for Visa services will decline due to popularity among consumers,
merchants, and banks.
 Recently met per-share earnings expectations.
 Insider transactions show active buying throughout November and December 2008 in the
$50 range.
 Analyst Recs.: 14 Buys, 11 Holds, 1 Sell
o Target Price: 64.06
Potential Risks/Sell Considerations:
 Lack of financial information due to the fact the company has only been public for nearly
a year. Evaluations and analysis with excel models should be looked over carefully.
 Reassess with a decline in transactions volume.
 Review at an increase of 20% ($60) or a decrease of 20% ($40).
Financial Ratios:
 Cash of $4.98B v. industry peer average of $4.60B.
 Total Debt/Total Equity is 0.48% v. 125.15% among industry peer average.
 Total Debt/Total Assets is 0.30% v. industry average of 23.5%.
 Altman-Z of 3.90.
 **Due to the limited time frame since IPO many financial ratios are unavailable.
Our Projections:
 We recommend V due to their strong growth potential both at home and abroad. We
believe they are priced more competitively than MasterCard and carry less financial risk
than American Express.
 *Using the model a price of $64.49 was generated using conservative estimates.
o Assumptions include:
 8% Sales Growth v. 74% in 2008, 21% in 2007.
 We also used a conservative EBIT Margin of 15% for 2009 compared to
43% in 2008 and 33% in 2007.
25
HEALTHCARE
Becton Dickinson & Company – BDX
Beta: 0.68
Price: $72.82
Hi: $98.12
Lo: $58.14
Description:
Becton, Dickinson and Co. is a medical technology company engaged in the manufacture and sale
of medical supplies, devices, laboratory equipment and diagnostic products used by healthcare
institutions, life science researchers, clinical laboratories, industry and the general public. Their
operations consist of three worldwide business segments. Operations outside the United States are
conducted in Canada, Europe, Japan, Asia Pacific, and Latin America.
Strengths:
 Healthy annual dividend of $1.32 per share. The Company recently increased their
quarterly dividend from $0.28 to $0.33.
 Considerable investments in R&D.
 Strong Altman-Z of 6.83, signifying a low risk of bankruptcy.
 Planned $450 million common share buyback throughout 2009.
 Strategic acquisition of Tri-Path cancer diagnostics.
 Analyst Recs.: 6 Buys, 2 Holds
o Target Price: 83.80
Potential Risk/Sell Considerations:
 Continued decline in hospital spending.
 FDA disapproval of a product.
 High profile lawsuits.
 Reassess with a 10% increase ($80) in price or 15% drop ($64).
Financial Ratios:
 BDX ROE is 24.24% compared to the Bloomberg Peers ROE of 23.10%.
 Total Debt/Total Capital is 18.96% v. 28.45% among industry peer average.
 Profit Margin also outweighed the industry peer group with 15.37% v. 10.64%.
Our Projections:
 We recommend BDX due to their strong outlook and diversification of products.
 Using the Free Cash Flow model a price of $87.29 was generated.
o Assumptions include:
 5% Sales Growth v. 8.38% Historically and 12.34% in 2007
26
Celgene Corp. – CELG
Beta: 0.84
Price: $53.47
Hi: $77.39
Lo: $45.44
Descriptions:
Celgene is an integrated biopharmaceutical company engaged in the discovery,
development, and commercialization of therapies designed to treat cancer and immuneinflammatory-related diseases. CELG develops drugs designed to treat life-threatening
diseases of chronic debilitating conditions where patients are poorly served by current
therapies.
Strengths:
 CELG holds a strong financial position with no debt.
 Depressed price due to overall market compared with initial suggested price.
 Strong Altman-Z of 24.13, basically signifying an extremely low risk of bankruptcy.
 Increased adoption of the product Revlimid and the Vidaza approval in the European
Union should provide steady sales in the future. Vidaza is the only epigenetic cancer
therapy proven to extend survival for patients.
 Type of treatment typically is a necessity, providing some safety in the current economic
situation.
 54% increase in R&D between 2006 and 2007.
 Analyst Recs.: 19 Buys, 3 Holds
o Target Price: 72.38
o Beta v. SPX: .84
Potential Risk/Sell Considerations:
 Failures in expansion of Revlimid and Vidaza, two current strong sellers.
 Failures in future products in the company’s pipeline.
 Loss in approval of products by FDA or a similar international regulatory authority.
 Review at an increase of 20% ($64) or a decline of 20% ($43).
Financial Ratios:
 CELG has 0% debt compared to 22.73% industry peer average.
 1-year EPS growth approached 195% v. 48.92% peer average.
 Profit Margin also outweighed the industry peer group with 23.09% v. 1.5%.
Our Projections:
 We recommend CELG due to their increasing market share, global expansion, and lack
of debt.
 Using the Free Cash Flow model a price of $76.30 was generated.
o Assumptions include:
 50% Sales Growth v. 60% Historically and 56.40% in 2007
 *Due to large variance in the change in working capital, the model is
limited in its accuracy.
27
CVS Caremark – CVS
Beta: 0.71
Price: $26.80
Hi: $44.29
Lo: $23.19
Description:
CVS Corp. operates one of the largest drug store chains in the U.S., based on revenues,
net income and store count. The company offers prescription drugs and a wide assortment
of general merchandise, including OTC drugs, beauty products and cosmetics, film and
photo finishing services, seasonal merchandise, greeting cards and convenience foods.
Strengths:
 Same-Store-Sales recently increased by 3.7%
 Currently CVS is trading near its 52-week low and lower than our initial suggested buy
price of $29.69.
 Recent increase in quarterly dividend from $ 0.24 to $ 0.32.
 Strong Altman-Z of 6.82, signifying a low risk of bankruptcy. The company has
historically strong cash flows, being America’s largest drug retailer.
 Increased market share and exposure due to recent acquisitions. The closure of the
acquisition of Long’s Drug Stores gives CVS a less costly entry and exposure to the
Western U.S. and Hawaii, typically expensive markets to enter. This should continue to
prove beneficial in the long-term.
 Adoption of generic and mail-order prescription plans gives CVS a hand these two
growing trends.
 Analyst Recs.: 18 Buys, 3 Holds with target price at 34.50
Potential Risk/Sell Considerations:
 Recently lowered forecasts signals this company is not immune to a recession and that
management believes it may negatively affect sales.
 Reported decrease in number of prescriptions filled. A continuation of this trend may
require a revision of this holding.
 Potential issues with the acquisition of Long’s Drug Stores debt.
Financial Ratios:
 CVS has a higher ROE among peer group.
 Both Total Debt/Total Equity and Total Debt/Total Assets are lower than industry peer
group average.
 CVS Profit Margin also outweighed the industry peer group.
Our Projections:
 We recommend CVS due to their large and increasing market share during these difficult
economic times.
 Using the EPS Evaluation model with a price of $37.57 was generated.
o This price is over a 40% premium to its current price.
o Assumptions include:
 11% Sales Growth v. 15.3% Historically
 An Estimated P/E of 10, which is lower than the Company’s current P/E
and industry peer group average.
 Reassess at an increase of 30% ($35) or a decrease in price of 20% ($23).
28
Genentech – DNA
Beta: 0.68
Price: $82.10
Hi: $99.14
Lo: $66.80
Description:
Genentech, Inc. (Genentech) is a biotechnology company that discovers, develops,
manufactures and commercializes pharmaceutical products to treat patients with unmet
medical needs. It commercializes multiple biotechnology products and also receives
royalties from companies that are licensed to market products based on the Company’s
technology.
Strengths:
 10 new FDA applications and clearance given on 4 products.
 Increase in R&D spending from $2.4 billion to $2.8 billion.
 Strong Altman-Z of 11.84, signifying a low risk of bankruptcy.
 Analyst Recs.: 17 Buys, 4 Holds
o Target Price: 95.36
Potential Risk/Sell Considerations:
 Continued decline in hospital spending.
 FDA disapproval of a product.
 High profile lawsuits.
 Potential backlash if Roche were to completely walk away from their acquisition
aspirations.
 Reassess with a 15% increase ($94) in price or 15% drop ($70).
Financial Ratios:
 DNA ROE is 24.85% compared to the Bloomberg Peers ROE of 19.67%.
 Total Debt/Total Capital is 15.29% v. 25.16% among industry peer average.
 Profit Margin also outweighed the industry peer group with 25.11% v. 5.55%.
Our Projections:
 We recommend DNA due to their strong outlook and their vertical integration of
corporate structure. The Company does its own research, development, manufacturing,
and marketing of products.
 Using the Free Cash Flow model a price of $83.61 was generated, close to current price
using conservative estimates.
o Assumptions include:
 5% Sales Growth v. 27.56% Historically and 14.45% in 2007
29
Johnson & Johnson – JNJ
Beta: 0.68
Price: $57.63
Hi: $72.76
Lo: $52.06
Description:
Johnson & Johnson is a company engaged in the research and development, manufacture
and sale of a range of products in the healthcare field. JNJ has more than 250 operating
companies. The Company operates in three segments: Consumer, Pharmaceutical, and
Medical Devices and Diagnostics.
Strengths:
 Strong company that has historically been a defensive holding during economic decline
as well as a quality holding in normal economic conditions.
 Recent downward trend of market has pushed JNJ price close to the 52-week low, an
attractive buy price below our initially suggested buy price.
 Strong Altman-Z of 6.05, signifying a low risk of bankruptcy.
 Healthy dividend of $1.66 and a 5-yr dividend growth rate of 14.48%
 Success with recent product releases across various market segments provides stable
sales expectations.
 Analyst Recs.: 11 Buys, 6 Holds
o Target Price: 65.33
Potential Risks/Sell Considerations:
 The strengthening of the dollar may negatively affect JNJ due to their international
exposure. A revision would be required in this situation. However, a weakening of the
dollar will prove beneficial to the Company.
 Failure in product launches or the entry of a low-cost or generic competitor.
 High profile lawsuits or regulatory dilemma.
 Review at an increase of 20% ($65) or a decrease of 10% ($50).
Financial Ratios:
 JNJ ROE is 28.24% compared to the Bloomberg Peers ROE of 21.05%.
 Total Debt/Total Capital is 24.25% v. 30.08% among industry peer average.
 Total Debt/Total Assets is 16.69% v. industry average of 21.68%.
 Profit Margin also outweighed the industry peer group with 17.88% v. 14.84%.
Our Projections:
 We recommend JNJ due to their diversification in products and its historic quality, and
suggest a long-term position.
 Using the Free Cash Flow model a price of $57.25 was generated using conservative
estimates.
o Assumptions include:
 -3% Sales Growth v. 10.27% Historically and 4.34% in 2008.
 We also used a conservative sales estimate of 2% for 2010.
30
Stryker Corp. – SYK
Beta: 0.88
Price: $42.24
Hi: $70.56
Lo: $35.38
Description:
Stryker Corporation is a medical technology company with a range of products in orthopaedics
and a presence in other medical specialties. The Company's products include implants used in
joint replacement, trauma, craniomaxillofacial and spinal surgeries; biologics; surgical,
neurologic, ear, nose and throat and interventional pain equipment; endoscopic, surgical
navigation, communications and digital imaging systems; as well as patient handling and
emergency medical equipment. The Company operates in two business segments: Orthopaedic
Implants and MedSurg Equipment. The Orthopaedic Implants segment sells orthopaedic
reconstructive, trauma, craniomaxillofacial and spinal implant systems; bone cement; and the
bone growth factor OP-1. The MedSurg Equipment segment sells surgical equipment; surgical
navigation systems; endoscopic, communications and digital imaging systems; as well as patient
handling and emergency medical equipment.
Strengths:
 Currently trading near 52-week low and lower than our initial suggested buy price of
$49.12.
 Majority of orthopedic surgery reimbursed by government or third-party, padding sales
from discretionary operations.
 No long-term debt.
 Almost a decade of double digit sales growth.
 Increase in R&D spending by $50 million, to $375 million.
 Strong Altman-Z of 11.72, signifying a low risk of bankruptcy.
 Analyst Recs.: 13 Buys, 9 Holds, 2 Sells
o Target Price: 49.86
Potential Risk/Sell Considerations:
 Continued decline in hospital spending.
 FDA disapproval of a product.
 High profile lawsuits.
 A decline in ‘optional’ surgeries.
 Reassess with a 20% increase ($50) in price or 10% drop ($38).
Financial Ratios:
 Total Debt/Total Capital is 0.37% v. 28.45% among industry peer average.
 Profit Margin also outweighed the industry peer group with 16.56% v. 10.64%.
 ROE, not outperforming industry peer average, but among its top performers.
Our Projections:
 We recommend SYK due to their favorable position among the upcoming stimulus
package.
 Using the Free Cash Flow model a price of $50.32 was generated.
o Assumptions include:
 12% Sales Growth v. 18.45% Historically and 16.58% in 2007
31
Teva Pharmaceuticals – TEVA
Beta: 0.68
Price: $41.35
Hi: $50.00
Lo: $35.89
Description:
Teva Pharmaceutical Industries Ltd. is a global pharmaceutical company that develops,
produces and markets generic drugs covering all major treatment categories. The
Company has an innovative pharmaceutical business, as well as a proprietary specialty
pharmaceutical business, which consists primarily of respiratory products. Teva’s global
operations are conducted in North America, Europe, Latin America, Asia and Israel. Teva
has operations in more than 50 countries, as well as 36 pharmaceutical manufacturing
sites in 16 countries.
Strengths:
 TEVA is currently trading below our initial suggested buy price of $42.98.
 Annual dividend of $0.40 per share
 Growing generic trend among pharmaceuticals puts TEVA is a strategic position for
growth and or future M&A.
 Launch of generic version of heartburn hit Prevacid.
 Planned entry into Japan, the second largest generic drug market.
 587 drugs currently on the market with nearly 200 pending FDA applications.
 Strategic acquisition of Barr Pharmaceuticals.
 Strong entry point with positive outlook.
 Analyst Recs.: 20 Buys, 4 Holds
o Target Price: 52.52
Potential Risk/Sell Considerations:
 Decline of FDA applications.
 Failure to penetrate the Japanese market.
 High profile litigation, patent infringements on competitors.
 Increased debt obligation with acquisition of Barr.
 Instability of Israel region and its effects on the local indices.
 Reassess with a 15% increase ($48) in price or 15% drop ($36).
Financial Ratios:
 Profit Margin also outweighed the industry peer group with 22.41% v. 11.46%.
 EPS (1-year growth) was 251.92% v. 33.89%.
 TEVA has slightly higher Total Debt/Total Assets of 18.66% v. 15.41% average among
the peer group. We believe this is due to the recent acquisition of Barr, its debt, and the
bridge loan required to complete the acquisition.
Our Projections:
 We recommend TEVA due to their wide array of generic drugs, the potential to benefit
from the growing popularity of generics, and global position to distribute their products.
 *TEVA is an ADR and will not pull into any of the funds models.
32
CONSUMER CYCLICAL
Coach Inc. - COH
Beta: 1.27
Price: 14.60
Hi: 37.64
Lo: 13.19
Description:
Coach is a leading designer and marketer of high-quality accessories. The company’s
primary products include handbags, women’s and men’s accessories, footwear, business
cases, sunglasses, watches, travel bags, and fragrances. As of June 28, 2008 the company
operated 297 retail and 102 factory leased stores located in North America; and 149
Coach-operated department store shop-in-shops, retail stores, and factory stores in Japan.
Strengths:
 Coach is the number one luxury accessories brand in the United States with a 20%
market share. This market is estimated to be worth over $8.7 billion.
 Developing/Emerging markets are expected to be the next growth opportunity for this
segment, with global market worth expected to exceed $25 billion by 2010. Coach has
already started investing in China, already opening 27 stores in China. Even with 27
store locations, Coach has only captured 4% of the expected market, leaving tremendous
growth opportunities.
o Plan to open at least 20 net new wholesale locations in emerging markets and 5
locations in China.
o Estimate North America can support up to 500 retail locations
 The handbag/accessories market grew at an estimated 20% pace in 2007 and 2006, 17%
in 2005, 30% in 2004, and 23% in 2003. While growth has slowed in 2008 to a 5% -10%
pace, it remains one of the best performing categories at retail.
 Altman Z Score= 11.14 which signifies an extremely low chance of default on debt
outstanding.
Potential Risks/Sell Considerations:
 A continued decrease in consumer spending, especially on consumer discretionary items
as witnessed during the 2008 holiday season.
 A decrease in industry leading operating and profit margins
 Failure to gain market share in emerging markets (China, South America, etc.).
 A new competitor enters the luxury accessory market and dethrones Coach as the #1
brand within the segment.
Financial Ratios:
 Coach has a fabulous Long-term Debt to Equity ratio of 0.17, with only $2.58 million in
long-term debt on 2008 projected revenues of roughly $3.5 billion.
 Operating Margin is high at 75.68% which correlates to a profit margin of 24.62%.
Our Projections:
 By means of the multiplier evaluation spreadsheet, we project Coach’s EPS to be $1.90.
o Assumptions include sales growth of 5%; a forecasted sales growth from
company guidance prior to holiday season.
o $1.90 is at the middle of the Bloomberg earnings estimates.
33
Nike, Inc. - NKE
Beta: 1.03
Price: 45.25
Hi: 70.60
Lo: 42.68
Description:
Nike, Inc. is the world’s leading designer and marketer of high-quality athletic footwear,
athletic apparel, and accessories.
Strengths:
 Nike has a very strong international presence, with 48% of their 2008 sales coming from
outside the United States. Therefore they will not need to rely on purely U.S. sales (they
sell merchandise in over 180 countries). However, their domestic sales could also
provide a safety net should international sales see a dramatic decrease.
 Nike consistently outperforms the S&P 500 and has substantially outperformed the index
during recessionary periods.
 Nike’s dividend has increased three of the past four years, with a 5-year average of 1.2%.
 Stronger than expected 2Q numbers; year over year quarterly revenue grew 6% (highest
2Q ever) and diluted EPS grew 13%.
 Nike has an outright market share grasp on its industry and on the world of consumer
athletics.
 A favorable entry point would include a stock price under $50 and would be a mid-tolong term holding.
Potential Risks/Sell Considerations:
 International revenue growth significantly decreases as a result of global recession.
 Two consecutive quarters of year-over-year decreases will raise much concern.
 A decrease in market share in relation to any of Nike’s competitors (Under Armour,
Adidas).
Financial Ratios:
 Current assets (less inventory) cover total liabilities by 1.45 times.
 Diluted EPS of 3.74 is very high in relation to Nike’s peers.
 Altman Z-score of 7.08. This measures the probability of insolvency within a firm,
indicating that Nike has a very small risk of bankruptcy.
Our Projections:
 We assess that Nike has taken considerable steps to combat the slumping global economy
by reducing S, G & A expense, tightening inventory purchasing, and focusing on the
financial health of suppliers and customers. Their operational strength can propel them
through a period of slow growth.
 Using very conservative 3Q and 4Q projections, the financial comparison model yielded
an estimated stock price of $57.51, indicating the Nike is currently undervalued by 11%.
34
Wal-Mart – WMT
Beta: 0.77
Price: $46.57
Hi: $63.85
Lo: $46.57
Description:
Wal-Mart Stores, Inc. operates retail stores in various formats around the world. The
Company earns the trust of its customers every day by providing an assortment of
merchandise and services at every day low prices, while fostering a culture that rewards
and embraces mutual respect, integrity and diversity. Wal-Mart’s operations comprise
three business segments: Wal-Mart Stores, Sam’s Club and International.
Strengths:
 Price has been depressed recently due to less-than-expected holiday spending and is
trading lower than initial buy price.
 Consistent YOY EPS and Dividend growth (5yr. 22%).
 Strong Altman-Z of 4.97, signifying a low likelihood of bankruptcy.
 As an industry, December retail sales were down approximately 2.5% whereas Wal-Mart,
Inc. only lost 0.1%. Wal-Mart Stores U.S. had sales growth of 4.3%, well above the
industry average.
 Expansion into South America.
 Same-Store-Sales increased for WMT in December by 1.7% and up for the year by 2.8%.
 WMT has a strong and growing market share among discount retailers. This is expected
to be the trend as the economic situation continues to deteriorate and consumer sentiment
is low, leaving shoppers looking for the best prices available.
 Current focus on decreasing new store openings and remodeling existing sites in order to
cut costs.
 Analyst Recs.: 20 Buys, 6 Holds, 1 Sell
o Target Price: 60.94
Potential Risk/Sell Considerations:
 Further price appreciation. WMT is currently trading lower than initial buy price,
however further appreciation may lead to an overvaluation of the stock.
 Decrease in monthly same-store-sales and store traffic that may signal consumers are
tightening spending and/or moving to an alternative discount retailer.
o Calendar Item(s): 2/05/2009: January Sales and Revised 3
2/17/2009: Q4 2008 Earnings Release
 Currency exchange loss from a strengthening U.S. dollar.
Financial Ratios:
 WMT is currently trading at a 14.80 P/E v. 24.80 P/E within peer group.
 WMT ROE is at 21% compared to 17.44% peer group.
 The Company carries a total debt/ total equity of 69.66 v. 80.45 within the peer group.
Our Projections:
 Using the EPS Evaluation model, a price of $56.03 was generated.
o This price is nearly a 10% premium of its current price.
o Assumptions include 8% sales growth compared to a historical average of 17%.
35
INDUSTRIALS
Emerson Electric Co. - EMR
Beta: 1.1
Price: 31.18
Hi: 58.72
Lo: 29.26
Emerson Electric Co.
Emerson Electric Co. manufactures and markets electrical, electronmechanical, and
electronic products and systems. The company produces a variety of products, including
process control, industrial automation, electronics, appliance components, and electric
motors. Emerson sells its products around the world.
Strengths:
 Overall Cash flow is very solid. Cash Flow from operations is $3.293 Billion while Cash
flow per share is at $4.22. This leaves the company trading at 9.67 where the industry
average is 15.23 (Price to Cash Flow).
 Emerson has $1.78 Billion in cash or roughly $2.32 per share.
 Ranked number one to its competitors in growing its Factory Automation at 16.81%
while controlling 26.09% of the market.
 Increased dividend 52 consecutive years.
Potential Risks/Sell Considerations:
 Historically, Emerson Electric’s stock price has not performed well in recessions but has
placed large gains toward the end of the cycle.
 The company continues to expand and acquire other companies despite poor outlooks for
the 09 year.
 Expect a decline in earnings from $3.21 a share to anywhere from $2.80-$3.20.
Financial Ratios:
 ROE: 27.44%, EMR shows that it is able to reinvest its earnings more efficiently than
96% of its competitors in the Conglomerates industry
 Debt/Equity: 0.50, indicates that it has been less aggressive with using debt to finance
growth than 60% of its peers in the Conglomerates industry
 Operating Margin: 14.48%, EMR controls its costs and expenses better than 75% of its
peers.
 EPS growth rate: 17.4, greater than 90% of its peers in the Conglomerates industry.
36
Jacobs Engineering - JEC
Beta: 1.6
Price: 37.5
Hi: 28.5
Lo: 98.01
Description:
Provides engineering, design and consulting services. The company also provides
construction and construction management services, as well as process plan maintenance
services to a variety of industrial, commercial, and governmental clients. Jacobs’s
provides its services through offices and subsidiaries located around the world.
Strengths:
 In Jacobs fiscal year 2008 revenues rose 33% and profits rose 45%
 Has been increasing profit margins over last couple of years. Which is significant
because it is has a big relation to profit
 Very large portion of revenues are made up of smaller contracts performed for
established customer, this relationship based work has a lower risk profile and allows
management to be better utilized.
 Analyst project 10-15% sale growth in 2009
 Debt to equity is very low at less than 1%
 Has been currently receiving many large contracts: ExxonMobil, San Fransico water
pipe, Louisiana traffic consulting services, Navy are some of the few
 Very large current backlog. It has grown by 1 Billion dollars over previous year.
 Very good quarter, where profits rose 18% to $.94/ share.
 Jacobs has targeted the Middle East as a major area of expansion and it already has a
strong presence in India.
 9 Buys, 5 Holds
Potential Risks/Sell Considerations:
 Company may be at risk to loose out on current contracts if company decided to no
longer go with the projects.
 If the overall economy continues to drag it could put a damper on Jacob’s performance.
Financial Ratios:
 P/E 11.02, well below is historical average. Right on the peer group
 Beta of 1.6
 P/B 2.1
 Debt/Equity less than 1%
 Jacobs does not give out a dividend
Our Projections:
o Did not do projections on Jacobs
37
Raytheon Company - RTN
Beta: 0.59
Price: 49.00
Hi: 41.67
Lo: 67.59
Description:
Raytheon Company conducts operations in defense, government, and commercial
electronics. The company also has operations in space, information, technology,
technical services, and business and special mission aircraft.
Strengths:
 Raytheon has continued to do well in this economy. They will set a new record for total
sales this year and the company has raised its expectations.
 Raytheon has a diversified product line, and can sell its military products over seas to our
allies.
 They currently have a record backlog going into 2009
o Up 9% from a year ago.
 The company has been steadily buying back its stock over the last year and plane to
continue to do so.
o The company has also been lowering its debt and its current debt ratio is 10%.
With this very low debt and a lot of cash, the company will be able to invest in
newer projects.
 Former executive at Raytheon was just appointed deputy defense secretary
o The current feel is that the defense budget is safe going forward.
Potential Risks/Sell Considerations:
 The defense budget is a concern and will be watched closely
 Decisions being made regarding current Raytheon projects and whether or not the
government will go forward with them.
Financial Ratios:
 Raytheon is currently selling at 11.11x08 earnings. This is average within peer group and
well below is historical average.
 P/B=1.72 versus 1.9-2 for peer group
o Dividend yield at 2.8%
o Altman Z 4.42\
o P/S .99
o Current Ration 1.66
 Analyst project a 13% increase in earnings in 2009 5 Buys 5 Holds
Our Projections:
 In our projections we used the Nick squared Model. We Projected
o 6% Sales Growth
o 11% EBIT Margin
o 33.5 Tax
o Expected Stock Price of 75 (Which seems a little High)
38
Waste Management - WMI
Beta: 0.59
Price: 31.19
Hi: 39.25
Lo: 24.51
Waste Management
Waste Management provides waste management services including collection transfer,
resource recovery and disposal services, and operates waste-to-energy facilities. The
company serves municipal, commercial, industrial, and residential customers throughout
North America.
Strengths:
 Controls 25% of North America trash disposal, while Republic Services (and Allied
Waste) control 17%.
 Revenue growth for landfills is at its highest since 2006; Municipal solid waste disposal
highest since 2005.
 $3 Billion of public sector business and strong residential business is expected to get
through recession.
 Operate 277 US landfills with 30 year life expectancies and could add 54 more landfills
this year.
 Has just over $500 million in cash available
 Lower fuel prices result in higher operating margin
 Analyst Recommendation= 8 buys, 2 holds, Target Price= $38.40
 Low Volatility over last 5 months
 Increased dividend 7.4%
Potential Risks/Sell Considerations:
 As economy slows, so does output and waste that needs to be collected
 Merger of Allied Waste and Republic Services is a threat to gain volume and control of
market.
 Overall stock price has had difficulty trading above $40.
 May be too late to enter position, stock has not moved much over past year.
Financial Ratios:
 Gross Margin: 93.56%, more than 98% of other companies in the Waste Management
Services industry
 ROE: 19.92%, more efficient than 84%
 Operating Margin: 17.23%, WMI controls its costs and expenses better than 90% of its
peers.
39
BASIC MATERIALS
Monsanto Co. - MON
Beta: 0.79
Price: 76.60
Hi: 145.80
Lo: 68.02
Description:
Monsanto provides technology-based solutions and agricultural products for growers and
downstream customers in the agricultural markets. The Company’s herbicides, seeds, and
related genetic trait products provide growers with integrated solutions to produce crops
at higher yields, while controlling weeds, insects, and diseases.
Strength:
 Sales are relatively diversified geographically
 Low long-term debt: 10% High position in cash: 9%: 1.6 Billion
 Demand in for their products especially corn and soybean seeds remain strong as farmer
increase planted acre to meet demands from Asian and Latin America market and for
alternative fuel.
 Invest heavily in R&D: 800M
 Competitive advantage: leader in seeds market + technology advanced (licensed and
patents in various type of biogenetic seeds and herbicides)
 Roundup Ready 2 Yield soybean expected to be released in roughly 1M acres globally. It
also was recently approved in China, Japan, Philippines and Taiwan.
 1.6B shares purchase plan
 1Q profit doubles from 1st Q of 2007 surprise all analysts.
 Declare a 10% increase in the quarterly dividend on common shares.
 Altman’s Z-score: 5.4
Sell Criteria:
 Significant changes in agricultural future prices.
 Significant prices drop (20-30%)
 Continuing trending of rising cost of raw materials and energy.
 Sell when the stock reaches its P/S fair value of $107.06 which is quite reasonable
compare to its 52 week high of $145.80
Financial Ratios:
 Sales growth 36% during recession time.
 Gross Margin steadily above 40%. Operating margin also increase in the past 4 years.
 ROE, ROA, ROC all are increasing.
Projection:
 Free Cash Flow Model Target Price: $90.79
 P/E Model: EPS = 4.63 Current P/E (20) = 92.67 Best P/E (16.5)= 76.83
 P/S Model: Current P/S (4.3) = 107.06 Best P/S (3.71) = 92. 19
40
Nucor Co. - NUE
Beta: 1.26
Price: 41.23
Hi: 83.56
Lo: 25.25
Description:
Nucor Corporation manufactures steel products. The company products include carbon
and alloy steel, steel joists and joist girders, steel deck, cold finished steel, steel grinding
balls, steel fasteners, steel bearing product, and metal building systems.
Strength:
 High cash position: 14.19% (1.6B) actively seeking acquisition and building new plant.
(Strategic position)
 Largest U.S based steel producer.
 Bought raw-material supplier to benefit the recent declining raw material cost.
 Long-term growth remains strong because of major emerging market: China, India,
Russia, Brazil.
 81.25% hold by institution.
 $230 million renovation of Nucor Steel Memphis Inc, which should begin producing high
quality SBQ product by first quarter of 2009. (New product)
 Plant to generate its own power at its plant site and sell some of it to the regional grid.
 Benefit directly from Obama’s stimulus package.
 Cloudy global economy outlook beat down the industry prices.
 Altman’s Z-score: 5.21
Sell Criteria:
 Financial weakness (The ability to pay short-term debt)
 Further bad news about global infrastructure development and other end markets.
 Bad changes in the development about its new pig iron plant.
 Continuing trend of rising raw materials and energy cost.
 Significant price drop (30-40%)
 Sells when the stock reach its project prices of $45.55
Financial Ratios:
 Gross Margin and Operating Margin face pressures as commodities prices increasing.
However, it still remains at 19.57% and 16.67% respectably.
 ROE remains at the 30% level.
Projection:
 Free Cash Flow Model Target Price: 45.55
 Fiscal Year 2008: Estimated EPS = 7.32
 Fiscal Year 2009: Estimated EPS = 6.01
41
Best P/E( 6.749) = $49.4
Best P/E(6.749) = $40.5
Sigma-Aldrich Co. - SIAL
Beta: 0.72
Price: 36.00
Hi: 63.04
Lo: 34.33
Description:
Sigma-Aldrich Corporation provides biochemical, organic chemicals, chromatography
products, and diagnostic reagents. The company’s products are used in research and
development, in the diagnosis of disease, and as specialty chemicals for pharmaceutical
and other manufacturing purposes.
Strength:
 Diversified market. Other International 52.5% U.S.: 37.1% UK: 10%
 50% of the firm employees are outside the U.S.
 Continuously trying to enter new markets, make acquisition and joint venture globally.
 SIAL is one of the world’s leading science and technology research firm.
 Positive trend in the healthcare industry which positively affect growth of SIAL
(Research Chemicals)
 Sigma-Aldrich launches new Methylated DNA Quantification technology that facilitates
advanced disease research.
 Construction of the new plant ($30M in investment) is expected to be complete by the
end of 2009
 Steady sales growth since 1987. Their stock price has also grown healthy since 1999.
 Low long-term debt (7.87%). High position of cash (9.04%)
 Maintain the level of quarterly dividends.
 Altman’s Z-score: 6.64
Selling Criteria:
 Reversion of the healthcare trend.
 Update in its financial strength.
 Sells when the stock reach its project prices of $46.85
Financial Ratios:
 Gross margin stay above 50%, while operating margin remain above 20%
 Sales growth decline to 7%
 Short term interest vs Float interest decrease 132 bp which indicate that they have a low
probability of default.
Projection
 Free Cash Flow Model Target Price: $46.85
Projected EPS
2.65
Projected PE
15.79
Estimated Price (XSIF PE)
$
41.77
Current Price
$
43.86
52 Week High
$
63.04
52 Week Low
$
34.42
42
ENERGY
Exxon Mobil - XOM
Beta: 0.81
Price: 75.91 Hi: 94.56
Lo: 62.35
Description:
Exxon Mobil engages in oil and gas exploration, production, supply, transportation, and
marketing worldwide.
Strengths:
 Globally diversified oil services firms with division of exploration and production of
crude oil and natural gas, manufacture of petroleum products and transportation and sail
of crude oil, natural gas and petroleum products.
 Exxon is also a manufacturer and marketer of petrochemicals, has interests in electric
power generation facilities, and its affiliates conduct research programs.
 Operates in North America, Europe, Africa, Asia Pacific/Middle East, Russia/Caspian
Sea
 Profits per barrel and return on capital are tops in the group, owing to a tough-minded
brand of efficiency put to work on king-sized projects
 One of the biggest R&D spenders, the company consistently finds new ways to do
everything from appraising oil wells, running refineries, and developing battery
technology for automotive
 use
Weaknesses:
 Some business segments are consumer cyclical and will be affected by lack of demand
with current global economic slowdown
 Decrease in Demand for oil and more fuel efficient cars
Potential Risks/Sell Considerations:
 Exxon Mobil is a sustainable global energy company and would only be looked at as a
sell if oil prices were to plunge and if we were to cut back our allocation to the energy
sector.
 Significant Decrease in Oil Prices/Demand. Oil Price below $30 dollars a barrel
 Decrease in Dividend below $0.40.
Financial Ratios:
Large-Cap Blend
Market Cap: $389 billion
Altman Z: 5.19
Quick Ratio: 1.22
Current Ratio: 1.47
Our Projections:
As an industry leader Exxon will continue to gain market share during the economic downturn
and has plenty of capital to expand it research and remain an industry leader.
43
Marathon Oil - MRO
Beta: 1.26
Price:27.23
Hi: 55.75
Lo: 19.34
Description:
Marathon Oil Corporation is engaged in the business of exploration, development and production
activities in 11 countries. Principal exploration activities are in the United States, Angola,
Norway and Indonesia. The Company’s operations consist of four operating segments:
Exploration and Production (E&P), which explores for, produces and markets liquid
hydrocarbons and natural gas on a worldwide basis; Oil Sands Mining (OSM) segment mines,
extracts and transports bitumen from oil sands deposits in Alberta, Canada, and upgrades the
bitumen to produce and market synthetic crude oil and by-products; Refining, Marketing and
Transportation (RM&T) refines, markets and transports crude oil and petroleum products,
primarily in the Midwest, upper Great Plains, Gulf Coast and southeastern regions of the United
States, and Integrated Gas (IG) markets and transports products manufactured from natural gas,
such as liquefied natural gas (LNG) and methanol, on a worldwide basis.
Strengths:
 Diversified energy company with business segments in Exploration and Production, Oil
Sands Mining, Integrated Gas, and Refining, Marketing and Transportation
 The company explores for and produces oil and gas primarily in Angola, Equatorial
Guinea, Ireland, Libya, Norway, Indonesia, the UK, and the US.
 Good management in place, CEO Clarence Cazalot, Jr. has a strong background in the
energy sector and is well regarded.
 In October 2008, MRO said it expected its 2009 capital program to be 15% lower than its
2008 expenditures of $8 billion.
Potential Risks/Sell Considerations:
 While it continues to move to a more global scale, Marathon still received 90 percent of
its revenues in 2007 from the United States.
 Price is correlated with the price of crude oil and slowing global demand could depress
the stock price
 If the company were to decrease/increase in price by 20% we would bring the holding
under review as to whether it’s an equity we want to continue to hold.
Financial Ratios:
 Marathon has a great ROE for it’s industry with a TTM of 21.95, along with a 5 year
average of 27.00
 High P/ Free Cash Flow in comparison to Industry Peers at 24.47
 P/E Ratio-4.58
o P/Sales-.23
Our Projections:
 Through the EPS evaluation spreadsheet, we project their Stock Price to be 59.38.
o This earnings per share is based on assumptions of a 6% increase in sales, 7
percentage points lower than company guidance and projections.
 6% growth is down from the 15.62 % of what the company has been
averaging in the past 5 years
o The Free Cash Flow price we came in with was $40.31, with an EBIT Margin of
9%, Tax Rate of 40%, Cap Expenditures at 6.50%, with a 6 % Sales Growth
44
Transocean - RIG
Beta: 1.12
Price:49.92
Hi: 163.00
Lo: 41.95
Description:
Transocean LTD., is an international provider of offshore contract drilling services for oil and gas
wells. As of February 20, 2008, the Company owned, had partial ownership interests in or
operated 139 mobile offshore drilling units. Its fleet included 39 high-specification floaters (ultradeepwater, deepwater and harsh environment semisubmersibles, and drillships), 29 midwater
floaters, 10 high-specification jackups, 57 standard jackups and four other rigs. As of February
20, 2008, the Company also has eight ultra-deepwater floaters contracted for or under
construction. The Company’s primary business is to contract these drilling rigs, related equipment
and work crews primarily on a day rate basis to drill oil and gas wells.
Strengths:
 World’s largest offshore drilling company that explores, develops, and produces natural
gas, crude oil, and natural gas liquids.
 Operations in seven regions Far East (21 units), United Kingdom, North Sea (19 units),
Middle East (18 units), United States Gulf of Mexico (16 units), Nigeria (13 units), India
(12 units), Angola (11 units), Brazil (eight units), Norway (five units), other West
African countries (five units), the Caspian Sea (three units), Trinidad (three units),
Australia (two units), the Mediterranean (two units) and Canada (one unit)
 Has 3,752 months of rigs under contract, or an average of about 26 months of backlog for
every rig in the fleet. That translates to a dollar value of backlog of $41.1 billion, as of
Nov. 3, 2008.
Potential Risks/Sell Considerations:
 Susceptible to global demand and a slowing economic growth in 2009 could adversely
affect production and depress the stock price.
 Doesn’t pay a dividend.
 If the company were to decrease/increase in price by 20% we would bring the holding
under review as to whether it’s an equity we want to continue to hold.
Financial Ratios:
 Marathon has a great ROE for it’s industry with a TTM 36.28, along with an Operating
Margin of 47.19.
 EBIT Margin of 57.95
 P/E Ratio-3.52
o P/Sales-1.31
o P/Book-.99
Our Projections:
 Through the Cash Flow evaluation spreadsheet, we project their Stock Price to be 85.19.
o This evaluation is based on assumptions of a 14% increase in sales, 7 percentage
points lower than company guidance and projections.
 15% growth is down from the 18.99 % of what the company has been
averaging in the past 5 years
o The EPS price we came in with was $49.07, with an EBIT Margin of 45%, Tax
Rate of 25%, Cap Expenditures at 35%, along with a 14 % Sales Growth
45
Peabody Energy - BTU
Beta: 1.74
Price:25.00
Hi: 88.69
Lo: 16.00
Description:
Peabody Energy Corporation is a coal company. During the year ended December 31, 2007, the
Company sold 237.8 million tons of coal. It sells coal to over 340 electricity generating and
industrial plants in 19 countries. At December 31, 2007, the Company had 9.3 billion tons of
proven and probable coal reserves. The Company owns majority interests in 31 coal operations
located throughout all the United States coal producing regions and in Australia. In addition, it
owns a minority interest in one Venezuelan mine, through a joint venture arrangement. Most of
the production in the western United States is low-sulfur coal from the Powder River Basin.
Peabody owns and operates six mines in Queensland, Australia, and five mines in New South
Wales, Australia.
Strengths:
 Global through its subsidiaries, engages in the exploration, mining, and production of
coal worldwide.
 It sells coal to over 340 electricity generating and industrial plants in 19 countries.
 Ending 2007, Peabody had 9.3 billion tons of proven and probable coal reserves. The
Company owns majority interests in 31 coal operations located throughout all the United
States coal producing regions and in Australia. In addition, Peabody owns a minority
interest in one Venezuelan mine, through a joint venture arrangement.
 Peabody announced that its Board of Directors has doubled the size of the Company's
existing share repurchase program, raising the total authorized amount to $1 billion. The
company has been repurchasing shares under this program, first authorized in 2005.
Potential Risks/Sell Considerations:
 Susceptible to global demand and a slowing economic growth in 2009 could adversely
affect production and depress the stock price.
 High Long Term Debt Ratio
 BTU reduced its '09 production targets for Powder River Basin and Australian
metallurgical coal, citing higher inventories and lower demand.
 If the company were to decrease/increase in price by 15% we would bring the holding
under review as to whether it’s an equity we want to continue to hold.
Financial Ratios:
 Peabody has a strong Operating Margin compared to the Industry Average at 21.13,
along with an Profit Margin of 15.03
 ROE-36.32
 EBIT Margin of 27.29
 P/E Ratio-6.93, P/Sales-1.05
Our Projections:
 Through the Cash Flow evaluation spreadsheet, we project their Stock Price to be 26.50.
o This evaluation is based on assumptions of a 15% increase in sales
 15% growth is down from the 18.55 % of what the company has been
averaging in the past 5 years
o EBIT Margin of 40%, Tax Rate of 37%, Cap Expeditures at 35%, along
with a 15 % Sales Growth
46
British Petroleum - BP
Beta: 0.99
Price:41.31 Hi:76.12 Lo:39.56
Description:
BP is one of the world's largest energy companies, providing its customers with fuel for
transportation, energy for heat and light, retail services and petrochemicals products for
everyday items
Strengths:
 Globally Diversified, markets it’s products in more than 100 countries
 Focus on continual growth as seen recently; during the year ended December 31, 2007,
BP acquired Chevron’s Netherlands manufacturing company, Texaco Raffiniderij Pernis
B.V. In April 2008, BP registered in Russia its subsidiary BP Exploration Services.
 Heavy emphasis on looking forward and taking strong initiative into Alternative
Energy(September 15-BP announced first bioethanol production from it’s Brazilian
Biofuels joint venture, Tropical BioEnergia; their investment is the largest made by any
international oil company into Brazil’s ethanol market)
 Started commercial operations at its Silver Star wind farm in Texas and at Edom Hills,
California (August); started commercial operations of Sherbino wind farm in Texas, has
capacity of 750MW (20October).
 Oct. 23-“Oil giant BP announced yesterday that its Titan wind farm in South Dakota
planned to be the world's largest at 5050 MW -- would proceed in a joint-venture
announced with turbine manufacturer Clipper Windpower.”
Weaknesses:
 Slowed global demand for oil and natural gas products could lead to a price depression
 More susceptible to global impacts like terrorist attacks and political instability
Potential Risk/Sell Considerations:
 BP would be a sell if there is a lot of Eastern Europe activity regarding to political and
social unrest, along with a steep decline in oil prices triggered by a decline in demand.
 Competition of Russian Joint Venture
 Significant Decrease in Oil Prices/Demand. Oil Price below $30 dollars a barrel
 Decrease in Dividend
Financial Ratios
 Cash: $3.5 billion
 Current:1.10
 LTD/Equity:13.3
 P/Sales: .46
 P/Book:1.29
 Dividend Yield = 7.3%
47
FINANCIALS
Aflac Inc. - AFL
Beta: 1.28
Price: 23.21
Hi: 68.81
Lo: 19.35
Description:
Aflac, Inc. provides supplemental insurance to individuals in the United States and Japan.
The Company’s products help fill gaps in consumers’ primary insurance coverage.
Aflac’s products include cancer expense insurance, care plans, supplemental general
medical expense plans, and living benefit plans.
News:
Shares of AFLAC on Thursday Jan. 22 dropped 37% on fear they will suffer abnormal
losses on their investment portfolio. AFLAC owns $8.1 billion or roughly 12% of their
net investment portfolio in hybrid securities, with 80% of these securities being issued by
European banks. Analysts have shown concern over how these securities will be treated
if European governments nationalize these banks. AFLAC’s CEO released a statement
on Jan. 23 reaffirming the strength of AFLAC’s investment portfolio and capital levels.
Mr. Amos stated that 98% of AFLAC’s debt securities and perpetual debentures were
investment grade.
Strengths:
 The low exposure to sub-prime debt and equity positions puts AFLAC in the upper
echelon of insurance providers.
 Analyst recommendations include 7 buys and 9 holds with an average price target of
$44.50
 Aflac has very recently been upgraded to a “buy” by Citigroup and Deutsche Bank,
among others.
Potential Risks/Sell Considerations:
 Higher than expected losses on investment portfolio
 Unforecasted weakness in the Japanese market.
 Drastic changes in the relationship between the dollar and the yen.
 Sales growth sees a decrease closer to the level of Aflac’s peers.
 Exposure in the Japanese market grows to an unfavorable level.
Financial Ratios:
 Dividend currently yields 4.61%. In addition, Aflac’s dividend growth over the past 5
years is 26.19%.
 12-month sales growth stands at 8.29%, an impressive figure when compared to a peer
average of -5.91%.
 12-month return on equity stands at 19.25% compared to a peer average 2.98%.
Our Projections:
 Although our relative valuation models will not work with financial institutions,
consensus estimates of EPS for 2008 all generally float around $4.01. Using ValueLine’s
predicted P/E of 16.5 over the next 5 years, we get projected stock price of $66.17.
48
Chubb Corp. - CB
Beta: 0.99
Price: 42.58
Hi: 69.39
Lo: 33.47
Description:
The Chubb Corporation, a holding company, offers property and casualty insurance,
which includes personal, standard commercial, and specialty commercial insurance. The
company provides insurance coverage principally in the United States, Canada, Europe,
Australia, and parts of Latin America and the Far East.
Strengths:
 Chubb’s diversified insurance offerings should help it with any short-term liabilities, with
31% in insurance premiums, 43% in commercial insurance, and 26% in specialty
insurance.
 As of Dec. 31, 2007 roughly 25% of Chubb’s taxable bond holdings are in mortgagebacked securities, with the remaining 75% in U.S. Treasuries, Corporate, and Foreign
bonds.
 Revenue breakup includes 78% from United States operations and 22% from
international business. We think we could pair this breakdown up well with Aflac, whose
heavy international presence exposes us to those markets while Chubb has an
overweighted domestic presence.
 Analyst recommendations include 9 buys, 6 holds, and 2 sells with a target price of
$50.62.
Potential Risks/Sell Considerations:
 Sales growth continues to decrease, approaching its peers.
 Natural catastrophe causes spike in specialty insurance and commercial claims.
 Investment portfolio suffers losses in-line with peers and below expectations.
Financial Ratios:
 A very impressive operating margin of 20.33% trumps their peer average of 18.09%.
 A notable number is their return on equity, which stands at 18.04% compared to the 2.8% peer average.
 Chubb has a solid cash dividend coverage ratio of 4.35. Peer average is 4.27.
 They do have a negative 12-month sales growth of -2.8%, however the peer average
stands at -5.91%, so we’re optimistic about where Chubb stands against their
competitors.
Our Projections:
 Using a consensus ’09 EPS of $5.64 and a ValueLine estimated 5-year PE of 13, an
estimated stock price of $73.32 currently gives us an undervalues stock price.
49
Bank ETF’s
Due to the turbulent times, and recent government purchase of preferred stocks for 9 financial
institutions, we recommend buying two ETF’s until liquidity and possible losses are more
transparent.
ETF Strategy:

Buying ETF’s at this point in time is a great way to avoid stand-alone risk
associated with the current credit crisis. The Vanguard ETF gives great exposure
to large, national banks and investment firms. Many believe the regional banks,
with a more conservative loan portfolio and balance sheet will be the first to
rebound out of this crisis, which is well represented in our iShares Regional Bank
ETF. We would be overweighted toward the large bank ETF.
Vanguard ETF Top Holdings as of 9/30/08 - VFH
Price: 19.78
Hi: 53.49
Lo: 17.99
JPMorgan Chase
8.38%
Bank of America Corp
7.82%
Wells Fargo and Co.
5.77%
Citigroup Inc.
5.28%
US Bancorp
3.07%
Goldman Sachs Group Inc. 2.45%
Berkshire Hathaway Inc.
2.11%
MetLife Inc.
1.88%
Bank of New York Mellon
1.83%
American Express Co.
1.81%
iShares Regional Bank ETF Top Holdings as of 12/31/08 - IAT
Price: 16.26
Hi: 56.33
Lo: 15.17
US Bancorp
16.83%
PNC Financial Services
8.66%
Northern Trust Corp.
8.57%
BB&T Corp.
7.68%
Hudson City Bancorp
3.92%
SunTrust Banks Inc
3.19%
New York Community
3.08%
Keycorp
2.64%
M&T Bank
2.15%
Regions Financial Corp.
1.96%
Potential Risks/Sell Considerations:
 Fund weightings of top holdings become unfavorable.
 Fund has too much exposure to individual equities we are not comfortable with.
50
UTILITIES
Dominion Resources, Inc. - D
Beta: 0.74
Price: 36.16
Hi: 48.50
Lo: 31.26
Description:
Dominion Resources, Inc., a diversified utility holding company, generates, transmits,
distributes, and sells electric energy in Virginia and northeastern North Carolina. The
Company produces, transports, distributes, and markets natural gas to customers in the
Northeast and Mid-Atlantic regions of the United States.
Strengths:
 Dominion and a unit of BP Plc are evaluating wind energy projects in Tazewell County,
VA. And Wise County, Va.
o Project size has yet to be determined.
 Dominion currently holds $283,000,000 in Cash and equivalents.
 Total debt was continually rising from the 90’s until last year. Last year total debt
decreased from 19463.00 (2006) to 16186.00 (2007), a little over 15% decline.
 In 2007, Dominion completed transformation transactions by selling a vast majority of its
exploration and production (E&P) assets for $14 billion
o Thought to allow Dominion to focus on its core businesses
 One of the nation’s largest producers and transporters of energy
o Operates one of the largest natural gas storage facilities
 Reported healthy profits for both the fourth quarter and fiscal year 2008
o Earnings for the fiscal year were $1.83 billion, an increase of 8.9%
 Cut back the capital spending in 2009 by $350 million
 Offering to its customers two ways to purchase Dominion Green Power
o Supports renewable energy
 Currently trading at 15.6% higher than its 52 week low of $31.26 in October
 Altman Z Score of 1.35
Potential Risks/Sell Considerations:
 Increase in utility rates
o Possibly causing their unexpected losses to increase and revenue to decrease
 Overpriced and not partaking in the new electric grid system
Financial Ratios:
 Dominion has poor liquidity ratios as they are heavy on debt
 Higher operating margin’s than its peers
 Has a P/E Ratio lower than the industry
Our Projections:
 Through the EPS evaluation spreadsheet, we project their FY 2008 EPS to be $2.93
o The earnings per share is based on assumptions of a 1% increase in sales, 7
percentage points lower than company guidance and projections.
 Through the Free Cash Flow Model spreadsheet, we projected Dominion to be
underpriced
o At a 1% sales growth, the estimated stock price is $50.95
51
Duke Energy Corporation - DUK
Beta: 0.74
Price: 15.00
Hi: 19.42
Lo: 13.50
Description:
Duke Energy Corporation is a diversified multinational energy company with an
integrated network of energy assets and expertise. The company manages a portfolio of
natural gas and electric supply, delivery, and trading businesses.
Strengths:
 Duke along with Vectren performed an environmental cleanup in Indiana
o
Shows signs of continually going green, which goes with President Obama’s
stimulus plan
 Duke just recently sold $750 million in five-year senior notes
o Size of the deal was increased from the original $500 million. (6.30% Maturity
2/1/2014)
 Recessionary environments have proven to increase outsourcing needs of companies as
they as pressured to reduce costs
 Decreased its long-term debt by 47% (18,118,000,000 in 2006 to 9,498,000,000 in 2007)
 Currently trading at 11.11% higher than its 52 week low of $13.50 in October
 Altman Z Score of 0.94
Potential Risks/Sell Considerations:
 Continual issues with power outages
o Customers having to pay an extra fee for the extra time the crews put in to make
the repairs
o However, revising how they deal with catastrophic situations
 Potential of Duke dropping solar plans due to restrictions
o This would cause Duke not to meet state requirements for solar energy
production in 2010
Financial Ratios:
 Duke’s 1 Year Total Return (%) is currently lower than its peer group.
 Has a current operating margin of 19.64
 Higher P/E Ratio than the industry
Our Projections:
 Through the EPS evaluation spreadsheet, we project their FY 2008 EPS to be $1.13.
o This earnings per share is based on assumptions of a 1% increase in sales, 4
percentage points lower than company guidance and projections
 1% growth is an assumption that Duke does not take on any big project
 Through the Free Cash Flow Model spreadsheet, we projected Duke to be overpriced
o At a 1% sales growth, the estimated stock price is $11.09
52
PG&E Corporation - PCG
Beta: 0.71
Price: 38.85
Hi: 42.98
Lo: 26.67
Description:
PG&E Corporation is an energy-based holding company that owns Pacific Gas and
Electric Co, a combination natural gas and electric utility in the United States.
Strengths:
 Plans to launch a new solar initiative that will include direct investment in solar plants
and panels.
o Actual size not yet known, however described as “significant”
o First time the company builds and retains ownership of its own solar facility
rather than purchasing it through a third-party source
 Looking to be an equity investor in renewable energy, primarily solar because of
company’s peak power needs
 Dividend growth for 3-years is 8.24 with a regular cash dividend of $0.39
 Currently trading at 46.0% higher than its 52 week low of $26.67 in October
 Altman Z Score of 0.88
Potential Risks/Sell Considerations:
 Pipeline joint issues
o Possibility of needing to replace many of their pipelines will create more debt for
the company
 Cash continually decreasing since 2003 and debt remaining the same
 Solar project not profiting like anticipated
Financial Ratios:
 PG&E’s one Year Total Return (%) is currently lower than its peer group.
 Has earnings higher than its peer group
Our Projections:
 Through the EPS evaluation spreadsheet, we project their FY 2008 EPS to be $3.49.
o This earnings per share is based on assumptions of a 1% increase in sales, 4
percentage points lower than company guidance and projections
 1% growth is an assumption that everything remains steady
 Through the Free Cash Flow Model spreadsheet, we projected PG&E to be underpriced
o At a 1% sales growth, the estimated stock price is $149.26
53
TELECOMMUNICATIONS
AT&T - T
Beta: 0.92
Price: $24.62
Hi: $40.70
Lo: $20.90
Description:
AT&T Inc. (AT&T) is a provider of telecommunications services in the United States. It
offers its services and products to consumers in the United States, and services and
products to businesses and other providers of telecommunications services worldwide.
The services and products that it offers vary by market, and include wireless
communications, local exchange services, long-distance services, data/broadband and
Internet services, video services, telecommunications equipment, managed networking,
wholesale services and directory advertising and publishing. Its traditional wireline local
exchange subsidiaries operate in 22 states: Alabama, Arkansas, California, Connecticut,
Illinois, Indiana, Florida, Georgia, Kentucky, Louisiana, Kansas, Michigan, Mississippi,
Missouri, Nevada, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas
and Wisconsin (22-state area). In March 2008, Black Box Corporation acquired AT&T's
NEC TDM voice CPE business line in AT&T's southeast region.
Strengths:
 T has a dividend yield of 5.8% and it is expected to rise to 6.2%.
 Missed last earnings report due to the iPhone (large upfront costs) and hurricane costs.
 Revenues were up 4% last quarter with 2 million new subscribers leading to increased
revenues over time.
 Introduction of U-Verse, similar to Verizon FiOs, has seen 10% market penetration in
less than 1 year and makes T very attractive to potential consumers.
 Continue to streamline operations, which will improve profit margins.
Potential Risks/Sell Considerations:
 Begin to see a drop in the number of subscribers.
 Continued slowing of the economy could cut into projected profits.
 Obama stimulus doesn’t aid telecom companies as much as planned.
 Earnings miss expectations dramatically.
 Sell: Under review @ $32 and under review @ $21.
Financial Ratios:
 Attractive P/E of 10.1
 Altman Z: 1.94 Best vs. peer group
 2.74 EPS also #1 in peer group.
 FCF/share in ’07 was 0.71 (Stock: $37), AT&T is has now recovered and FCF/share is
back at its ’07 levels.
Our Projections:
 Using our EPS & FCF worksheet: Stock Price of $35.41
o Using Sales Growth: 1%, Change in working capital: 0.29%, Terminal growth: 3%
 My expectations were in the $35 -$40 range.
 Analyst consensus is $32.78 (18 Buy, 10 Hold)
54
Windstream Corp - WIN
Beta: 1.00
Price: $8.68
Hi: $15.00
Lo: $6.37
Description:
Windstream Corporation (Windstream) is a provider of telecommunications services in
rural communities in the United States. The Company owns subsidiaries that provide
local telephone, high-speed Internet, long distance, network access, and video services in
16 states. Windstream is a provider of telecommunications services in rural communities
in the United States. A subsidiary also publishes telephone directories for its affiliates and
other independent telephone companies. On August 31, 2007, Windstream completed the
acquisition of CT Communications, Inc. On November 30, 2007, the Company
completed the split off of its directory publishing business (the publishing business) with
Welsh, Carson, Anderson & Stowe (WCAS). As of December 31, 2007, Windstream
served more than 3.2 million communications customers in 16 states. Additionally,
Windstream provides data services to more than 871,000 high-speed Internet customers.
Strengths:
 WIN has a dividend yield of 11.1%.
 Being a smaller telecom (3.88 Bil) compared to AT&T, Verizon, or Sprint, WIN is an
attractive candidate for a merger, acquisition, or buyout.
 Giving public schools $200,000 for computer labs which will use their services.
 Company goal is to increase broadband presence and the House panel recently backed $3
billion stimulus for the internet.
Potential Risks/Sell Considerations:
 Continued slowing of the economy could cut into projected profits.
 Debt outweighs current market cap. (47.12% - 52.89%), but the bulk of the debt is not
due until 2016.
o Should the debt grow even more this would be a cause for concern and bring the
stock under immediate review.
 Obama stimulus and potential new regulations that may hurt profit margins.
 Earnings report much worse than expected. (Feb. 4) Est. 0.25 EPS
 Sell: Under review $7.90>Px>$12
Financial Ratios:
 Attractive P/E of 8.8.
 Altman Z = 2.02
 ROE: Q1: 72%, Q2: 85%, Q3: 115%
 Cash flow per share for 2008: 5% increase from 2007.
Our Projections:
 Using our EPS & FCF worksheet: Stock Price of $13.19
o Using Sales Growth: -2%, Change in working capital of 0.5%, Terminal growth of
3%.
 Analyst consensus: $10.50 (9 Buy 6 Hold).
55
Juniper Newtorks Inc - JNPR
Beta: 1.34
Price: $14.16
Hi: $29.49
Lo: $13.29
Description:
Juniper Networks, Inc. designs, develops and sells products and services that together
provide its customers with network infrastructure that creates responsive and trusted
environments for accelerating the deployment of services and applications over a single
Internet Protocol (IP)-based network. The Company’s operations are organized into three
business segments: Infrastructure, Service Layer Technologies (SLT) and Service. Its
Infrastructure segment primarily offers scalable routing products that are used to control
and direct network traffic from the core, through the edge, aggregation and the customer
premise equipment level. Its SLT segment offers solutions that meet an array of its
customer’s priorities, from protecting the network itself, and protecting data on the
network, to maximizing existing bandwidth and acceleration of applications across a
distributed network. Its Service segment delivers world-wide services to customers of the
Infrastructure and SLT segments.
Strengths:
 0 Debt
 Would benefit from Obama infrastructure stimulus.
 Revenues in all 3 business segments see steady growth.
 Just picked up networking contracts with Australian company.
 Juniper continues to grow in this economy and continues to keep a close watch over cost
management.
 Cisco is gearing up to make a big push into the server market which will boost
competition, Juniper could see business as the server market competition increases and
the need for networking these serves grows.
Potential Risks/Sell Considerations:
 Expectations are rather high for the company which could lead to unrealistic performance
outlook from investors.
 During their latest earnings report Juniper came out with a lower than expected outlook.
We should keep an eye out for any further cuts in the future outlook.
 Sell: Under review $12.75>Px>$20.50
Financial Ratios:
 P/E of 15.2.
 EPS in 2008 1.18, YoY change of 35%.
 ROE of 11.38 for ’08 YoY change of 18%.
 Projected ’09 cash flows per share of 1.56 up from 1.42 in ’08.
 Sales up 27% in 2008.
 Increased operating margin to 20.6% from 18.2% a year ago.
 Altman Z: 6.53
Our Projections:
 Using our EPS & FCF worksheet: Stock Price of $24.58
o Using Sales Growth: 2.5%, Change in working capital of 5%, Terminal growth 3%
 Analysts: $19.62 (14 Buy 16 Hold)
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Disclaimer
All of the views expressed in this research report accurately reflect the research analysts'
personal views and opinions regarding any and all of the subject securities or issuers. Past
performance is not necessarily indicative of future results. This material is based upon
information that we consider to be reliable, but XSEIF does not warrant its completeness,
accuracy or adequacy and it should not be relied upon as such. Assumptions, opinions
and estimates constitute our judgment as of the date of this material and are subject to
change without notice. This material is not intended as an offer or solicitation for the
purchase or sale of any security or other financial instrument since securities or strategies
mentioned herein may not be suitable for all investors. Any opinions expressed herein are
given in good faith, are subject to change without notice, and are only correct as of the
stated date of their issue.
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