Financial Sector
Jeff Voorhees
Tyler Ragor
Agenda
• Overview
• Analysis
• Valuation
• Recommendation
Overview
Analysis
Valuation
Recommendation
Sector overview
Global Index Classification Sector: Financials
Industries:
Industry
Company
Market Cap (Billions)
Bank of America
143.31
Diversifed Financials JPMC
207.39
CITI
150.6
Allstate
23.48
Insurance
AIG
67.29
Lincoln National
10.38
Fifth Third
16.24
Banks
PNC
40.37
Wells Fargo
226.47
CBRE
7.62
Real Estate
Kimco Realty
8.88
Vornado
15.86
Overview
Analysis
Valuation
Recommendation
Sector overview
Global Breakdown
Betas
Overview
Analysis
Valuation
Financial
1.61
Insurance
Real Estate
Div Fins
Banks
2.05
2.25
2.07
1.68
Recommendation
Sector overview
Breakdown in detail
Industry
Market Cap P/E
Accident & Health Insurance
196
8.9
Asset Management
9980
13.6
Closed-End Fund - Debt
164
0
Closed-End Fund - Equity
594
0
Closed-End Fund - Foreign
196
13.9
Credit Services
2569
20.4
Diversified Investments
128
12.4
Foreign Money Center Banks
426
25.3
Foreign Regional Banks
735
0.8
Insurance Brokers
269
25.5
Investment Brokerage - National
3926
31.2
Life Insurance
9982
15.4
Money Center Banks
122622
11
Mortgage Investment
2737
2.4
Property & Casualty Insurance
8608
22
Property Management
1887
0
Real Estate Development
4372
27.7
Regional Banks
4622
14.4
REIT
4170
23.1
Savings & Loans
97
16.1
Overview
ROE %
12.3
20.7
0
0
3.7
14.1
13.9
4.2
10
13.8
4.7
4.2
7.4
14.5
7.9
8.5
7.8
11.1
11.5
7.6
Analysis
Div. Yield %
Debt to Equity Price to Book Net Profit Margin Price To Free Cash Flow
2.102
28.775
1.12
8.6
10
2.602
36.491
2.93
34.9
-30.9
5.036
25.006
2.69
0
-11.1
1.866
4.467
4.44
0
-248.5
3.252
3.405
0.48
38.3
35.2
1.029
339.609
3.99
16.7
41.2
2.418
396.205
1.62
11.8
-22.2
5.074
NA
1.21
5.1
-20.1
2.513
NA
1.42
10.7
-103.8
1.999
66.796
-10.72
7.5
-90.9
1.255
421.166
1.63
7.7
15.1
2.259
90.673
0.93
2.3
44.2
2.311
73.319
1.31
13.9
11.8
3.172
2437.61
1.69
29
-23.7
1.69
68.252
1.79
8.9
105.5
2.48
107.074
2.86
9
-74.4
1.635
50.791
1.24
11.3
-84.1
2.224
NA
1.89
20.5
32.4
4.804
67.967
2.36
30.3
-30.8
2.983
205.43
1.52
18
23.4
Valuation
Recommendation
Sector overview
Overview
Analysis
Valuation
Recommendation
Recent performance
1 month 3 month 6 month 12 month
S&P 500 (July 5, 2013)
Energy
Materials
Industrials
Consumer Discrestionary
Consumer Staples
Health Care
Financials
Banks
Diversified Financials
Insurance
Real Estate
Information Technology
Telecommunication
Services
Utilities
Overview
Analysis
0.7%
0.1%
-2.1%
1.2%
3.9%
0.1%
0.7%
1.4%
5.7%
-0.2%
3.0%
-2.8%
-0.6%
0.9%
-1.2%
5.6%
3.8%
1.7%
6.2%
10.2%
1.6%
4.4%
10.5%
15.6%
12.5%
11.9%
-4.4%
6.5%
12.5%
8.3%
1.1%
12.0%
19.4%
13.1%
18.9%
17.1%
21.0%
17.8%
21.8%
2.1%
6.7%
23.2%
22.6%
15.1%
27.8%
36.0%
17.7%
30.8%
41.0%
30.7%
56.4%
42.0%
7.7%
12.2%
0.0%
-5.8%
8.2%
5.3%
12.7%
4.7%
Valuation
Recommendation
Overview
Analysis
Valuation
Cash
10%
Utilities
15%
Telecommunication
Services
Materials
Information
Technology
Industrials
Health Care
Financials
Energy
Consumer Staples
Consumer
Discretionary
Market Weight vs. SIM Weight
20%
S&P 500 Weight
SIM Weight
5%
0%
June 26, 2013
Recommendation
Business cycle
Overview
Analysis
Valuation
Recommendation
Porter’s Five Forces Analysis
Buyer
Power
Substitution
Risk
Rivalry
Intensity
New
Entrant Risk
Supplier
Power
Overview
Analysis
Valuation
Recommendation
Porter’s Five Forces Analysis
Bargaining power of suppliers
Low – many large, established businesses, similar products and terms, capital
suppliers have influence
Bargaining power of buyers
Low (for most) – majority of customers have little power to influence business terms,
difficult/time consuming to change providers. Very large corporate/institutional investors may
exert disproportionate influence.
Threat of new entrants
Low – Market demands are currently met, high cost of market entry (regulation,
capital requirements), opportunity may exist in the smaller niche markets (e.g. credit unions).
Threat of substitution
Medium – Many similar products, switching is difficult and time consuming
Intensity of rivalry
High – Many providers of similar products, largely competing on margin
Overview
Analysis
Valuation
Recommendation
Economic analysis
Financial sector continues to experience recovery
Unemployment numbers steadily improving
Housing market is improving (new home construction, new home prices, Case Shiller)
Consumer confidence improving
Interest rates artificially low (though increased recently)
Europe continues to drag
Overview
Analysis
Valuation
Recommendation
Economic analysis – Financials and GDP
Overview
Analysis
Valuation
Recommendation
Financial analysis – Revenue Growth
Overview
Analysis
Valuation
Recommendation
Financial analysis – Financial Sector - EPS
Mar
June
Sep
Dec
Yr.
Year to Year
Overview
2008
1.47
0.97
-1.66
-2.96
-2.18
Financial Sector - EPS
2009
2010
2.06
3.84
4.05
3.97
2.6
4.35
1.94
3.58
10.64
588%
Analysis
15.73
48%
2011
7.31
4.29
4.17
4.07
2012
4.88
4.3
5.12
4.69
2013
5.35
5.09
5.07
5.33
19.84
26%
18.99
-4%
20.66
9%
Valuation
Recommendation
Financial analysis – Insurance EPS
Mar
June
Sep
Dec
Yr.
Year to Year
Overview
2008
6.84
7.01
5.1
1.46
20.4
Industry: Insurance - EPS
2009
2010
2011
3.88
6.07
7.14
5.93
6.29
6.91
5.73
6.59
6.14
5.3
6.19
7.27
20.84
2%
Analysis
25.13
21%
27.46
9%
Valuation
2012
7.23
6.94
7.15
7.09
2013
8.19
7.53
7.62
7.69
28.41
3%
30.98
9%
Recommendation
Financial analysis – Diversified Financials EPS
Mar
June
Sep
Dec
Yr.
Year to Year
Overview
Industry: Diversified Financials - EPS
2008
2009
2010
2011
-0.59
0.69
1.13
4.14
0.64
1.18
1.07
1.3
-0.53
-0.24
1.03
1.02
-3.13
-0.45
0.71
0.79
-3.61
1.18
133%
Analysis
3.94
235%
7.24
84%
Valuation
2012
1.25
1.04
1.34
1.18
2013
1.26
1.3
1.29
1.32
4.81
-34%
5.17
7%
Recommendation
Financial analysis – Real Estate - EPS
Mar
June
Sep
Dec
Yr.
Year to Year
Overview
2008
1.15
1.22
1.68
-2.02
2.03
Industry: Real Estate - EPS
2009
2010
2011
-0.23
0.08
0.84
0.31
1.38
1.61
0.61
1.53
1.84
2.14
2.75
3.37
2.83
39%
Analysis
5.74
1%
7.65
33%
Valuation
2012
1.07
2.07
1.99
4.21
2013
1.22
2.6
2.58
4.51
9.33
22%
10.92
17%
Recommendation
Financial analysis – Regional Banks - EPS
Mar
June
Sep
Dec
Yr.
Year to Year
Overview
Industry: Regional Banks - EPS
2008
2009
2010
2011
1.36
-0.16
0.02
0.93
0.41
-0.69
0.44
1.06
0.64
-0.78
0.56
1.15
-1.21
-0.85
0.71
1.05
1.2
-2.48
-307%
Analysis
1.74
170%
4.19
141%
Valuation
2012
1.19
1.28
1.69
1.43
2013
1.45
1.4
1.42
1.45
5.59
33%
5.72
2%
Recommendation
Financial analysis – Industry Comparison - EPS
Financials
2008
-2.18
2009
10.64
2010
15.73
2011
19.84
2012
18.99
2013
20.66
Diversified Financials
Insurance
Real Estate
Regional Banks
-3.61
20.4
2.03
1.2
1.18
20.84
2.83
-2.48
3.94
25.13
5.74
1.74
7.24
27.46
7.65
4.19
4.81
28.41
9.33
5.59
5.17
30.98
10.92
5.72
Overview
Analysis
Valuation
Recommendation
Valuation – Financial Sector
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Div Fin'ls
Median Current Difference
12.3
11.4
-7%
11.4
10.2
-11%
0.8
0.8
0%
1.9
1.9
0%
9.9
9.2
-7%
Insurance - 10 Year
Median Current Difference
11.6
9.5
-18%
10.2
9.1
-11%
1.3
0.9
-31%
1
0.7
-30%
9.8
8.7
-11%
Relative to SP500 Median Current Difference
P/Trailing E
0.67
0.62
-7%
P/Forward E
0.67
0.62
-7%
P/B
0.5
0.4
-20%
P/S
0.7
0.5
-29%
P/CF
1
0.9
-10%
Overview
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Relative to SP500 Median Current Difference
P/Trailing E
0.82
0.88
6.8%
P/Forward E
0.81
0.87
6.9%
P/B
0.5
0.5
0.0%
P/S
1.3
1.3
0.0%
P/CF
1
1.1
9.1%
Relative to SP500 Median Current Difference
P/Trailing E
0.73
0.74
1%
P/Forward E
0.71
0.69
-3%
P/B
0.4
0.3
-25%
P/S
1.4
1.4
0%
P/CF
0.9
0.9
0%
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Financial - 10 Year
Median Current Difference
13.3
13.5
1.5%
12.4
12.6
1.6%
1.2
1.2
0.0%
1.7
1.8
5.6%
9.8
10.7
8.4%
Absolute Basis
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Relative to SP500
P/Trailing E
P/Forward E
P/B
P/S
P/CF
Financials
1%
2%
0%
6%
8%
7%
7%
0%
0%
9%
Analysis
Relative to SP500 Median Current Difference
P/Trailing E
1.3
1.4
8%
P/Forward E
1.3
1.3
0%
P/B
1.1
1.2
9%
P/S
3.8
4.2
11%
P/CF
2
1.9
-5%
Current vs. 10 Year
Industry
Diversified Financials Insurance Real Estate Regional Banks
-7%
-18%
16%
-13%
-11%
-11%
11%
-7%
0%
-31%
17%
10%
0%
-30%
30%
14%
-7%
-11%
8%
-16%
1%
-3%
-25%
0%
0%
-7%
-7%
-20%
-29%
-10%
8%
0%
9%
11%
-5%
Real Estate - 10 Year
Median Current Difference
19.4
22.5
16%
17.8
19.8
11%
2.4
2.8
17%
4.6
6
30%
17.7
19.1
8%
-5%
1%
25%
0%
-20%
Valuation
Regional Banks - 10 Year
Absolute Basis
Median Current Difference
P/Trailing E
13.7
11.9
-13%
P/Forward E
13.2
12.3
-7%
P/B
1
1.1
10%
P/S
2.2
2.5
14%
P/CF
10.2
8.6
-16%
Relative toMedian
SP500
Current Difference
P/Trailing E
0.81
0.77
-5%
P/Forward E
0.83
0.84
1%
P/B
0.4
0.5
25%
P/S
1.7
1.7
0%
P/CF
1
0.8
-20%
Recommendation
Current Events
Diversified Financials and New Capital Requirement Regulations
Big banks to become more conservative? Smaller?
Real Estate – rising interest and mortgage rates
Insurance – ObamaCare
Unknown effects, still in implementation phase
Overview
Analysis
Valuation
Recommendation
Recommendations
Long-term year-over-year growth should decrease
Continued near-term “growth” (read: recovery) in financial industry
Opportunity to increase underweight holdings in Financials
Overview
Analysis
Valuation
Recommendation
Overview
Analysis
Valuation
Recommendation
Recommendations
Long-term year-over-year growth should decrease
Continued near-term “growth” (read: recovery) in financial industry
Opportunity to increase underweight holdings in Financials
Opportunity for investment in banks and diversified financials with real estate
exposure
Suggest specific incorporation of real estate industry as part of SIM course
beginning Autumn 2013
Overview
Analysis
Valuation
Recommendation
Questions?