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S & P 500 Financials Sector Stock Recommendations. 8/11/2009 Jerod Tilton Jon Verworn Zachary Wang. Agenda. Recap of Sector Presentation Current Valuation JPMorgan Chase (JPM) Hudson City Bankcorp (HCBK) Wells Fargo (WFC) Visa (V) Recommendation Recap Questions.
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S & P 500 Financials SectorStock Recommendations 8/11/2009 Jerod Tilton Jon Verworn Zachary Wang
Agenda S & P 500 Financials Sector Stock Recommendations Recap of Sector Presentation Current Valuation JPMorgan Chase (JPM) Hudson City Bankcorp (HCBK) Wells Fargo (WFC) Visa (V) Recommendation Recap Questions
Sector Recap – As Presented (7/14/09) S & P 500 Financials Sector Stock Recommendations • Financial Sector Underweight Relative to S&P 500 by 4.4% • 4.0% excl cash
Sector Recap – Current (7/31/09) S & P 500 Financials Sector Stock Recommendations • Financial Sector Underweight Relative to S&P 500 by 4.93% • 4.61% excl cash ÷nds • SIM portfolio not performing up to S&P 500
Potential Causes for Downside S & P 500 Financials Sector Stock Recommendations • More Bank Failures • Deeper Recession • e.g. Double-dip Recession • Low Investor Confidence • Federal Funds Rate Increase • Increased Regulation • Credit Card Defaults Due to unemployment • Lack of Dividends • Toxic Assets
Potential Causes for Upsides S & P 500 Financials Sector Stock Recommendations Systemic recovery—high beta Less competition for those left = more market share Potential privatization of Social Security savings Increased savings trends Purging of toxic assets
Sector Recommendation S & P 500 Financials Sector Stock Recommendations Keep financials services underweight In the short term, returns will poor. Financial services will not out perform the market, however, once the credit crisis and other issues are resolved, then returns will increase Currently risk outweighs reward. We feel that a systemic rebound can be experienced in other sectors without as much risk. We are bullish long term, however for the short term, we are bearish. We recommend leaving the financial services at 440 basis points underweight
Current Valuation S & P 500 Financials Sector Stock Recommendations Current upside for stocks
Stock Performance S & P 500 Financials Sector Stock Recommendations Two year stock performance of the SIM financial stocks in addition to Visa (Black) and the S&P 500 Financial Sector Index (Purple)
JPM Info S & P 500 Financials Sector Stock Recommendations • Pro’s • Jamie Dimon can do no wrong on Wall Street • Washington Mutual conversion complete by EOY • Repaid TARP funds • New organic growth opportunities • Con’s • Jamie Dimon can do no wrong on Wall Street • Total insured Share 9.2% • Growth by acquisition limited • Decreases dividend from $0.35 to $0.05
JPM Data S & P 500 Financials Sector Stock Recommendations Has outperformed the S&P 500 financial sector for almost the last two years Peak in late 2008 due to WaMu aquisition
JPM Data Cont’d S & P 500 Financials Sector Stock Recommendations • JPM Price is passing two year median. • Is it close to maxing out?
JPM Valuation S & P 500 Financials Sector Stock Recommendations Using combination of DCF & Valuation Model Target Price of $47.84 9 out of 10 analysts assign inline rating or better (yahoo.com)
HCBK Info S & P 500 Financials Sector Stock Recommendations • Pro’s • Did not take TARP • Did not show price swing during week of 8/3/09 • Increased dividend from $0.14 to $0.15 • Con’s • In 22 counties, only top five in eight, ranked first in only one • Only beat earnings estimates by $0.01 • 7.69% Tier 1 Capital Rating • WFC 9.8%; JPM 9.7%
HCBK Data S & P 500 Financials Sector Stock Recommendations • Has outperformed the S&P 500 financial sector for almost the last two years • Has growth maxed out?
HCBK Data Cont’d S & P 500 Financials Sector Stock Recommendations • Near Two Year Median Price • May be more growth potential
HCBK Valuation S & P 500 Financials Sector Stock Recommendations • Using combination of DCF & Valuation Model Target Price of $16.18 • Thompson Mean Price Target $14.67 (yahoo.com) • Concensous Hold • Thompson Reuters
WFC Info S & P 500 Financials Sector Stock Recommendations • Pro’s • Continuous restructuring could help nullify some of Wachovia’s toxic assets • Con’s • Total insured Share 9.6% • Growth by Acquisition Limited • Assets are heavily exposed to Wachovia’s toxic assets • Current price has surpassed the target price
WFC Data S & P 500 Financials Sector Stock Recommendations • Has outperformed the financial sector in the last two years • Spike in 2008 due to acquisition of Wachovia • However, toxic assets has declined performance • Recent increase due to restructuring • Wells Fargo Securities
WFC Data Cont’d S & P 500 Financials Sector Stock Recommendations Based on the price history, Wells Fargo is getting close to the 2 year median.
WFC Valuation • Equally weighing the DCF and the Valuation Model suggests a target price of $26.14 • Current Price of $28.76 (8/7/09) has already surpassed target price • - Potential downside of 9.11% to reach target S & P 500 Financials Sector Stock Recommendations
V Info S & P 500 Financials Sector Stock Recommendations U.S. market share ranked by transaction processor, based on credit card receivables outstanding:1. Visa -- 46 percent2. MasterCard -- 36 percent 3. American Express -- 12 percent4. Discover Card -- 6 percent (Source: Nilson Report, May 2008)
V Info Cont’d S & P 500 Financials Sector Stock Recommendations 2008 worldwide purchase volume by card typeVisa credit - 31.7 percentVisa debit - 28.6 percentMC credit - 22.0 percentAmex credit - 10.0 percentMC debit - 6.3 percentJCB credit - 0.9 percentDiners credit 0.4 percent(Source: Nilson Report, May 2009)
V Info Cont’d S & P 500 Financials Sector Stock Recommendations 2008 global market share for general purpose credit cards(Ranked in terms of purchase volume)Visa - 60.25 percentMasterCard - 28.33 percentAmerican.Express - 10.04 percentJCB - 0.94 percentDiners Club - 0.44 percent(Source: Nilson Report, May 2009)
V Info Cont’d S & P 500 Financials Sector Stock Recommendations U.S. Visa cardholders alone conduct more than $1 trillion in annual volume. (Source: Visa USA internal statistics, 4th quarter 2006) Consumers carry more than 1 billion Visa cards worldwide. More than 450 million of those cards are in the United States. (Source: Visa USA internal statistics, 4th quarter 2006) There were 984 million bank-issued Visa and MasterCard credit card and debit card accounts in the U.S in 2006. (Sources: Visa USA, MasterCard International) In 2008, 72 percent of consumers indicated they used a debit card in the past year. In 2007, that number was 65 percent. (Source: Javelin, "Credit Card Spending Declines" study, March 2009) 74 percent of monthly college spending is with cash and debit cards. Only 7 percent is with credit cards. (Source: Student Monitor annual financial services study, 2008
V Info Con’t S & P 500 Financials Sector Stock Recommendations More than 23 billion credit cards transactions were processed in the United States in 2007, and they are projected to grow by 26 percent over the next five years. (Source: Nilson Report) Visa says rewards cards now make up more than half of all credit cards and about 80 percent of money spent on a credit card. (Source: Aite Group, January 2008) Consumers say rewards are the second-most important reason for choosing to apply for a specific card, behind no annual fees and ahead of low interest rates. (Source: Aite Group survey, January 2008) More than one third of consumers choose which card to use in order to maximize card rewards. (Source: ComScore, September 2008)
V Data S & P 500 Financials Sector Stock Recommendations Outperformed Mastercard (MA), American Express (AXP), and Discover (DFS)
V Data Cont’d • Outperformed S & P 500 S & P 500 Financials Sector Stock Recommendations
V Data Con’t S & P 500 Financials Sector Stock Recommendations Above price median since IPO March 2008
V Quantitative S & P 500 Financials Sector Stock Recommendations At a conservative P/E Ratio of 20, expect average annual return of 9%
Recommendation S & P 500 Financials Sector Stock Recommendations Swap Wells Fargo for Visa Equal Weight JPM & HCBK
Financial Sector S & P 500 Financials Sector Stock Recommendations Questions??