1 / 36

FIN724/824 The Stock Market Company Recommendation

FIN724/824 The Stock Market Company Recommendation. Marsel J. Tadger Kyle M. Ward-Dahl Ke Wang Adam J. Wilson. Size and Composition of Financial Sector. Largest Companies (Market Cap in Billions) American Express (AXP) $44.8

kapono
Download Presentation

FIN724/824 The Stock Market Company Recommendation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. FIN724/824 The Stock MarketCompany Recommendation Marsel J. Tadger Kyle M. Ward-Dahl Ke Wang Adam J. Wilson

  2. Size and Composition of Financial Sector • Largest Companies (Market Cap in Billions) • American Express (AXP) $44.8 • Bank of American (BAC) $150.8 • Berkshire Hathaway (BRK) $234.6 • Citigroup (C) $93.8 • Goldman Sachs (GS) $76.5 • Bank of NY Mellon (BK) $35 • JP Morgan Chase & Co (JPM) $153.4 • Morgan Stanley (MS) $36.4 • U.S. Bancorp (USB) $48 • Wells Fargo (WFC) $145.3 • Market Cap: 1.6 Trillion • 16.00% of S&P 500 • Industries • Banks • Consumer Finance • Diverse Financial Service • Insurance • Multi-sector Holdings • Real Estate Investment Trust

  3. Recap of Sector Presentation • Increase 100 basis points for Financial Sector • Sold 241 basis points for Berkshire Hathaway • New underweight: 234 basis points • Feb 28th S&P Value=16.00% • Feb 28th SIM Value=8.98% • Necessary SIM Value=13.66% • Additional needed=468 BP’s

  4. S&P Index and SIM Weights

  5. Current Sector Setup JPM – 172 bp GS – 305 bp TCB – 270 bp HCBK – 152 bp Total – 898 bp Underweight to expected– 468 bp

  6. Recommendation • Increase holdings of Goldman Sachs (GS) • Increase holdings Hudson City Bancorp Inc. (HCBK) • SELL ALL TCF Financial Corp (TCB) • BUY Progressive Corp. (PGR) • Hold JP Morgan Chase & Co (JPM)

  7. Proposed Setup • After Selling TCB • Underweight to expected by 468+270=738 • JPM – 164 bp (stays the same) • GS – 493 bp (increased by 188bp) • HCBK – 452 bp (increased by 300 bp) • PGR – 250 bp (New Stock)

  8. Recommendation 1: GS • Market Cap: $80.38 B • Outstanding diluted shares: 550.9 M • Stock Price: $158.75 • Beta: 1.74 • Market Consensus: $215 • Lines of Businesses: • Investment Banking (10.62% of total sales) • Trading and Principal Investments (76.09% of total sales) • Asset Management and Securities Services (13.29% of total sales) • Competitors: • JP Morgan Chase Co. • Morgan Stanley • Merrill Lynch (privately held by Bank of America)

  9. Historic Prices of GS

  10. Relative Performance of GS

  11. Sales of GS • Sales • Red numbers are forecast in Assignment 2 • Strong rebound in Trading and Principal Investments

  12. DCF of GS

  13. Valuation of GS • Target price to buy: $213 (average of DCF and Valuation prices)

  14. Key Ratios of GS

  15. Catalysts of GS • The increase of employees • Global and emerging markets • Opened offices in Mumbai, Moscow, Sao Paulo, Dubai, Qatar, Riyadh and Tel Aviv • Became licensed broker-dealer in Russia, India and China • Opened banks in Brazil, Ireland and Russia • Entered asset management business in South Korea and India • The recovery of economy and financial markets

  16. Risks of GS • Uncertainties • Real estate market • Interest rates • Lack of investors’ confidence • Record high unemployment rate • Regulations • Liability tax bill (0.15%) • Limitation of proprietary trading • Prohibition of Private Equity business

  17. GDP Forecast

  18. Interest Rate Forecast • Federal Reserve is going to keep the current interest rate • Interest rate rise is beneficial in the long term

  19. Quantify key risks or benefits • Liability tax • -$1.17 B, -$2.12 per share • Prohibition of Private Equity Investment • $14 B of PE holdings, 2% of $849 B total assets • Probably spin-off if the bill is passed • Limitation of Proprietary Trading • Hard to determine the definition and size • Probably not being passed • Preferred Stock of Sumitomo • Converted to Common Shares • $1.1 B, not included in financial statements, $2 per share • No material impact on Goldman Sachs

  20. Recommendation 2: PGR • Mitigate risk • SIM has no insurance industry stock. • Hedge against Goldman Sachs • PGR = Auto Insurance • No mortgages, no hurricanes, no bailouts. • Focused strategy vs. nearly all competitors are vertically integrated. • Low cost • Companies such as Nationwide and AllState are losing customers to no-agent based player like Progressive.

  21. Progressive DCF

  22. Correlation of GS and PGR Correlation -.60

  23. Progressive has a strong correlation to auto sales (.79)

  24. Automotive sales are expected to increase significantly in next 5 years.

  25. Valuation of PGR Average = $26.17

  26. Recommendation 3: HCBK • Add 300 basis points to Hudson City Bancorp (HCBK) • Remarkably safe bank-stock • No exposure to commercial real estate • Comparatively very low foreclosure risk • High yield

  27. Safe Bank Stock • During the recent credit crunch, while competitors were consolidating losses, HCBK was able to grow its assets substantially • Only fell ~50% from peak to trough, as opposed to 90%+ for many of its competitors • No risky investments (CDS, derivatives, foreign assets etc)

  28. No Commercial Real Estate • HCBK has no exposure to any commercial real estate risk • Solely focused on consumer loans • HCBK focuses on one distinct asset class • High-value jumbo home loans • Wealthy areas of New York, New Jersey, and Connecticut • Able to specialize in this asset class

  29. Low Foreclosure Rate • Low acceptance rate • They finance only top value clients • Most clients have the net worth that they could finance the home with their own personal assets • Very high down-payments • 30% down payment is their most common variety

  30. Example (Homes bought at peak in 2006) HCBK Competitor 5loans to unknown value customers $200,000 homes $10,000 down payment per house Loan values=$950,000 • 1 loan to high wealth customer • $1,000,000 home • $300,000 down payment • Loan value=$700,000

  31. Housing Market Falls 35% From Peak to Trough in 2009 HCBK Competitor Loan value=$950,000-principal repaid Home values=$650,000 Negative equity=~$250,000 I think we know the result here • Loan value=$700,000-principal already paid • Home value=$650,000 • Negative equity=~$25,000 • Average customer still has plenty of net worth to ride out the storm

  32. Expanding Markets • Looking to purchase a bank in Florida, where many of its high-value customers have summer homes • Looking to expand its banking operations in the New York Metro area, to further serve its high-value customers

  33. High Yield • HCBK Yielding 4.44% as of 02/09 • HCBK has consistently and rapidly increased its dividend since its IPO in 2000 • Company expects these increases to continues

  34. DCF

  35. Multiples Valuation Average=23.67

  36. Q&A

More Related