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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
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FIN724/824 The Stock MarketCompany 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 • 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
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
Current Sector Setup JPM – 172 bp GS – 305 bp TCB – 270 bp HCBK – 152 bp Total – 898 bp Underweight to expected– 468 bp
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)
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)
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)
Sales of GS • Sales • Red numbers are forecast in Assignment 2 • Strong rebound in Trading and Principal Investments
Valuation of GS • Target price to buy: $213 (average of DCF and Valuation prices)
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
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
Interest Rate Forecast • Federal Reserve is going to keep the current interest rate • Interest rate rise is beneficial in the long term
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
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.
Correlation of GS and PGR Correlation -.60
Automotive sales are expected to increase significantly in next 5 years.
Valuation of PGR Average = $26.17
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
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)
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
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
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
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
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
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
Multiples Valuation Average=23.67