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Financials

Financials. David Kaplan, Nikhil Ketkar, Jonathan Khoury, Steve Kuljko. Agenda. Sector Recap Recommendations Business/Financial Analysis & Valuation: Hudson City Bank Business/Financial Analysis & Valuation: JP Morgan Chase and Co. Review of Recommendations.

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Financials

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  1. Financials David Kaplan, Nikhil Ketkar, Jonathan Khoury, Steve Kuljko

  2. Agenda • Sector Recap • Recommendations • Business/Financial Analysis & Valuation: Hudson City Bank • Business/Financial Analysis & Valuation: JP Morgan Chase and Co. • Review of Recommendations

  3. Recap: SIM v. S&P 500 Weightings

  4. Previous Recommendations • Overweight in Financials: sell Financials and move investment to more reliable sectors • Technical analysis suggested we were overvalued • Worries prevalent about interest rate increases • Political Reform and its negative impact on the financial sector Class Consensus: Remain at current underweight level

  5. Company Recommendations • Position Alterations: • J.P. Morgan: Sell all (172 basis points) • Progressive: Hold (299 basis points) • Goldman Sachs: Hold (441 basis points) • HCBK: Buy (increase by 172 basis points)

  6. Recommendation 1 JP Morgan Chase (Sell) • Stock Price: $39.84 • Market Cap: $154.7B • Outstanding diluted shares: 3.98B • Beta: 1.16 • Lines of Business: • Investment Banking: 26% of sales • Retail Financial Services: 30% • Card Services: 19% • Commercial Banking: 5% • Treasury and Security Services: 7% • Asset Management: 7% • Corporate/Private Equity: 6%

  7. JPM v. S&P 500 (1 year)

  8. JPM v. S&P 500 (6 months)

  9. JPM return vs. FS returns

  10. Background Information Earnings Revenues

  11. JPM DCF

  12. JPM Valuation

  13. Risks to JPM • Headline risk • SEC currently conducting criminal investigation against JPM, C, GS and others • Interest Rate risk • Rates currently at all time lows, will increase • Increased interest rates will hurt investment banking business and margins in the market • Regulation • Volcker Rule • No longer too big to fail • Moody’s will downgrade debt ratings if the regulation passes

  14. Recommendation 2 • HCBK (Buy) • Strong Buy 28% Upside • Target Price: $16.50 • Buy 170 Basis Points, currently 2.4% of SIM • Increase Holding to 4.1% • Use HCBK as a hedge against regulation

  15. Background Information: 1 • Current Price: $13.00 • Dividend Yield: 4.6% • Dividend Growth 5 Yr: 19.79% • Market Cap: 6.8 Billion • Shares Outstanding: 470 M • Beta Vs. S&P: 0.95 • Industry: Thrift & Savings

  16. Background Information: 2 Earnings Revenues

  17. Income Statement: Graph

  18. Discounted Cash Flow Model Strong Buy

  19. Sensitivity Analysis

  20. Valuation: Relative Multiples

  21. Valuation: Absolute Multiples The Price-to-Book 1.6x

  22. Risks Interest rates Negatively correlated with interest rates Interest rates will increase soon Economic risks 10% Unemployment High national debt

  23. Questions? Sell: JPM Buy: HCBK

  24. Market Cap: $77.14 B • Outstanding diluted shares: 538.6 M • Stock Price: $143.23 • Beta: 1.40 • Lines of Businesses: • Investment Banking (10.62% of total sales) • Trading and Principal Investments (76.1% of total sales) • Asset Management and Securities Services (13.30% of total sales) • Competitors: • JP Morgan Chase Co. • Morgan Stanley • Citigroup Recommendation 1: GS

  25. Price Movement: GS

  26. Sales of GS • This quarter was a PERFECT trading quarter. Not one day did GS sustain a loss • 0% increase for principal and trading reflects the rest of the year being tough in light of the SEC and regulation

  27. DCF for GS • Higher terminal Discount rate for headline risk still doesn’t take the upside away… 20% upside from the current price with 18% discount rate

  28. Valuation of GS

  29. Risks to recommendation • Headline risk • Damaged reputation from S.E.C charges • Material fines and business reduction • Interest Rate risk • currently low, will increase… • Increased interest rates will hurt margins for trading, lower volume, less activity • Regulation • Material effects of financial reform on GS business

  30. Analysis: PGR

  31. Analysis: PGR

  32. Qualitative Assessment: PGR • Price target: $22 (8.10%) • Limited volatility in relation to other financial stocks (product offering…) • Acquisition of market share promising • April EPS consistent with April ‘09, revenues up to $1.47bn vs $1.41bn

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