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Financial Sector Analysis: Recommendations for JP Morgan, Goldman Sachs, and Hudson City Bank

This report outlines key financial recommendations following a sector analysis by David Kaplan and his team, focusing on Hudson City Bank (HCBK) and JP Morgan Chase. With suggestions to sell JP Morgan due to potential interest rate rises and SEC investigations, we recommend purchasing HCBK for a 28% upside potential. The analysis also highlights the importance of navigating risks such as regulatory changes and market volatility. Alongside, Goldman Sachs is assessed for its stable trading performance, despite future challenges.

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Financial Sector Analysis: Recommendations for JP Morgan, Goldman Sachs, and Hudson City Bank

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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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