CIF Sector Recommendation Report (Fall 2012)

Transcription

1 CIF Sector Recommendation Report (Fall 2012) Date: March 20, 2013 Analyst: Lillian Mojica Sector: Financial Review Period: March 1 st - 15 th Section (A) Sector Performance Review FIN Ticker Current Beg. Stop-loss Target % Cap # Shares Current vs. Sectorvs. S&P 500 Price Price Price Price Gain Value S&P 500 $INX % Sector ETF XLF $18.45 $ % $260, % Current Holdings Aflac Inc AFL $51.08 $49.95 $45.99 $ % 400 $20, % 5.21% 1

2 Headline News: Nineteen financial institutions took a stress test to see if they were healthy enough to survive an economic downturn. Of the 19 institutions 18 passed the test. Citigroup had very strong result compared to last year results. The stress test in 2 parts and the companies took the first section. The test looks at what would happen to the banks if there was a 50% drop in equities, an unemployment rate of 12.1% and a 20% decline in housing. These are extreme conditions, but the Fed wants to make sure that the banks will not suffer as they have in the past. (Yahoo Finance) Bank of America received a 6.8% for their tier 1 common ratio. With this the company was upgraded by Edward Jones from a hold to a buy due to the company gaining financial strength. (MarketWatch) Highlight the biggest (+) and the biggest (-) movers The two biggest movers (+) during evaluation period were Legg Mason Inc. with an increase of 16.13% and Genworth Financial Inc. with an increase of 15.67%. Legg Mason beat their 52 week high on March 13 th. Before the 52-week high of $30.73 and it is now as $ Right now analysts see the company as a hold because of the lack of growth in the earnings per share, however their revenue has seen growth. Also Legg Mason and Permal acquired Fauchier Partners, which is a European manager fund. The other biggest mover was Genworth Financial. In the last four months the stock has risen 100% because of the new CEO Thomas McInerney. The company has been upgraded to an outperform by Scotia and the next day, March 11, Glenworth rose 6%. The biggest movers (-) during the evaluation period were Equity Residential with a decrease of 2.40% and Public Storage with a decrease of 2.36%. Equity Residential was downgraded from a buy to a hold. Analysts believe that in the coming year the earnings per share will underperform even though it had improved from the last year. Analysts also believe that Equity Residential has had poor stock performance and bad operating cash flows. The other biggest mover (-) was Public Storage. On March 7 th 876,569 shares were exchanged which is quite a bit more than the usual exchange of 669,400 shares. Due to this Public Storage fell $2.13, making it one of the biggest movers (-). (TheStreet) Largest Holdings: The two largest holdings in the financial sector are JP Morgan Chase and Co with a holding of 8.44% and Berkshire Hathaway with a holding of 8.32%. Berkshire Hathaway nominated Meryl Witmer to the board of directors. For JP Morgan chase there was a panel on 2

3 March 14 th about a traing loss of $6.2 million. There is an investigation that states Chase executives ignored the risk and hid the losses from their investors. Chase is denying that they knew about the loss, but know that they made a mistake. Short-term Outlook: The short-term outlook for the financial sector is bullish. The interest rate is going to remain low and many companies are optimizing their resources and minimizing costs. (Forbes.com). If there is a financial downturn 18 of the 19 financial institutions are healthy and would be able to overcome it. Since the beginning of the year the financial sector has been above the S&P 500, which has also seen an increase. (MarketWatch) Section (B) Sector Holding Updates Company #1: Aflac Inc. (AFL) Date Recommended: 03/08/13 Date Re-evaluated: 03/20/13 Company Update The class bought Aflac halfway through the two week review period. Aflac has increased sales but they still missed revenue estimates. Aflac is trying to increase their sales in order to compete with the other large insurance companies such as AIG and State Farm. Aflac is also focusing on Japan, which has a lot of potential for an increase in sales. As shown below the revisions have changed slightly in the last two weeks due to the fact that the revenues were missed and might be a little lower than expected for the quarter ending Mar-13. The stock was also downgraded because of the lower than expected earnings. Also according to Yahoo Finance Aflac is investing in lower risk and lower yield projects. Analysts also believe that there will be a continuation of slow growth. Relative Performance Aflac has been below both the financial sector and the S&P500 for both the 3 month chart and the 1 year chart, as shown below. However they have sown large growth in the last year because of the increase in sales. Aflac plans on increasing their sales again in 2013 however analyst believe that they will not be able to grow as much as they like because of Aflac s lower than expected 2012 revenue and earnings. 3

4 Price Charts Insert a price chart of the stock for the most recent three months. You should include on the same chart (1) the SPDR sector ETF, (2) and the SP500 prices for the same period Insert a price chart of the stock for the most recent one year. You should include on the same chart (1) the SPDR sector ETF, (2) and the SP500 prices for the same period 4

5 Valuations Analysis Original Analysis Ratio Analysis Company Industry Sector P/E (TTM) P/S (TTM) P/B (MRQ) P/CF (TTM) 1.60 (Morningstar) (Reuters) 2.70 (Morningstar) Re-evaluation Analysis Ratio Analysis Company Industry Sector P/E (TTM) P/S (TTM) P/B (MRQ) P/CF (TTM) 1.60 (Morningstar) (Reuters) 2.70 (Morningstar) In the past two weeks the valuation analysis has not changed by much on any of the 4 valuations that are re-evaluated. For the company all of the valuations have increased by about.03. In the sector and the industry both the price to sales decreased by a little bit. The P/B and P/E ratios increased and the P/CF for the industry decreased and for the sector the ratio increased. Historical Surprises Original Analysis Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Dec-12 6, , Quarter Ending Sep-12 6, , Quarter Ending Jun-12 6, , Quarter Ending Mar-12 6, , Quarter Ending Dec-11 6, , Earnings (per share) Quarter Ending Dec

6 Quarter Ending Sep Quarter Ending Jun Quarter Ending Mar Quarter Ending Dec Re-evaluation Analysis HISTORICAL SURPRISES Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) Estimates vs Actual Estimate Actual Difference Surprise % SALES (in millions) Quarter Ending Dec-12 6, , Quarter Ending Sep-12 6, , Quarter Ending Jun-12 6, , Quarter Ending Mar-12 6, , Quarter Ending Dec-11 6, , Earnings (per share) Quarter Ending Dec Quarter Ending Sep Quarter Ending Jun Quarter Ending Mar Quarter Ending Dec Consensus Estimates Original Analysis # of Estimates Mean High Low 1 Year SALES (in millions) Quarter Ending Mar , , % 5, % 6, Quarter Ending Jun , , % 6, % 6,

7 Year Ending Dec , , % 24, % 26, Year Ending Dec , , % 25, % 27, Earnings (per share) Quarter Ending Mar % % 1.75 Quarter Ending Jun % % 1.75 Year Ending Dec % % 7.06 Year Ending Dec % % 7.59 LT Growth Rate (%) % % Re-Evaluation Analysis CONSENSUS ESTIMATES ANALYSIS Sales and Profit Figures in US Dollar (USD) Earnings and Dividend Figures in US Dollar (USD) # of Estimates Mean High Low 1 Year SALES (in millions) Quarter Ending Mar , , , , Quarter Ending Jun , , , , Year Ending Dec , , , , Year Ending Dec , , , , Earnings (per share) Quarter Ending Mar Quarter Ending Jun Year Ending Dec Year Ending Dec LT Growth Rate (%)

8 In the quarters ending in Mar-13 and Jun-13 the revenue estimates have dropped for both quarters. However it seems that Aflac believes they will have the same earnings per share for the next two quarters. When looking at the year ending in Dec-13 and Dec-14 the earnings and revenue have both decreased. As stated before Aflac was focusing on increasing their sales and they did accomplish that, however they were off revenue estimates. Estimate Revision Analysis Original Analysis (03/08/2013) Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Mar Quarter Ending Jun Year Ending Dec Year Ending Dec Earnings Quarter Ending Mar Quarter Ending Jun Year Ending Dec Year Ending Dec Re-Evaluation Analysis ESTIMATES REVISIONS SUMMARY Last Week Last 4 Weeks Number Of Revisions: Up Down Up Down Revenue Quarter Ending Mar Quarter Ending Jun Year Ending Dec Year Ending Dec Earnings 8

9 Quarter Ending Mar Quarter Ending Jun Year Ending Dec Year Ending Dec For the revenue in the last week all of the revisions have decreased by 1 or 2. For earnings the down revisions were also changed. However there was only a change for the quarter ending Mar-13 and the year ending Dec-14. There have also been revisions in the last 4 weeks for all of the quarters and year endings in both the revenue section and the earnings. There were drastic changes for estimate revisions for earnings per share. The quarter ending Mar-13, Jun-13 and the Year Ending Dec-13 and Dec-14 all had revisions between 11 and 19. Revenue was not as drastic as earnings but the revisions were between 2 and 6. These revisions could have to do with the fact that Analysts Recommendations Original Analysis 1-5 Linear Scale Current 1 Month 2 Month (1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Month Mean Rating Re-Evaluation Analysis ANALYST RECOMMENDATIONS AND REVISIONS 1-5 Linear Scale Current 1 Month 2 Month 3 Month 9

10 (1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Mean Rating There are only a couple changes in the analyst recommendation and revision. The hold from two months ago went from 10 to 12 and the hold from 3 months ago also went up from 9 to 10. The outperform from 2 months and 3 months both went up by 1 as well. This has to do with the yearly revenue and earnings were not what were to be expected. Section (C) Sector Recommendations holding or the current Aflac holding. The financial sector has continually grown since the beginning of If there happens to be an economic downturn the financial institutions should be able to handle the situation. Also we have only held the stock Aflac for almost 2 weeks and I believe that it still has potential to grow. The stock has already gone up a dollar and I see it to continue growing the target price of $ Even though there are some analysts who believe the stock won t continue to grow, we can see how the revenue and earnings estimates turn out from the quarter ending in Mar-13. From there the class can decide if Aflac will continue to grow with sales as well as revenue and earnings or if we should pull out. Right now I am bullish on the sector because over the past 3 months the financial sector has beaten the S&P500, and I believe it will keep beating it. I also am bullish because the Fed is taking precautions on the sector and the financial institutions within the sector. The stress test is a very good indicator of how a financial institution will survive in case of an economic downturn. As of right now I believe the financial sector will continue to flourish. Section (D) Sector Holding Recommendations 10

11 Based on your analysis, are there stocks CIF currently owns from your sector you would recommend to: 1. Sell and why? 2. Adjust target price and why? If you recommend an adjustment, you must suggest a new target price 3. Adjust stop-loss price and why? If you recommend an adjustment, you must suggest a new stop-loss price Provide your recommendations in the following table Company Name Ticker Symbol Date Recommended Date Reevaluated Sell Recommendation (Explain Why) Adjust Target Price Aflac Inc AFL 03/08/ /20/2013 No No No Adjust Stoploss Price The Cougar Endowment Fund has only has the stock for 12 days, and I do not believe that is enough time to see the stock grow. I believe that Aflac has a good plan to increase sales and that they will work on beating estimates for revenue and earnings. The class should see where the stock goes in the next couple months and how it does compared to the sector. References YahooFinance.com Reuters-Aflac.com Reuters-XLF.com MarketWatch.com TheStreet.com DailyFinancecom 11