Stock Recommendations in the Financial Sector Student Investment Management. Deven Suthar

Transcription

1 Stock Recommendations in the Financial Sector Student Investment Management Deven Suthar 1

2 Table of Contents Sector review Review current holdings Citigroup Wells Fargo American Express Company Goldman Sachs Review additions Metlife Recommendations Questions 2

3 Financial Sector Overview Student Investment Management Fund SIM Fund financial holdings underweight S&P 500 3

4 Financial Sector Overview Sector performance past 5 years Sector Performance vs. S&P 500 Financial sector has underperformed the S&P 500 over the past 10 years Sectors YTD 1 Year 3 Year 5 Year 10 Year S&P 500 Index 1.3% -1.2% 27.3% 63.4% 65.5% Utilities 16.7% 19.5% 34.2% 54.1% 57.5% Telecommunication Services 16.2% 13.2% 8.7% 34.7% 33.9% Energy 11.7% -11.1% -14.6% -6.5% 26.6% Materials 8.4% -5.4% 18.1% 29.5% 56.9% Consumer Staples 5.9% 11.4% 31.3% 71.6% 124.7% Industrials 4.5% 1.5% 29.4% 58.4% 58.9% Consumer Discretionary -0.2% 2.1% 39.1% 108.0% 137.0% Information Technology -1.4% 0.0% 42.1% 82.0% 130.2% Health Care -2.8% -6.1% 44.5% 101.7% 130.2% Financials -5.1% -9.3% 16.2% 53.5% -28.6% 4

5 Financial Sector Overview Sector consists of eight industries Industries within the Sector 3, % 2, % 45.0% 40.0% 2, % 30.0% 1, % 1, % 15.7% 10.0% 8.4% 2.6% 1.4% 1.2% 20.0% 15.0% 10.0% 5.0% - Banks Insurance REITs Capital Markets Diversified Financial Services Consumer Finance Real Estate Management Thrifts & Mortgage Finance 0.0% Market Cap ($B) % of Total 5

6 Citigroup Company Overview Citigroup Overview Global diversified financial services company headquartered in Manhattan, New York City Present Citigroup formed in 1998 when Citibank merged with Travelers Group revenue split between US and Global Six primary segments Retail banking Citi cards Capital markets and IM Market and securities services Private banking Treasuries and trade 6

7 Citigroup One Year Stock Performance: -24.3% vs. -7.6% for XLF Stock Performance 7

8 Citigroup DCF 15.6% Upside DCF Valuation Citigroup (C) Analyst: Deven Suthar 13.0% Terminal Discount Rate 7/16/ % Terminal FCF Growth (000s) Year E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenue, net of interest expenses $ 76,354 $ 70,806 $ 73,834 $ 76,029 $ 78,148 $ 80,493 $ 82,908 $ 85,395 $ 87,957 $ 90,596 $ 93,313 % Growth -7.3% 4.3% 3.0% 2.8% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Operating Expenses $ 43,615 $ 42,669 $ 43,249 $ 43,841 $ 44,624 $ 46,802 $ 48,376 $ 49,501 $ 50,879 $ 52,438 $ 54,157 % of Rev, net of interest expenses 57.1% 60.3% 58.6% 57.7% 57.1% 58.1% 58.3% 58.0% 57.8% 57.9% 58.0% Provisions on Credit Losses $ 7,913 $ 8,500 $ 8,000 $ 7,500 $ 7,500 $ 7,725 $ 7,957 $ 8,195 $ 8,441 $ 8,695 $ 8,955 Provisions as % of Revenue 10.4% 12.0% 10.8% 9.9% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% 9.6% Taxes $ 7,440 $ 5,891 $ 6,776 $ 7,407 $ 7,807 $ 7,790 $ 7,972 $ 8,310 $ 8,591 $ 8,839 $ 9,060 Tax Rate 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% NI (Loss) from Discounted Ops, net of taxes $ (54) $ 45 $ 45 $ 45 $ 45 $ 45 $ 45 $ 45 $ 45 $ 45 $ 45 NI attributable to noncontrolling interest $ 90 $ 175 $ 175 $ 175 $ 175 $ 175 $ 175 $ 175 $ 175 $ 175 $ 175 Adjustments $ 993 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 $ 993 $ 622 $ 457 Net Income $ 16,249 $ 13,116 $ 15,180 $ 16,652 $ 17,587 $ 17,546 $ 17,972 $ 18,759 $ 18,923 $ 19,872 $ 20,554 % Growth 122.3% -19.3% 15.7% 9.7% 5.6% -0.2% 2.4% 4.4% 0.9% 5.0% 3.4% NPV of Cash Flows $ 91, % Terminal Value $ 211,705 NPV of Terminal Value $ 62, % Free Cash Yield 9.71% Projected Equity Value $ 154, % Terminal P/E Current Free Cash Flow Yield 12.2% Terminal EV/EBITDA Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA Shares Outstanding Current Price $ Implied Equity Value/Share $ Upside/(Downside) to DCF 15.6% 8

9 Goldman Sachs Company Overview Goldman Sachs Overview Multinational banking company focused on investment banking and investment management headquartered in Manhattan, New York City Four primary segments Investment banking 21% Investing and lending 16% Institutional client services 45% Investment management 18% 9

10 Goldman Sachs One Year Stock Performance: -23.9% vs. -7.6% for XLF Stock Performance 10

11 Goldman Sachs DCF Valuation DCF 18.6% Upside Goldman Sachs (GS) Analyst: Deven Suthar 13.5% Terminal Discount Rate 7/17/ % Terminal FCF Growth (000s) Year E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenue, net of interest expenses $ 33,820 $ 32,795 $ 34,717 $ 36,980 $ 39,654 $ 41,635 $ 43,301 $ 44,600 $ 46,161 $ 47,777 $ 49,449 % Growth -3.0% 5.9% 6.5% 7.2% 5.0% 4.0% 3.0% 3.5% 3.5% 3.5% Operating Expenses $ 25,042 $ 22,356 $ 23,033 $ 23,789 $ 24,602 $ 24,981 $ 25,980 $ 26,760 $ 27,563 $ 28,390 $ 29,241 % of Rev, net of interest expenses 74.0% 68.2% 66.3% 64.3% 62.0% 60.0% 60.0% 60.0% 59.7% 59.4% 59.1% Taxes $ 2,695 $ 3,236 $ 3,622 $ 4,089 $ 4,666 $ 5,163 $ 5,369 $ 5,530 $ 5,696 $ 5,867 $ 6,043 Tax Rate 30.7% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 30.6% 30.3% 29.9% Preferred stock dividends $ 515 $ 567 $ 623 $ 685 $ 754 $ 829 $ 912 $ 1,004 $ 1,104 $ 1,214 $ 1,336 Net Income $ 5,568 $ 6,636 $ 7,439 $ 8,417 $ 9,632 $ 10,662 $ 11,040 $ 11,306 $ 11,798 $ 12,306 $ 12,829 % Growth -23.8% 19.2% 12.1% 13.1% 14.4% 10.7% 3.5% 2.4% 4.4% 4.3% 4.3% NPV of Cash Flows $ 50, % Terminal Value $ 132,778 NPV of Terminal Value $ 37, % Free Cash Yield 9.66% Projected Equity Value $ 87, % Terminal P/E Current Free Cash Flow Yield 7.5% Terminal EV/EBITDA Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA Shares Outstanding Current Price $ Implied Equity Value/Share $ Upside/(Downside) to DCF 18.6% 11

12 Wells Fargo Wells Fargo Overview Financial services holding company headquartered in San Francisco, California Founded in 1852 to provide banking services in California by Henry Wells and William G. Fargo, also the founders of American Express Three primary segments Community banking 57% Wholesale banking 27% Wealth and investment management 16% Company Overview 12

13 Wells Fargo One Year Stock Performance: -17.7% YoY vs. -7.6% for XLF Stock Performance 13

14 Wells Fargo DCF Valuation DCF 1.2% Upside Wells Fargo (WFC) Analyst: Deven Suthar 12.0% Terminal Discount Rate 7/15/ % Terminal FCF Growth (000s) Year E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenue, net of interest expenses $ 86,057 $ 83,475 $ 87,649 $ 92,032 $ 95,713 $ 98,584 $ 101,542 $ 104,588 $ 107,726 $ 110,957 $ 114,286 % Growth -3.0% 5.0% 5.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Operating Expenses $ 49,974 $ 48,416 $ 50,836 $ 53,378 $ 55,513 $ 57,179 $ 58,894 $ 60,661 $ 62,481 $ 64,355 $ 66,286 % of Rev, net of interest expenses 58.1% 58.0% 58.0% 58.0% 58.0% 58.0% 58.0% 58.0% 58.0% 58.0% 58.0% Provisions on Credit Losses $ 2,442 $ 2,922 $ 2,629 $ 2,301 $ 1,914 $ 1,972 $ 2,031 $ 2,092 $ 2,155 $ 2,219 $ 2,286 Provisions as % of Revenue 2.8% 3.5% 3.0% 2.5% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Taxes $ 10,365 $ 10,017 $ 10,518 $ 11,044 $ 11,486 $ 11,830 $ 12,185 $ 12,551 $ 12,927 $ 13,315 $ 13,714 Tax Rate 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% NI attributable to noncontrolling interest $ 382 $ 382 $ 382 $ 382 $ 382 $ 382 $ 382 $ 382 $ 382 $ 382 $ 382 Preferred stock dividends $ 1,424 $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500 $ 1,500 Net Income $ 21,470 $ 20,239 $ 21,783 $ 23,427 $ 24,918 $ 25,722 $ 26,550 $ 27,403 $ 28,281 $ 29,186 $ 30,118 % Growth -1.6% -5.7% 7.6% 7.5% 6.4% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% NPV of Cash Flows $ 140, % Terminal Value $ 344,685 NPV of Terminal Value $ 110, % Free Cash Yield 8.74% Projected Equity Value $ 251, % Terminal P/E Current Free Cash Flow Yield 8.7% Terminal EV/EBITDA 9.22 Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA Shares Outstanding 5210 Current Price $ Implied Equity Value/Share $ Upside/(Downside) to DCF 1.2% 14

15 American Express Company Company Overview American Express Company Overview Global charge and credit payment card and travel related services company headquartered in Manhattan, New York City Founded in 1850 to provide express mail services Henry Wells and William G. Fargo Primary segments Consumer cards Small business services Commercial cards and services Traveler's checks Travel Services (focused on business travel) Publishing (currently divesting business segment) 15

16 American Express Company One Year Stock Performance: -19.5% vs. -7.6% for XLF Stock Performance 16

17 American Express Company DCF Valuation DCF 10.1% Upside American Express Company (AXP) Analyst: Deven Suthar 13.0% Terminal Discount Rate 7/15/ % Terminal FCF Growth (000s) Year E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenue, net of interest expenses $ 34,441 $ 34,785 $ 36,525 $ 38,351 $ 40,268 $ 42,282 $ 43,973 $ 45,732 $ 47,561 $ 49,464 $ 51,442 % Growth 1.0% 5.0% 5.0% 5.0% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0% Operating Expenses $ 26,503 $ 26,089 $ 27,028 $ 27,996 $ 29,396 $ 30,866 $ 32,100 $ 33,384 $ 34,720 $ 36,109 $ 37,553 % of Rev, net of interest expenses 77.0% 75.0% 74.0% 73.0% 73.0% 73.0% 73.0% 73.0% 73.0% 73.0% 73.0% Taxes $ 2,775 $ 3,131 $ 3,287 $ 3,452 $ 3,624 $ 3,805 $ 3,958 $ 4,116 $ 4,281 $ 4,452 $ 4,630 Tax Rate 8.1% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% Adjustments $ 100 $ 50 $ 50 $ 50 $ 50 $ 50 $ 50 $ 50 $ 50 $ 50 $ 50 Net Income $ 5,063 $ 5,516 $ 6,159 $ 6,853 $ 7,198 $ 7,561 $ 7,865 $ 8,182 $ 8,511 $ 8,853 $ 9,210 % Growth -13.3% 8.9% 11.7% 11.3% 5.0% 5.0% 4.0% 4.0% 4.0% 4.0% 4.0% NPV of Cash Flows $ 39, % Terminal Value $ 106,422 NPV of Terminal Value $ 31, % Free Cash Yield 8.65% Projected Equity Value $ 70, % Terminal P/E Current Free Cash Flow Yield 7.9% Terminal EV/EBITDA Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA Shares Outstanding 1003 Current Price $ Implied Equity Value/Share $ Upside/(Downside) to DCF 10.1% 17

18 Metlife Inc. Company Overview Metlife Inc Overview Global diversified insurance, annuity, and employee benefits provider headquartered in Manhattan, New York City Founded in 1863 as National Union Life and Limb Insurance Company focused on insuring Civil War sailors and soldiers against wartime incidences. Primary segments Life insurance Dental Disability Annuities Auto & Home 18

19 Metlife Inc. One Year Stock Performance: -25.9% vs. -7.6% for XLF Stock Performance 19

20 Metlife Inc DCF Valuation DCF 32.8% Upside Metlife Inc (MET) Analyst: Deven Suthar 13.0% Terminal Discount Rate 7/15/ % Terminal FCF Growth (000s) Year E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Revenue, net of interest expenses $ 68,833 $ 72,275 $ 75,888 $ 78,165 $ 80,510 $ 82,925 $ 85,413 $ 87,975 $ 90,615 $ 93,333 $ 96,133 % Growth 5.0% 5.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% Operating Expenses $ 61,363 $ 63,602 $ 66,023 $ 67,222 $ 69,239 $ 71,316 $ 73,455 $ 75,659 $ 77,929 $ 80,266 $ 82,674 % of Rev, net of interest expenses 89.1% 88.0% 87.0% 86.0% 86.0% 86.0% 86.0% 86.0% 86.0% 86.0% 86.0% Taxes $ 2,148 $ 2,891 $ 3,794 $ 3,908 $ 4,025 $ 4,146 $ 4,271 $ 4,399 $ 4,531 $ 4,667 $ 4,807 Tax Rate 3.0% 4.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Minority Interest $ 12 $ 12 $ 12 $ 12 $ 12 $ 12 $ 12 $ 12 $ 12 $ 12 $ 12 Adjustments $ 158 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 $ 125 Net Income $ 5,152 $ 5,645 $ 5,934 $ 6,898 $ 7,109 $ 7,326 $ 7,550 $ 7,781 $ 8,018 $ 8,263 $ 8,515 % Growth -16.7% 9.6% 5.1% 16.2% 3.1% 3.1% 3.1% 3.1% 3.1% 3.1% 3.0% NPV of Cash Flows $ 37, % Terminal Value $ 87,704 NPV of Terminal Value $ 25, % Free Cash Yield 9.71% Projected Equity Value $ 63, % Terminal P/E Current Free Cash Flow Yield 10.7% Terminal EV/EBITDA 9.89 Current P/E Projected P/E Current EV/EBITDA Projected EV/EBITDA Shares Outstanding 1128 Current Price $ Implied Equity Value/Share $ Upside/(Downside) to DCF 32.8% 20

21 Summary Current Holdings Current SIM Holdings Current holding relatively inexpensive compared to sector WFC expensive compared to banks Not well diversified within sector Portfolio 1.25% underweight to S&P 500 Company Ticker % of Portfolio Trailing PE Forward PE Trailing EPS Forward EPS P/S P/BV Wells Fargo WFC 4.27% Goldman Sachs GS 4.08% American Express AXP 2.85% Citigroup C 4.08% S&P 500 SPX N/A Fin Sector S5FINL N/A

22 Summary Recommended SIM Fund Holdings Sell Wells Fargo Expensive compare to peers Hold American Express Buy additional shares of Citigroup and Goldman Sachs Buy Metlife Adds insurance company to the portfolio Maintain.50% underweight to S&P 500 Company Ticker Current Weight Current Price Previous Target Price My Price Target % Upside Recommended SIM Holdings Recommenda tion Proposed Weight Delta Weight Wells Fargo WFC 4.14% $ $ $ % Sell 1.50% -2.64% Citigroup C 3.82% $ $ $ % Buy 4.25% 0.43% Goldman Sachs GS 3.78% $ $ $ % Buy 4.25% 0.47% American Express AXP 2.71% $ $ $ % Hold 2.71% 0.00% Metlife MET 0.00% $ $ % Buy 2.50% 2.50% Underweight % % -0.76% Total Weight 15.69% 15.69% 22

23 Questions Questions? Company Ticker Current Weight Current Price Previous Target Price My Price Target % Upside Recommenda tion Proposed Weight Delta Weight Wells Fargo WFC 4.14% $ $ $ % Sell 1.50% -2.64% Citigroup C 3.82% $ $ $ % Buy 4.25% 0.43% Goldman Sachs GS 3.78% $ $ $ % Buy 4.25% 0.47% American Express AXP 2.71% $ $ $ % Hold 2.71% 0.00% Metlife MET 0.00% $ $ % Buy 2.50% 2.50% Underweight % % -0.76% Total Weight 15.69% 15.69% 23