CIF Sector Recommendation Report (Fall 2012)

Transcription

1 Date: 4/22/13 Analyst: Matthew Landen CIF Sector Recommendation Report (Fall 2012) Sector: Financials Review Period: 4/4/13 4/17/13 Section (A) Sector Performance Review The financial sector has outperformed the S&P 500 by about 0.5% over my review period. It saw a bit of decline after the poor jobs report number dragged down stocks. After that, 1

2 however, we saw a steady increase for both the financial sector and the S&P 500 all the way up until April 15 th, when a report of slow economic growth out of China forced stocks lower in the morning, and then the Boston marathon bombing resulted in an even larger sell- off. The significant rebound seen the next day was the result of a favorable housing report, which showed housing starts in the month of March reached 1.04 million. This is a 7% increase from February, a 47% increase from a year ago, and the first time in 5 years that housing starts have been over one million. The sharp dip at the end was primarily from poor earnings from BAC, who made about 13% less than analysts were expecting. This sparked a sell- off among other big banks like JPM, GS, and C. The Hartford Financial Services Group, Inc. (HIG) was the biggest gainer during my review period with an 8.74% return. They are in the midst of a restructuring plan that includes reducing their total debt by $1 billion while simultaneously repurchasing $500 million worth of shares by the end of They have completed some recent divestitures that have left them significant surplus capital that has enabled them to do this restructuring. Aflac Inc. (AFL) was the biggest loser in the financial sector with a % return over my review period. AFL, which does 77% of its business in Japan, took a heavy hit when the Bank of Japan made it clear they will be shifting monetary policy to promote a modest inflationary environment in order to help combat the deflation they have seen for nearly two decades. This policy would weaken the yen in relation to the dollar, resulting in less reported earnings for Aflac. The two largest holdings from the sector are Berkshire Hathaway B (BRK.B) with 8.69% and JP Morgan Chase & Co (JPM) with 8.18%. BRK.B slightly outperformed the sector with a 0.89% return driven by their property and casualty insurance business. JPM fell % over the review period, underperforming the sector by 0.63%. The majority of this fall came in the last few days of the review period as they saw a sell- off induced by an earnings miss of BAC. Because the financial sector is so heavily tied to the overall market health, the short- term outlook is as muddled as it is for the general economy. The upcoming earnings this week will provide a bit of clarity as investors can reevaluate whether they think the economy will continue to recover at the pace it has been. I am slightly bearish on the overall economy as upcoming earnings and general economic news may not be able to keep up with the expectations that had been building from record high markets. We have already begun to see a bit of this in those companies who have already reported earnings. Many actually had decent earnings but may not have lived up to analyst expectation, causing a sell- off. If this trend continues, any actual bad news could result in a significant decline in the market and in financials. 2

3 Section (B) Sector Holding Updates Company #1: Aflac Inc. (AFL) Date Recommended: 03/08/2013 Date Re- evaluated: 04/22/2013 Company Update Aflac was the biggest loser of the financial sector during my review period. This was almost entirely because of the stimulus policy that the Bank of Japan continues to employ in order to fight deflation. Aflac does 77% of its business in Japan and has severe exchange rate risk. The weakening yen could see lower earnings for the company. Despite this, numerous analysts remain bullish on the stock primarily for its strong financial standing, unique market position, and its history of dividends. Relative Performance We can see that Aflac had a fairly significant dip right at the beginning of my review period. This was because of the stimulus policy of the Bank of Japan discussed earlier. Since then, the stock has traded fairly flat, generally mirroring the sector and the S&P 500. Price Charts 3

4 Valuations Analysis Original Analysis 4

5 Re- evaluation Analysis Nearly all the ratios have stayed the same or have improved. This can be explained because the only thing that has changed for the stock is the weakening yen/dollar exchange rate. The stock took a dip and thus these ratios have improved. Historical Surprises Original Analysis 5

6 Re- evaluation Analysis Because we only bought Aflac a short while ago, nothing has changed for the historical surprises. Consensus Estimates Original Analysis 6

7 Re- Evaluation Analysis All of the mean numbers are slightly lower now than they were when first recommended. This can be explained because analysts now worry that when Aflac translates their profits from yen to dollar, the weakened yen will cause revenues and earnings to be less. This is probably true, 7

8 but it is mostly just a paper loss, as Aflac doesn t actually repatriate much of their Japanese earnings. Estimate Revision Analysis Re- Evaluation Analysis 8

9 Again, we can see analysts revise down their estimates for both revenue and earnings because of the weakening yen. Analysts Recommendations Original Analysis Re- Evaluation Analysis We can see that the mean rating is the exact same as it was when the stock was first recommended. Despite the dip in the stock price from the weakening yen, analysts have not changed their stance on the company. Company #2: American Tower Corporation (AMT) 9

10 Date Recommended: 04/01/2013 Date Re- evaluated: 04/22/2013 Company Update Relatively little has happened with American Tower Corp. during the review period. It is still performing quite well and remains a strong buy to a number of analysts. The stock has benefited from the strong real estate market that has been bolstered by good economic data on the housing sector. AMT could benefit from the Fed s continued low interest rate policy that forces investors to look for yield in REITs like AMT. Relative Performance AMT posted a 2.26% gain during my review period, outperforming the S&P 500, the sector, and the two other financial stocks the CIF owns. As stated earlier, the positive housing data and low interest rate policy of the Fed has helped AMT (and other REITs) outperform. Price Charts 10

11 Valuations Analysis Original Analysis 11

12 Re- evaluation Analysis All the valuation ratios have increased in accordance with the stock s price increase. Because the original analysis was only a couple weeks prior to the re- evaluation, all the increases can be explained from the short- term price fluctuation. Historical Surprises Original Analysis 12

13 Re- evaluation Analysis The CIF hasn t owned the stock long enough to see any change in the historical surprises. Consensus Estimates 13

14 Original Analysis Re- Evaluation Analysis 14

15 Similar to the historical surprises, nothing has changed with the consensus estimates, presumably because there hasn t been enough time in between evaluations. Estimate Revision Analysis 15

16 Re- Evaluation Analysis 16

17 The lack of activity in the re- evaluation could be because all of the revisions happened right when AMT was completing its conversion of a REIT. There hasn t been much news relating to AMT since the original evaluation, which could be why there are very few revisions this time around. Analysts Recommendations Original Analysis Re- Evaluation Analysis 17

18 The analyst recommendations are almost identical, with only difference being one more analyst was reporting in the re- evaluation than was reporting in the original evaluation. Analysts remain bullish on the stock with a mean rating of Company #3: Discover Financial Services (DFS) Date Recommended: 04/12/2013 Date Re- evaluated: 04/22/2013 Company Update Discover Financial Services raised its dividend by 43% from $0.14 to $0.20 a share on April 16 th. This dividend will be payable on May 23 rd to shareholders of record as of May 9 th. DFS was also just recently ranked as the leader in customer brand loyalty for credit cards for the 17 th consecutive year. Relative Performance DFS underperformed both the sector and the S&P 500 during my review period, losing %. However, we have only owned DFS since 4/12/13, and since then we have seen a relatively mixed chart. DFS dipped on the 15 th along with the sector and the market, but recovered the next day after they announced the increase in dividends. Price Charts 18

19 Valuations Analysis Original Analysis 19

20 Re- evaluation Analysis Through the end of my review period, we only owned DFS for about 5 days. The general down movement in the ratios is because of the small slide in stock price we have seen since we bought the stock. Historical Surprises Original Analysis 20

21 Re- evaluation Analysis Nothing has changed, which is consistent with what we would expect with a stock that we have only owned for 5 days. 21

22 Consensus Estimates Original Analysis Re- Evaluation Analysis 22

23 The mean numbers have only slightly changed, which seems to be the result of a greater number of estimates. The amount of change isn t enough to indicate that there is any changing consensus. Estimate Revision Analysis 23

24 Re- Evaluation Analysis 24

25 While there have been a few more up revisions for revenue since the original evaluation, there has been a greater increase in down revisions, especially for revenue. Analysts Recommendations Original Analysis 25

26 Re- Evaluation Analysis The analyst recommendations are exactly the same as they were during the original analysis, with a mean rating of Section (C) Sector Recommendations I am neutral to slightly bearish for the financial sector going forward. The sector is highly dependent on the economy as a whole, and generally rises or falls with the strength of the 26

27 market. The earnings from some of the big banks, while mostly positive (with the notable exception of BAC), aren t enough to boost financials going forward. This could be seen with the recent sell- off associated with the BAC miss. I would expect to see even more declines if the upcoming earnings for (mostly) non- financial stocks turn out to be relatively poor. This would only add to the increasing signs of a slowing global economy, as things like slower than expected growth in China as well as the recent plunge in commodities could make investors wary. This is all on top of the fact that markets has been trading at record highs, and have high expectations to compete with. Even if news or earnings are positive, they might not meet the even higher expectations, which could result in a dip in the market. The CIF should remain in its current sector holdings, as I think all the companies will outperform the sector in the long run. Although Aflac and Discover were negative for my review period, it was for reasons that were out of the company s control. Their positions within their respective industries as well as their financial stability have not changed. Section (D) Sector Holding Recommendations Company Name Ticker Symbol Date Recommended Date Re- evaluated Sell Recommendation (Explain Why) Adjust Target Price Aflac Inc. AFL 03/08/ /18/2013 No No No Adjust Stop- loss Price American Tower Corporation Discover Financial Services AMT 04/01/ /18/2013 No $88.46 No DFS 04/12/ /18/2013 No No No The only recommendation I have is to increase AMT s target price to $ This would be a 15% increase from the price the stock was trading at during the original recommendation. I feel as though the current target price is a bit low considering the stock is currently trading at about $81, a full $3 above the original price. The poor jobs report also wiped away any thought that the Fed might increase interest rates before 2015, which is great news for yield- producing stocks like AMT. 27

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