Financials.ppt

Sam HawkinsSunghoon Kim Shade Okusanya

13 February, 2003

FINANCIAL SECTOR FINANCIAL SECTOR OUTLOOKOUTLOOK

• Financial Sector Overview• Business Analysis• Financial Analysis• Valuation Analysis• Recommendation

OutlineOutline


Key Highlights• Smallest % sector of S&P in 1965• Largest % sector of S&P 500 today

{20.64%}• Mkt. Cap. of $1,596B• Industry Groups

– Banks (29)– Insurance (25)– Diversified Financials (23)– Real Estate (4)

Financial Sector OverviewFinancial Sector Overview




Banks

36%

Consumer Finance

3%

Diversified

Fin. Services

35%

Insurance Brokers

2%

Life & Hlth. Insurance

5%

Multi-line Insurance

10%

Prop. & Casualty

Insurance

7%

REIT

2%

24%

38%

Industry Groups (% of Sector)


0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

Equity O

ffice

EQ Res

iden

t

Simon P

rop. G

roup

Amer

ican

Ins.

Gro

up

All Sta

te C

apita

l

Mar

sh &

McL

ennan

Bank

Of Am

eric

a

Wac

hovia

Corpora

tion

Bank

One Corp

oratio

n

Citigro

up

Fannie

Mae

JP M

organ

Chas

e

Mk

t. C

ap

ita

liza

tio

n (

$B

)

9.92 6.41 6.32

121.10

22.22 21.79

101.60

47.2041.35

164.20

63.07

43.96

Real EstateInsurance Banks Diversified Financials

Largest Companies (IG/Mkt. Cap)


• Banks {Mature/Cyclical}• Insurance {Mature/Defensive}• Diversified Financials

{Mature/Cyclical}• Real Estate {Mature/Defensive}


Business AnalysisBusiness Analysis

Life/Business Cycle Classification



• Outlook for Sector Drivers– Normal Yield Curve - long term rates higher than short

– Expansionary Fed Policy - currently in stage between the last Fed easing and 1st Fed tightening (period averages approximately 12 months)

– Rates Remain Near Historic Lows – Fed Funds 1.25%

– Low Inflation – pressure from Energy sector, but stable overall

– GDP – consensus for slow but healthy 3.25%–3.5% 2003 growth

* All positive factors for economic recovery and stronger demand for financial products by business and

consumer



• Demand Analysis – Consumer Confidence (?) could dampen

economic recovery if falters due to War possibilities, poor economic data, etc.. ** recently fell to 51.4 (above 50 considered positive, while less than 50 considered negative)

– Improved Stock Market Returns (+) more IPO, M&A, and other financing activity; results in higher loan demand and fee income (market averages 19% during 12 month period after Fed easing, but before Fed tightening

– Demographics (N) % of population between 25-60 expected to decline 2% in 2003; Baby boomers to be replaced by “Echo Generation”



• Supply Analysis

– Industry Consolidation (+) Fewer

competitors especially in Banking

– Technology & Innovation (+) able to provide better services at a lower costs

– Continued Easing of Regulations (+) able to pursue new areas of growth opportunity



• Profitability & Pricing

– Increased distribution channels such as the Internet, will allow fewer companies to compete in more markets (true for all industries in the sector )

– New growth areas will provide the greatest opportunity to generate higher sales and revenue streams: ie.. Banks offering insurance products and brokerage services

– Outlook Next 12 months:• Positive for Banks and Diversified Financial

Services• Stable for Real Estate and Insurance

• Income Statement Analysis • Cash Flow Analysis• Dupont Analysis• Relative Comparison


Financial AnalysisFinancial Analysis

• High and stable operating margins– 99.02% in 2001 and 98.96% 09/2002

• Slight decrease in net profit margin– 43.7% in 2001 to 41.12% as at 09/2002

• High net profit margin relative to S&P though declined in 2002



Income Statement


StockVal®S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) Price 34.61993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

NET PROFIT MARGIN ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

HI 22.85 LO 9.82 ME 15.29 CU 19.20

03-31-199312-31-2002

Net Profit Margin Relative to S&P




PRICE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.7

0.8

0.9

1.0

1.1

1.3

1.5

HI 1.33 LO 0.79 ME 1.03 CU 1.28

02-05-199302-10-2003

PE RATIO RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.4

0.5

0.6

0.7

0.8

0.9

HI 0.81 LO 0.48 ME 0.70 CU 0.72 FY1 0.70 FY2 0.72

02-05-199302-10-2003

EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

0.9

1.0

1.1

1.2

1.3

HI 1.24 LO 0.87 ME 1.02 CU 1.21 FY1 1.24 FY2 1.21

03-31-199312-31-2002

Price/PE/EPS Relative to S&P




RETURN ON EQUITY RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.80

0.84

0.88

0.92

0.96

1.00

1.04

1.08

1.12

1.16

HI 1.13 LO 0.84 ME 0.94 CU 1.08

03-31-199312-31-2002

DIVIDEND YIELD RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.8

1.0

1.2

1.4

1.6

1.8

2.0

HI 1.96 LO 0.89 ME 1.22 CU 1.31

02-05-199302-10-2003

ROE/Dividend Yield Relative to S&P




GROWTH RATE ESTIMATE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

HI 0.94 LO 0.75 ME 0.81 CU 0.93

02-05-199302-10-2003

Growth Rate Estimate



1995 1996 1997 1998 1999 2000 2001 09/2002

Net Cash from Operations 2,304 2,368 2,556 3,916 3,842 3,938 2,452 4,756

Net Cash from Investing (8,511) (6,157) (9,488) (19,161) (15,914) (14,128) (14,285) (10,025)

Free Cash Flow (6,207)(3,789

) (6,932)(15,245

)(12,072

)(10,190

)(11,833

) (5,271)

Net Cash from Financing 6,355 5,937 7,555 15,753 11,868 11,851 12,625 4,720

Other Cash Flow 117 (1,468) 66 129 134 (703) (17) (11)

Change in Cash Flow 265 680 689 637 (70) 958 775 (562)


Cash Flow


Dupont Analytics


EBT T Sales Assets ------- ------- 1 ----- ------- -------

ROE Acct ROE

Sales EBIT EBT Assets Equity Rpt% Adj% Adj%

2001 0.25 67.71 13.76 12.51 4.15 16.65

2000 0.28 66.60 13.99 17.01 3.19 20.21

1999 0.33 67.52 13.82 18.33 2.73 21.06

1998 0.28 67.42 13.41 15.22 3.51 18.73

1997 0.30 66.38 13.59 17.13 1.98 19.11

2002 13.33 10.8741.25

43.70 9.84

6.72

MARGIN%

EBIT

INT TAX ASSET

BURDEN BURDEN% TURN LEVERAGE

EBT T Sales Assets ------- ------- 1 ----- ------- -------

ROE Acct ROE

Sales EBIT EBT Assets Equity Rpt% Adj% Adj%

2001 0.25 67.71 13.76 12.51 4.15 16.65

2000 0.28 66.60 13.99 17.01 3.19 20.21

1999 0.33 67.52 13.82 18.33 2.73 21.06

1998 0.28 67.42 13.41 15.22 3.51 18.73

1997 0.30 66.38 13.59 17.13 1.98 19.11

2002 13.33 10.8741.25

43.70 9.84

6.72

MARGIN%

EBIT

INT TAX ASSET

BURDEN BURDEN% TURN LEVERAGE

Valuation Analysis


P/E P/S P/B Weight(%)

Banks 13.33 2.46 2.30 7.41

Diversifed

Financials

14.03 1.72 2.36 7.82

Insurance 14.88 1.87 2.26 4.87

Real Estate

10.43 3.15 1.26 0.34

Financial Sector

13.92 2.05 2.30 10.45

S&P500 17.4 1.23 2.5 ----

Valuation (based on mean reversion)


Financial sector undervalued compared to S&P500.

Factors P/B P/S PE EPS

Highest 3.4 28.21 21.4 2.77

Lowest 1.5 6.42 9.1 0.99

Mean 2.5 19.35 15.5 1.90

Current 1.9 16.93 12.5 2.77

S&P500 2.5 1.23 17.4 1.58

Price = present value (future stream of cash dividend) P0 = D1/(k-g),

where, k= rf + beta* risk premium

= 1.17%+1.05 * 6.24% = 7.722% D1=0.88(1+g) = 0.88(1+0.04582) = $0.9203

($Mil) g=ROE* (payout ratio)=15.8%*0.29= 4.582% P0 =0.9203/(0.07722-0.04582)=0.9203/0.0314= $29.309

Intrinsic value : $27,832($Mil) (# of share*P0= $29.309 * 949.6 (Mil)

Market Value: $32,884 ($Mil)…….Overvalued compared to Intrinsic value

Intrinsic value (based on current price)


S&P500 ADJ Finance M-Wtd


1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

S&P 500 COMP ADJ FINANCE M-Wtd (SP5AF)PRICE 34.6 DATE 02-10-2003StockVal® EPS Lagged 1-Year

1010

1212

1414

1616

1818

2020

2424

2828

3232

3636

4242

50

58

66

The Ohio State UniversityFisher College of Business

Price Change % Diff SP5

1-Week -4.62 -1.79

4-Weeks -11.63 -1.75

QTD -6.06 -1.08

YTD -6.06 -1.08

2002 -16.97 6.40

2001 -10.79 2.25

2000 22.47 32.60

1999 4.20 -15.32 FYE Dec 2002 EPS 2.77

First Call Data 2003 2004 2005

Mean Estimate 3.05 3.46 NE

Change +10% +13%

High 3.22 3.69

Low 2.87 3.19

Total 20 15

# Up 5 1

# Down 13 3

House Estimate

PE Ratio 11.3 10.0 NE

Revenues ($Mil) 2,633

Market Value ($Mil) 32,884

Shares Out (Mil) 949.6

Daily Volume (Thou) 3,775

Daily Volume ($Mil) 130.7

Dividend Estimate 0.88

Payout Ratio 29%

Retention Rate 71%

Dividend Yield 2.54%

Data Page # 1

P/B, P/S, P/E, ROE


StockVal®S&P 500 COMP ADJ FINANCE M-Wtd (SP5AF) Price 34.61993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

PRICE / BOOK VALUE1

2

3

4

HI 3.4 LO 1.4 ME 2.5 CU 1.9

02-05-199302-10-2003

PRICE / SALES6

12

18

24

30

HI 28.21 LO 6.42 ME 19.35 CU 16.93

02-05-199302-10-2003

EARNINGS-PER-SHARE0.8

1.2

1.6

2.0

2.8HI 2.77 LO 0.99 ME 1.90 CU 2.77 GR 11.2%

03-31-199312-31-2002

RETURN ON EQUITY %12

14

16

18

20

HI 19.1 LO 13.9 ME 16.0 CU 15.8

03-31-199312-31-2002

Equity risk premium



EQUITY RISK PREMIUM0

2

4

6

8

HI 6.42 LO 1.65 ME 3.12 CU 6.24

02-05-199302-07-2003

EQUITY DISCOUNT RATE7

8

9

10

11

HI 10.16 LO 7.58 ME 8.80 CU 9.22

02-05-199302-07-2003

TOTAL RETURN %-40

0

60

160

320

HI 308.1 LO -10.6 CU 206.9 GR 11.9%

02-05-199302-10-2003

TAX RATE %31

32

33

34

35

HI 34.1 LO 31.3 ME 32.8 CU 31.3

12-31-199312-31-2001

ROE



TOTAL RETURN %-40

0

60

160

320

HI 308.1 LO -10.6 CU 206.9 GR 11.9%

02-05-199302-10-2003

RETURN ON EQUITY %12

14

16

18

20

HI 19.1 LO 13.9 ME 16.0 CU 15.8

03-31-199312-31-2002

DIVIDENDS-PER-SHARE0.2

0.3

0.4

0.6

0.9HI 0.85 LO 0.29 ME 0.54 CU 0.85 GR 11.5%

03-31-199312-31-2002

DIVIDEND YIELD %1

2

3

4

HI 3.6 LO 1.5 ME 2.1 CU 2.5

02-05-199302-10-2003

• Financials Sector - 20.64%– Banks (7.61%)– Insurance (4.85%)– Diversified Financial (7.84 %)– Real Estate (0.34%)

• SIM - 23.38%– Banks (2.28%)– Insurance (4.55%)– Diversified Financial (14.67%)– Real Estate– Other (1.88%)

Recommendation – Current Recommendation – Current WeightsWeights


S&P 500

• SIM - 20.64%– Banks (6.37%) * increase 4.09%– Insurance (4.55%)– Diversified Financial (7.84%) *

reduced 6.83%– Real Estate– Other (1.88%)

Recommendation – Proposed Recommendation – Proposed WeightsWeights


Recommendation – in terms of Recommendation – in terms of valuationvaluation


• Match SIM Portfolio weight with S&P financials sector - 20.64%

• Intrinsic Value suggest Financial Sector overvalued.

• War / Terrorism• Poor Stock Market Performance• Consumer Confidence /

Businesses Expectations

RecommendationRecommendation


Major Risks

QUESTIONSQUESTIONS


Financials.ppt

Economy & Finance

sector of sp

energy sector

business analysis outlook

financial products

sector new growth areas

brokerage services outlook

insurance products

insurance brokers