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Financial Stock Analysis. Adam Riegle, Nikolas Ristev, and James Rochowiak. Status Quo – Current Holdings. Industry Analysis – Interest Rates. Interest Rates Fed just raised interest rates another 0.25% and continued 2 years of consecutive rate hikes - PowerPoint PPT Presentation
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Financial Stock AnalysisAdam Riegle, Nikolas Ristev, and James Rochowiak
Status Quo – Current Holdings
Stock Current Price
Cost Dollars Invested
Total Return
Deutsche Bank
$114.86 $107.84 $423,396 6.51%
Fifth Third Bank
$38.05 $37.96 $604,320 0.24%
Citigroup $48.66 $41.48 $1,011,744 17.31%
Merrill Lynch
$69.94 $58.13 $1,012,892 20.32%
Capital One
$82.48 $64.08 $1,013,820 28.71%
Industry Analysis – Interest Rates
• Interest Rates• Fed just raised interest rates another
0.25% and continued 2 years of consecutive rate hikes
• Undiversified regional banks suffer from rising interest rates that cause net interest margins to decline
• Fed expected to pause rate hikes in the short term as commodity prices decline and US bond activity rises over fears of a slowing economy
Industry Analysis – Yield Curve
• Inverted Yield Curve• Higher short-term yield rates create a situation
where overexposed banks cannot generate higher net interest revenues
• The traditional view of the banking business holds that banks pay interest on their deposits based upon shorter-term interest rates while making loans tied to longer-term interest rates
• The difference between interest paid and received—the margin—should be influenced by the slope of the yield curve
Industry Analysis – Yield Curve
Industry Analysis - BanksStockVal®BANKS E-Wtd (013) Price 31.45
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
PRICE RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.4
0.5
0.6
0.7
0.8
0.9
1.1
HI 1.00 LO 0.47 ME 0.80 CU 0.82
05-17-199605-19-2006
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.6
0.8
1.0
1.2
1.4
HI 1.25 LO 0.65 ME 1.09 CU 1.19
05-17-199605-19-2006
RETURN ON EQUITY RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.68
0.72
0.76
0.80
0.84
0.88
0.93
HI 0.89 LO 0.68 ME 0.76 CU 0.88
06-30-199603-31-2006
Industry Analysis – Div. Fin. ServicesStockVal®DIVERSIFIED FINANCIAL SVC E-Wtd (040) Price 57.80
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
PRICE RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.1
0.2
0.4
0.6
1.0
HI 1.00 LO 0.10 ME 0.15 CU 0.20
05-17-199605-19-2006
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0
1
2
3
4
HI 99.90 +LO 0.97 ME 1.20 CU 1.33
05-17-199605-19-2006
RETURN ON EQUITY RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.0
0.2
0.4
0.6
0.8
1.0
1.2
HI 1.12 LO NEGME 0.84 CU 1.10
06-30-199603-31-2006
Industry Analysis – Sec. BrokeragesStockVal®SECURITIES BROKERAGE E-Wtd (135) Price 38.77
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
PRICE RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.2
0.3
0.40.5
0.8
1.1
1.5
HI 1.43 LO 0.25 ME 0.36 CU 0.39
05-17-199605-19-2006
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0
1
2
3
4
HI 99.90 +LO 0.28 ME 1.43 CU 1.02
05-17-199605-19-2006
RETURN ON EQUITY RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.0
0.4
0.8
1.2
1.6
2.0
2.4
HI 2.36 LO NEGME 0.55 CU 0.90
06-30-199603-31-2006
Fifth Third Bancorp
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
FIFTH THIRD BANCORP (FITB)PRICE 38.22 DATE 05-19-2006PRICE 38.22 DATE 05-19-2006StockVal®
1111
1313
1515
1818
2121
2424
2828
3333
3838
4545
5252
6161
72
84
98
The Ohio State UniversityFisher College of Business
Price Change % Diff SP5
1-Day 0.79 0.38
1-Week -1.57 0.30
4-Weeks -2.57 0.80
QTD -2.90 -0.75
YTD 1.33 -0.18
2005 -20.25 -23.25
2004 -19.97 -28.96
2003 0.94 -25.44 FYE Dec 2005 EPS 2.79
First Call Data 2006 2007 2008
Mean Estimate 2.74 3.03 3.37Change -2% +10% +11%
High 2.85 3.15 3.44
Low 2.64 2.83 3.30
Total 22 22 4
# Up 4 2 0
# Down 2 7 1
House Estimate
PE Ratio 13.9 12.6 11.4
Revenues ($Mil)
Market Value ($Mil) 21,269
Shares Out (Mil) 556.5
Volume 60-Day Avg (Th) 1,933
Volume 60-Day Avg ($M) 73.9
Dividend Estimate 1.52
Payout Ratio 55%
Retention Rate 45%
Dividend Yield 3.98%
Data Page # 1
Fifth Third Bancorp
• Risks• Flattening yield curve and rising interest
rates are narrowing net interest margins• NIM down 5% YTD despite 4% growth in
average earning assets• Recently switched to daily competitive
rates to attract core deposits, but this will create higher interest expense in 2006
• Potential acquisitions may distract management from organic improvement
Fifth Third Bancorp
• Target Price: $40.07• Current Price: $38.05• Potential: 5.3%• Technical Recommendation: HOLD• Yahoo! Finance Target Price: $39.18• However, we recommend that we SELL all
of our FITB holdings for a better investment• Trade a “single” for a “double” or “triple”
Capital One
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
CAPITAL ONE FINANCIAL CORPORATION (COF)PRICE 83.73 DATE 05-19-2006PRICE 83.73 DATE 05-19-2006StockVal®
66
88
101012121414
1818
2424
3030
3838
4646
5858
7474
92
116
146
The Ohio State UniversityFisher College of Business
Price Change % Diff SP5
1-Day -0.17 -0.58
1-Week -2.64 -0.76
4-Weeks -2.74 0.63
QTD 3.99 6.13
YTD -3.09 -4.59
2005 2.60 -0.40
2004 37.40 28.40
2003 106.22 79.84 FYE Dec 2005 EPS 6.92
First Call Data 2006 2007 2008
Mean Estimate 7.82 8.31 9.75Change +13% +6% +17%
High 8.54 8.65 9.94
Low 7.30 8.00 9.55
Total 27 26 6
# Up 16 10 0
# Down 2 5 1
House Estimate
PE Ratio 10.7 10.1 8.6
Revenues ($Mil)
Market Value ($Mil) 25,374
Shares Out (Mil) 303.0
Volume 60-Day Avg (Th) 2,793
Volume 60-Day Avg ($M) 233.8
Dividend Estimate 0.11
Payout Ratio 1%
Retention Rate 99%
Dividend Yield 0.13%
Data Page # 1
Capital One
• Current Price: $82.48• Yahoo! Finance Target Price: $99.83• Potential Upside: 21%• Technical Recommendation: BUY• Outlook:
• Acquisition of Hibernia Bank added $16.3 billion in loans, $23 billion in assets, and 262 banking centers located in Texas and Louisiana
• Auto finance division continues to outperform as auto loans increased over 16% YTD
• Credit card business is struggling from stiff competition and inverted yield curve impacts margins
Citigroup
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
CITIGROUP INCORPORATED (C)PRICE 48.80 DATE 05-19-2006PRICE 48.80 DATE 05-19-2006StockVal®
1010
1212
1414
1616
1818
2222
2626
3030
3636
4242
5050
58
68
80
The Ohio State UniversityFisher College of Business
Price Change % Diff SP5
1-Day 0.14 -0.27
1-Week -0.39 1.49
4-Weeks 1.65 5.02
QTD 3.32 5.47
YTD 0.56 -0.94
2005 0.73 -2.27
2004 -0.74 -9.74
2003 37.94 11.56 FYE Dec 2005 EPS 3.86
First Call Data 2006 2007 2008
Mean Estimate 4.33 4.68 5.22Change +12% +8% +12%
High 4.60 4.85 5.23
Low 4.20 4.50 5.22
Total 20 18 2
# Up 13 3 0
# Down 0 0 0
House Estimate
PE Ratio 11.3 10.4 9.3
Revenues ($Mil)
Market Value ($Mil) 242,597
Shares Out (Mil) 4,971.2
Volume 60-Day Avg (Th) 14,913
Volume 60-Day Avg ($M) 727.7
Dividend Estimate 1.96
Payout Ratio 45%
Retention Rate 55%
Dividend Yield 4.02%
Data Page # 1
Citigroup
• Current Price: $48.66• Yahoo! Finance Target Price: $55.35• Potential Upside: 13.8%• Technical Recommendation: HOLD• Outlook:
• Smith Barney Division experienced healthy increases in assets under management
• Result of steady internal growth and the acquisition of Legg Mason (124 branches and 1,200 financial advisors)
• Has a strong foothold across a number of businesses with solid growth prospects
• Credit card business has experienced poor performance in the past years due to high numbers of bankruptcy filings
• This effect should decline due to tougher legislation that is now in effect
Deutsche Bank
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
DEUTSCHE BANK AG (DB)PRICE 116.42 DATE 05-19-2006PRICE 116.42 DATE 05-19-2006StockVal®
2525
3030
3535
4040
454550505555
6565
7575
8585
100100
115115
130
150
170
The Ohio State UniversityFisher College of Business
Price Change % Diff SP5
1-Day 1.82 1.41
1-Week -5.23 -3.36
4-Weeks -1.81 1.56
QTD 1.91 4.06
YTD 20.18 18.68
2005 8.83 5.83
2004 8.27 -0.72
2003 80.96 54.58 FYE Dec 2004 EPS 6.81
First Call Data 2005 2006 2007
Mean Estimate 9.33 11.00 11.93Change +37% +18% +8%
High 10.04 11.40 12.46
Low 8.61 10.28 11.38
Total 3 3 3
# Up 1 2 2
# Down 1 0 0
House Estimate
PE Ratio 12.5 10.6 9.8
Revenues ($Mil)
Market Value ($Mil) 52,936
Shares Out (Mil) 454.7
Volume 60-Day Avg (Th) 166
Volume 60-Day Avg ($M) 19.4
Dividend Estimate None
Payout Ratio
Retention Rate
Dividend Yield
Data Page # 1
Deutsche Bank
• Current Price: $114.86• DCF Target Price: $137.39• Upside: 19.6%• Yahoo! Finance Target Price: $133.11• Technical Recommendation: HOLD• Outlook:
• Exposure to US interest rate risk limited• Recent announcement of acquisition of Chapel
Funding to strengthen residential mortgage backed securities business
• 1st qtr profits rose 55% over last year’s 1st qtr results
Merrill Lynch
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
MERRILL LYNCH & COMPANY INC (MER)PRICE 71.36 DATE 05-19-2006PRICE 71.36 DATE 05-19-2006StockVal®
1414
16161818
2222
2626
3030
3434
4040
4646
5454
6262
7272
84
96
112
The Ohio State UniversityFisher College of Business
Price Change % Diff SP5
1-Day 1.09 0.68
1-Week -1.90 -0.02
4-Weeks -10.98 -7.60
QTD -9.40 -7.25
YTD 5.36 3.86
2005 13.32 10.32
2004 1.91 -7.08
2003 54.55 28.17 FYE Dec 2005 EPS 5.27
First Call Data 2006 2007 2008
Mean Estimate 5.16 6.83 7.63Change -2% +32% +12%
High 5.40 7.15 7.96
Low 4.83 6.43 7.04
Total 18 18 4
# Up 16 16 3
# Down 2 0 0
House Estimate
PE Ratio 13.8 10.5 9.4
Revenues ($Mil) 52,782
Market Value ($Mil) 66,365
Shares Out (Mil) 930.0
Volume 60-Day Avg (Th) 4,993
Volume 60-Day Avg ($M) 356.3
Dividend Estimate 1.00
Payout Ratio 19%
Retention Rate 81%
Dividend Yield 1.40%
Data Page # 1
Merrill Lynch
• Current Price: $69.94• Personal Target Price: $84.33• Upside: 20.6%• Yahoo! Finance Target Price: $88.00• Technical Recommendation: BUY• Outlook:
• 1st qtr profits were their highest quarterly net revenues ever, rising 28% over last year’s 1st qtr results
• 1st qtr EPS were $0.12 higher than analysts’ expectations
• 4 of the last 5 changes in analysts’ opinions have been upgrades to buy or overweight
MasterCard
Mastercard
Income Statement FY FY FY FY FY
(Mills$) 2007E 2006E 2005 2004 2003
Operations Fees $2,567.0 $2,232.2 $1,941.0 $1,637.0 $1,431.0
Assessments 1,318.5 1,146.6 997.0 956.0 800.0
Net Revenue 3,885.5 3,378.7 2,938.0 2,593.0 2,231.0
General and Administrative 1,756.2 1,527.2 1,352.0 1,186.0 1,099.0
Advertising and Marketing Development 1,352.2 1,175.8 1,008.0 916.0 851.0
US Merchant Lawsuit and other Legal Settlements 50.0 50.0 75.0 22.0 763.0
Depreciation and Amortization 106.9 109.8 110.0 122.0 120.0
Total Operating Expenses 3,265.3 2,862.8 2,545.0 2,246.0 2,833.0
Operating Income (Loss) 620.2 515.9 393.0 347.0 (602.0)
Total Other Income (Expense) 15.0 15.0 14.0 (23.0) (10.0)
Income (loss) before tax expense (benefit) and cumulative effect of accounting change 635.2 530.9 407.0 324.0 (612.0)
Income tax expense (benefit) 196.9 164.6 140.0 86.0 (221.0)
Cumulative effect of accounting change, net of tax - - - - 5.0
Net Income (loss) $438.3 $366.3 $267.0 $238.0 $(386.0)
Basic & Diluted EPS 3.65 3.05 2.67 2.38 (3.86)
Diluted shares 120.0 120.0 100.0 100.0 100.0
MasterCard
• IPO Price: $40.00-$43.00 • IPO scheduled for May 24th
• Target Price: $63.07• Upside: 46.7%• DCF Recommendation: BUY
Year 2007 2006 2005 2004 2003Sales Growth 15.00% 15.00% 18.57% 14.40%SG&A to Sales 80.00% 80.00% 80.33% 81.06% 87.40% Chg YoY 0.00% -0.33% -0.74% -6.34%Operating Margin 15.96% 15.27% 13.38% 13.38% -26.98% Chg YoY 0.69% 1.89% -0.01% 40.37%Tax Rate 31.00% 31.00% 34.40% 26.54% 36.93%
MasterCard Sensitivity Analysis
Terminal Discount Rate
8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0%
FCF Growth
1.0% $81.72 $70.53 $61.93 $55.13 $49.63 $45.09 $41.30
1.5% $85.26 $72.95 $63.65 $56.38 $50.56 $45.80 $41.84
2.0% $89.39 $75.73 $65.58 $57.78 $51.59 $46.58 $42.44
2.5% $94.28 $78.92 $67.78 $59.33 $52.73 $47.43 $43.08
3.0% $100.13 $82.66 $70.28 $61.09 $53.99 $48.36 $43.78
3.5% $107.29 $87.07 $73.18 $63.07 $55.40 $49.39 $44.55
4.0% $116.24 $92.36 $76.55 $65.34 $56.99 $50.53 $45.40
MasterCard Outlook
• Pros• 1st qtr revenue is up
12.3% from 2005• 1st qtr EPS were up
$0.34 an increase of 36.6%
• Increasing cash flows even in year with negative NI
• Decreasing A/R and steady A/P
• Cons• Did have a year with
negative NI (2003)• Currently involved in
several legal cases• Costs of more than
$700million since 2003
• Several more cases pending
Recommendation Summary
• Hold – DB, COF, C, MER• Sell all of Fifth Third
• Performing poorly for several quarters in a row• Fairly valued (both analysts and our opinion)
• Buy MasterCard• Use proceeds from Fifth Third and additional
money to buy• At $45.00, buy to make it 427 basis points of the
SIM Class portfolio • Has a strong upside potential even with
conservative estimates
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