S & P 500 Financials Sector Stock Recommendations 8/11/2009 Jerod Tilton Jon Verworn Zachary Wang

S & P 500 Financials SectorStock Recommendations

8/11/2009

Jerod TiltonJon Verworn

Zachary Wang

Agenda

• Recap of Sector Presentation• Current Valuation• JPMorgan Chase (JPM)• Hudson City Bankcorp (HCBK)• Wells Fargo (WFC)• Visa (V)• Recommendation Recap• Questions

8/11/2009 2S & P 500 Financials Sector Stock Recommendations

Sector Recap – As Presented (7/14/09)

• Financial Sector Underweight Relative to S&P 500 by 4.4%– 4.0% excl cash

Consumer Discretionary

7.5%Consumer Staples

12.4%

Energy10.7%

Financials9.3%

Health Care13.6%

Industrials11.6%

Information Technology

20.2%

Materials4.1%

Telecommunication Services

3.3%Utilities

3.9%Cash3.5%

SIM WeightConsumer

Discretionary9.0%

Consumer Staples12.3%

Energy12.0%

Financials13.7%

Health Care14.1%

Industrials9.8%


18.4%

Materials3.2%


3.4%

Utilities4.1% Cash

0.0%

S & P 500 Weight


S&P 500 Sector Weighting

Rank Name

Market Capitalization

Billions Percentage

Percentage of SIM Shares

1 Information Technology 1,463 18.43% 28.69%2 Health Care 1,116 14.06% 9.52%3 Financials 1,088 13.70% 9.33%4 Consumer Staples 978 12.32% 6.87%5 Energy 956 12.05% 6.38%6 Industrials 778 9.79% 14.93%7 Consumer Discretionary 712 8.97% 9.27%8 Utilities 325 4.10% 2.29%9 Telecommunications Services 269 3.39% 2.86%10 Materials 254 3.20% 9.86%

S&P 500 7,939

Sector Recap – Current (7/31/09)• Financial Sector

Underweight Relative to S&P 500 by 4.93%– 4.61% excl cash &dividends

• SIM portfolio not performing up to S&P 500


Consumer Discretionary

9.1% Consumer Staples11.8%

Energy12.0%

Financials13.9%

Health Care13.7%

Industrials10.0%


18.7%

Materials3.4%


3.4%Utilities

3.9%Cash0.0% 0.0%

S & P 500 WeightConsumer

Discretionary7.2%

Consumer Staples11.7%

Energy10.7%

Financials8.9%

Health Care13.3%

Industrials12.4%


20.4%

Materials5.0%


3.4%

Utilities3.6% Cash

3.4%0.1%

SIM Weight

S&P 500 Sector Weighting

PriorRank

(7/14/09)New Rank(8/7/09) Name

Market Capitalization Billions(7/14/09) %

Market Capitaliz

ation Billions

(7/31/09) %

Market Capitaliz

ation Billions(8/7/09) %

%Diff

(7/14 - 8/7)

Percentage of SIM

Shares1 1 Information Technology 1,463 18.43% 1,621 18.72% 1,632 18.38% -0.05% 28.69%3 2 Financials 1,088 13.70% 1,200 13.86% 1,347 15.17% 1.46% 9.33%2 3 Health Care 1,116 14.06% 1,189 13.73% 1,178 13.27% -0.80% 9.52%5 4 Energy 956 12.05% 1,043 12.04% 1,044 11.76% -0.29% 6.38%4 5 Consumer Staples 978 12.32% 1,023 11.81% 1,012 11.39% -0.93% 6.87%6 6 Industrials 778 9.79% 864 9.98% 908 10.22% 0.43% 14.93%7 7 Consumer Discretionary 712 8.97% 789 9.11% 828 9.32% 0.35% 9.27%8 8 Utilities 325 4.10% 341 3.94% 340 3.83% -0.27% 2.29%10 9 Materials 254 3.20% 294 3.40% 306 3.45% 0.25% 9.86%9 10 Telecommunications Services 269 3.39% 295 3.41% 287 3.23% -0.16% 2.86%

S&P 500 7,939 8,660 8,883

Potential Causes for Downside• More Bank Failures• Deeper Recession– e.g. Double-dip Recession

• Low Investor Confidence• Federal Funds Rate Increase• Increased Regulation• Credit Card Defaults Due to unemployment• Lack of Dividends• Toxic Assets


Potential Causes for Upsides

• Systemic recovery—high beta • Less competition for those left = more market

share• Potential privatization of Social Security

savings• Increased savings trends• Purging of toxic assets


Sector Recommendation

• Keep financials services underweight• In the short term, returns will poor. Financial services will not out perform

the market, however, once the credit crisis and other issues are resolved, then returns will increase

• Currently risk outweighs reward. We feel that a systemic rebound can be experienced in other sectors without as much risk.

• We are bullish long term, however for the short term, we are bearish. We recommend leaving the financial services at 440 basis points underweight


Current Valuation

• Current upside for stocks

8/11/2009S & P 500 Financials Sector Stock Recommendations 8

Financial Sector Current Portfolio and Stocks Under Consideration (7/31/09)

Name Symbol SIM WeighingSIM Financial

Sector WeighingNumber of

Shares Unit CostPrice

(7/31/09)Current Price

(8/7/09) Target Price

Price Upside %

(Current vs Target)

Berkshire Hathaway Inc. - CL A BRK/A 2.247% 25.147% 4 109,449.23 97,000.00 108,099.99 130,000.00 20.26%Goldman Sachs Group Inc. GS 0.945% 10.584% 1,000 146.01 163.30 163.65 170.00 3.88%Hudson City Bancorp HCBK 2.255% 25.242% 27,700 11.63 14.06 14.50 16.18 11.59%JP Morgan Chase & Co. JPM 1.334% 14.930% 5,960 35.15 38.65 42.36 47.84 12.94%Wells Fargo WFC 2.153% 24.097% 15,200 31.36 24.46 28.76 26.14 -9.11%Visa V 0.000% 0.000% 65.46 69.17 88.00 27.22%

8.933% 100.000% 109,673.38 97,305.93 108,418.43 130,348.16 7.90% *

*8/7 vs Target based on Cap

Stock Performance


• Two year stock performance of the SIM financial stocks in addition to Visa (Black) and the S&P 500 Financial Sector Index (Purple)

JPM Info

• Pro’s– Jamie Dimon can do no wrong on Wall Street– Washington Mutual conversion complete by EOY– Repaid TARP funds– New organic growth opportunities

• Con’s– Jamie Dimon can do no wrong on Wall Street– Total insured Share 9.2%

• Growth by acquisition limited

– Decreases dividend from $0.35 to $0.05


JPM Data

• Has outperformed the S&P 500 financial sector for almost the last two years

• Peak in late 2008 due to WaMu aquisition


JPM Data Cont’d

• JPM Price is passing two year median.– Is it close to maxing out?


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JPM Price History

Price

2 Year Median Price

JPM Valuation• Using combination of DCF & Valuation Model Target Price of $47.84• 9 out of 10 analysts assign inline rating or better (yahoo.com)


Absolute Valuation High Low Median Current

#Your Target Multiple

*Your Target E, S, B, etc/Share

Your Target Price (F x G)

P/Forward E 23.4 9.6 12.2 19 15.00 3.57 53.55P/S 3 1.2 2.3 2 2.30 1.46 3.35 *P/B 1.8 0.6 1.3 1.2 1.30 35.30 45.89P/EBITDA 7.45 2.16 4.08 7.45 6.50 5.69 36.96P/CF 29.4 7.5 9.4 29.4 22.00 1.44 31.70

Average 42.02

DCF 53.66

*Not included in average Target Price 47.84

HCBK Info• Pro’s– Did not take TARP– Did not show price swing during week of 8/3/09– Increased dividend from $0.14 to $0.15

• Con’s– In 22 counties, only top five in eight, ranked first in only

one– Only beat earnings estimates by $0.01– 7.69% Tier 1 Capital Rating

• WFC 9.8%; JPM 9.7%


HCBK Data• Has outperformed the S&P 500 financial sector for almost

the last two years– Has growth maxed out?


HCBK Data Cont’d

• Near Two Year Median Price– May be more growth potential


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HCBK Price History

Price

2 Year Median Price

HCBK Valuation• Using combination of DCF & Valuation Model Target Price of $16.18• Thompson Mean Price Target $14.67 (yahoo.com)• Concensous Hold– Thompson Reuters


Absolute Valuation High Low Median Current Demoninator




P/Forward E 27.9 9.8 21.7 13.2 12.95 17.00 1.12 19.04P/S 15.8 6.3 13.2 6.7 7.53 10.00 1.93 19.27P/B 5.7 1.1 1.7 1.5 1.50 1.60 9.67 15.47P/EBITDA 14.24 2.86 8.37 3.4 3.40 5.00 4.26 21.32P/CF 29.9 10.9 25.5 13.4 13.40 17.00 1.08 18.40

Average 18.70

DCF 13.67

Target Price 16.18

WFC Info

• Pro’s– Continuous restructuring could help nullify some

of Wachovia’s toxic assets

• Con’s– Total insured Share 9.6%• Growth by Acquisition Limited

– Assets are heavily exposed to Wachovia’s toxic assets

– Current price has surpassed the target price


WFC Data• Has outperformed the financial sector in the last two years• Spike in 2008 due to acquisition of Wachovia– However, toxic assets has declined performance– Recent increase due to restructuring

Wells Fargo Securities


WFC Data Cont’d


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45

08/13/2007 08/13/2008

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WFC Price History

Price

2 Year Median Price

• Based on the price history, Wells Fargo is getting close to the 2 year median.

WFC Valuation


Absolute Valuation High Low Median Current




A. B. C. D. E. F. G. H.P/Forward E 18.8 9.3 13.1 17.3 14.50 1.60 23.20P/S 3.6 0.9 3.3 3.1 3.00 4.72 14.17P/B 3.1 0.8 2.6 1.8 2.35 15.98 37.55P/EBITDA 6.71 2.23 5.75 6.44 6.00 4.47 26.80P/CF 14.3 5.1 10 11.8 10.00 2.44 24.37

Average 25.22

DCF 27.06

Target Price 26.14

• Equally weighing the DCF and the Valuation Model suggests a target price of $26.14

• Current Price of $28.76 (8/7/09) has already surpassed target price- Potential downside of 9.11% to reach target

V Info

• U.S. market share ranked by transaction processor, based on credit card receivables outstanding:1. Visa -- 46 percent2. MasterCard -- 36 percent 3. American Express -- 12 percent4. Discover Card -- 6 percent (Source: Nilson Report, May 2008)


V Info Cont’d• 2008 worldwide purchase volume by card type

Visa credit - 31.7 percentVisa debit - 28.6 percentMC credit - 22.0 percentAmex credit - 10.0 percentMC debit - 6.3 percentJCB credit - 0.9 percentDiners credit 0.4 percent(Source: Nilson Report, May 2009)


V Info Cont’d

• 2008 global market share for general purpose credit cards(Ranked in terms of purchase volume)Visa - 60.25 percentMasterCard - 28.33 percentAmerican.Express - 10.04 percentJCB - 0.94 percentDiners Club - 0.44 percent(Source: Nilson Report, May 2009)


V Info Cont’d• U.S. Visa cardholders alone conduct more than $1 trillion in annual

volume. (Source: Visa USA internal statistics, 4th quarter 2006) • Consumers carry more than 1 billion Visa cards worldwide. More than 450

million of those cards are in the United States. (Source: Visa USA internal statistics, 4th quarter 2006)

• There were 984 million bank-issued Visa and MasterCard credit card and debit card accounts in the U.S in 2006. (Sources: Visa USA, MasterCard International)

• In 2008, 72 percent of consumers indicated they used a debit card in the past year. In 2007, that number was 65 percent. (Source: Javelin, "Credit Card Spending Declines" study, March 2009)

• 74 percent of monthly college spending is with cash and debit cards. Only 7 percent is with credit cards. (Source: Student Monitor annual financial services study, 2008


V Info Con’t

• More than 23 billion credit cards transactions were processed in the United States in 2007, and they are projected to grow by 26 percent over the next five years. (Source: Nilson Report) Visa says rewards cards now make up more than half of all credit cards and about 80 percent of money spent on a credit card. (Source: Aite Group, January 2008)

• Consumers say rewards are the second-most important reason for choosing to apply for a specific card, behind no annual fees and ahead of low interest rates. (Source: Aite Group survey, January 2008)

• More than one third of consumers choose which card to use in order to maximize card rewards. (Source: ComScore, September 2008)


MA Growth Since IPO

V Data• Outperformed

Mastercard (MA), American Express (AXP), and Discover (DFS)


V Data Cont’d


• Outperformed S & P 500

V Data Con’t

• Above price median since IPO March 2008


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03/19/2008

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V Price History

Price

2 Year Median Price

V Quantitative


• At a conservative P/E Ratio of 20, expect average annual return of 9%

VISA INCOME STMNT 2004 2005 2006 2007 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009E 2009E 2010 2011 2012

Revs 2429 2665 2948 5193 6263 1739 1647 1646 1650 6682 7217 7794 8417exp 1999 2212 2218 6309 5031 773 766 824 800 3163 3258 3356 3456

Op Inc 430 453 730 -1116 1232 966 881 822 850 3519 3959 4438 4961Other -75 3 -8 108 104 -13 6 475 10Net 210 360 455 -861 804 574 536 725 600 2435 2739 3071 3433

Rev Gr % 9.72% 10.62% 76.15% 20.60% 6.69% 8% 8% 8%Op Inc Gr% 12.49% 12.11% 11.78%Op Inc % 18.00% 17.00% 25.00% -21.00% 20.00% 55.55% 53.49% 49.94% 51.52% 52.66% 54.86% 56.95% 58.94% Avg Ann Ret

EPS 0.27 0.46 0.58 -1.11 1.03 0.74 0.69 0.93 0.77 3.13 3.52 3.95 4.41if P/E 36 9.72 16.66 21.05 -39.84 37.20 26.56 24.80 33.55 27.76 112.67 126.75 142.11 158.85 42%if P/E 25 6.75 11.57 14.62 -27.67 25.84 18.44 17.22 23.30 19.28 78.25 88.02 98.69 110.31 19%if P/E20 5.40 9.25 11.70 -22.13 20.67 14.76 13.78 18.64 15.42 62.60 70.42 78.95 88.25 9%

Shares Out 778

Recommendation• Swap Wells Fargo for Visa• Equal Weight JPM & HCBK


Financial Sector Current Portfolio and Stocks Under Consideration (7/31/09)

Name SymbolSIM Weighing

7/31/09*

ProposedSIM Weighig

8/11/09*SIM Weighing

Difference

SIM Financial

Sector Weighing

NewNumber of

SharesPrice

(7/31/09)Current Price

(8/7/09) Target Price Price Upside %Berkshire Hathaway Inc. - CL A BRK/A 2.247% 2.247% 0.000% 25.147% 4 97,000.00 108,099.99 130,000.00 20.26%Goldman Sachs Group Inc. GS 0.945% 0.945% 0.000% 10.584% 1,091 163.30 163.65 170.00 3.88%Hudson City Bancorp HCBK 2.255% 1.794% -0.461% 20.086% 23,373 14.06 14.50 16.18 11.59%JP Morgan Chase & Co. JPM 1.334% 1.794% 0.461% 20.086% 8,001 38.65 42.36 47.84 12.94%Wells Fargo WFC 2.153% 0.000% -2.153% 0.000% - 24.46 28.76 26.14 -9.11%Visa V 0.000% 2.153% 2.153% 24.097% 5,878 65.46 69.17 88.00 27.22%

8.933% 8.933% 0.000% 100.000% 97,305.93 108,418.43 130,348.16 16.99% **

*Assumes keeping the weighting at the 7/31/09 level**8/7 vs Target based on Cap

Financial Sector

Questions??


Documents

S & P 500 Financials Sector Stock Recommendations 8/11/2009 Jerod Tilton Jon Verworn Zachary Wang