- WB (Buy)

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Wachovia Corporation (WB) October 4, 2006 Analysts: Kur Robin Samson Cheng Associates: Derek Carroll Arthur Lam Stanton Lenahan Justin Leow Wesley Tillu

Transcript of - WB (Buy)

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Wachovia Corporation (WB)

October 4, 2006

Analysts:Kur RobinSamson Cheng

Associates:Derek CarrollArthur LamStanton LenahanJustin LeowWesley Tillu

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Universal Banking Model

Retail Brokerage

Asset Management

Wealth Management

Treasury Services

Investment Banking

Corporate Banking

Credit/debit Card

Trust Services

Mortgage / Home Equity

• Competitors include Citigroup, Bank of America, JPMorgan Chase

• 4th largest bank holding company in the U.S. by assets

• 3rd largest U.S. full-service brokerage firm based on client assets

• Purchased First Union, Golden West, Prudential’s brokerage & South Trust

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Universal Banking Model

One-stop shop for any customer needs Firms – commercial banking and investment

banking Use commercial bank loans to garner IB business Uniquely positioned for LBO’s because of cheap capital

Consumers Mortgages – in Wachovia’s case ARM’s Loans – car, lines of credit, etc. Investment Products – developed in-house

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Acquisition + Organic Growth

Merger With GoldenWest Loan & Mortgage Business

After merger with GoldenWest will have $402 billion in loans GoldenWest specializes in option ARM’s one of the fastest growing

segments in the mortgage industry Deposits

After merger with GoldenWest will have $390 billion in deposits The increase in deposits will allow them to pursue the universal

banking model shared with only a few other banks (CitiBank, Bank of America and JPMorgan)

Expansion into investment banking Head hunting for talent at other Investment Banks Recruiting heavily at campuses across country Utilizing unique opportunities of universal banking model

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Adjustable Rate Mortgage Risk

Adjustable Rate Mortgages—mortgages in which consumers pay some combination of interest and principal but not necessarily enough to decrease total amount owed 99% of GoldenWest’s mortgage portfolio $51.5 billion in ARM’s in 2005 56.9% of GDW earnings are deferred interest As rates rise, the housing market and the economy

slows down the risk of default increases

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CIB & Int’l Growth

CIB Growth Continual growth at Corporate and Investment Bank to build a

universal banking model Gained more domestic market share than any other firm on Wall

Street since 2001

International Lacks international coverage Expanded its Fixed Income Division with new trading floors in Hong

Kong and a series of key hires in Europe Expanded its global correspondent banking and trade services

platform with the Union Bank of California acquisition

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Interest Rate Sensitivity

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Valuation Ratios

Wachovia BofA Citigroup UBS Industry

P/E 12.59 13 10.1 10.1 18.1

P/B 1.79 1.89 2.16 3.15 2.0

P/CF 12.5 13.4 9.9 9.4 10.7

Dividend

Yield

4.1% 4.2% 3.9% 1.4% 3.3

EV/

EBITDA

.06 .05 .04 -.02

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Valuing Banks…

P/E is not the most accurate way to evaluate a diversified bank stock

P/B is a good metric to value stocks of companies in the capital-intensive industries (e.g. banks) that have large amount of tangible assets in their books.

P/B is a good indicator of measuring value of stocks that have a large amount of fixed assets and investments.

Compared to the industry Wachovia has a slightly lower P/B ratio than the industry

Wachovia does have a low EV/EBITDA at 0.06 which would indicate that the stock is undervalued

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Profitability/Accounting

Wachovia BofA Citigroup U.B.S. Industry

Revenues 26.97B 59.14B 79.16B 45.22B

Cash Flow 8.19B 5.19B 18.15B 9.60B

EBITDA Margin 58.1% 63.4% 57.1% 68.4%

ROA 1.27% 1.27% 1.5% 0.7% 1.4

ROE 13.99% 16.26% 21.9% 33.4% 16.7

Profit Margin 25.90% 27% 22% 12.9%

D/E 2.33 2.08 2.53 3.75 3.4

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Positives

Low revenues and cash flows which indicates room for growth A slightly high EBITDA margin which indicates steady profits but

still room for growth. Also a normalized Profit margin. High return on assets. Extremely important for a bank. High Dividend Yield and D/E indicating a lot of expected growth

and willing to finance its growth with debt. This makes up for the lower debt as mentioned before

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Industry Analyst Ratings

Mean target: $61.32 Median Target: $61.50

“Strong Buy” by S&P with target of $67 “Buy” by Thomson/First Call ($61.32 target) “Conviction Buy” by Goldman Sachs Most recent—“Neutral” by BofA

Today’s closing: $56.72

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Technical Analysis

Trends Support/Resistance Moving Averages Bollinger Bands RSI MACD

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Moving Averages – 1yr

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Moving Averages – 6mo

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Bollinger Bands1yr

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Bollinger Bands6mo

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MACD 1yr

Signal

MACD

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MACD 6mo

Signal

MACD

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RSI

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Conclusion

Potential Upsides: Growth opportunity in CIB Upside in both the US and int’l markets Synergy from GDW acquisition

Potential Downsides: Slower than expected economic growth Integration of GDW