Financial Sector Stock Presentation Colin Smith
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Transcript of Financial Sector Stock Presentation Colin Smith
Financial SectorStock Presentation
Colin SmithKaushal Shah
August 5, 2008
Agenda
•Recap of Sector Presentation•Stock Recommendation / Portfolio
Weights•Bank of America•Merrill Lynch•Summary
Sector Recommendation
Underweight Financials by 50 basis points
•Sector highly correlated to the overall market
•High risks due to uncertainties – not all losses have been realized as yet
Sector Analysis•Current Financial Sector Weighting
(as of July 31, 2008)
SIM 12.93%S&P 500 15.34%------------------------------Underweight 2.41%
Overall: Bring the SIM Portfolio underweight by 291 basis points relative to the S&P
Current CompositionCompany Ticker Current Weight*
Bank of America BAC 3.31%
Berkshire Hathaway BRKA 3.51%
Goldman Sachs GS 4.44%
Merrill Lynch MER 1.67%
TOTAL 12.93%
* Weightings according to SIM-July Appraisal Report
RecommendationCompany Current
WeightBuy / Sell Proposed
Weight
Bank of America 3.31% Sell – 1.81% 1.50%
Berkshire Hathaway
3.51% Hold 3.51%
Goldman Sachs 4.44% Hold 4.44%
Merrill Lynch 1.67% Buy – 1.31% 2.98%
TOTAL 12.93% 12.43%
Target PricesCompany Target
PriceCurrent Price*
Upside
Bank of America (BAC) 31.44 32.62 -3.62%
Berkshire Hathaway (BRKA)
113,667.00 114,500.00 -0.73%
Goldman Sachs (GS) 205.25 177.86 15.40%
Merrill Lynch (MER) 37.88 26.39 43.54%
*as of August 4, 2008
Bank of America (BAC): SELL•Current Weight: 3.31% •Current Price (as of close 8/4/08): $32.62•Target Price: $31.44•Downside: 3.62%•Proposed weight: 1.50%
Business Analysis - BAC•Founded 1874•Based in Charlotte, North Carolina•Market Capitalization : $145.26 Billion•CEO & Chairman: Kenneth D. Lewis• Industry : M0ney Center Banks•Principal Areas of Business:
▫Global Consumer and Small Business Banking
▫Global Corporate and Investment Banking▫Global Wealth and Investment Management
Positives - BAC•Large and diverse deposit base gives BAC
plenty of capital with which it can pursue investments
•Largest Consumer bank in U.S.•Brings diversity to SIM Financial portfolio•Top performing stock in July appraisal
report▫$206,787 gain
Negatives - BAC• 2nd Quarter Net Income: $3.41B
▫Down 41% y.o.y.• Exposure to irrelevant credit risk associated
with auto financiers▫Loans for leases and to dealerships▫GMAC, Chrysler Financial
• Poorly rated holdings▫Write-downs from CDOs in 08Q2: $645M▫S&P expects chargeoffs and write-downs to
continue throughout the rest of 2008• Countrywide acquisition poses a lot of risk
P/B & P/E: Soon to Hit Low Points
Merrill Lynch (MER): BUY•Current Weight: 1.67% •Current Price (as of close 8/4/08): $26.39•Target Price: $37.88•Upside: 43.54%•Proposed weight: 2.98%
Year to Date
Business Analysis•Founded 1914•Market Capitalization : $26.5 Billion•Industry : Investment Brokerage•Principal Areas of Business :
▫Global Markets and Investment Banking 3rd Largest Investment Bank
▫Global Wealth Management Largest in the world
Positives•Wealth Management remains a cash cow•Has been able to raise substantial capital
despite write-downs/losses•Recently shed off $30 billion in CDO’s at
22 cents on the dollar•CEO Thain is putting his money where his
mouth is : Buys 500,000 shares for over $11 million
Price/Book : Ten Year Low
Valuation remains positive
High Low MeanCurren
t
Target Multipl
e
Target B,EBITDA/Share
Target Price
Price / Book 4 0.8 2.1 0.8 2.1 35.36 $74.26 Price /
EBITDA 4.7 0.3 2 0.3 2 54.49
$108.97 DCF Model $40.38
Analyst Target $37.88
Negatives•4 straight quarterly losses
▫Write downs exceeding $40 billion▫Still has $9 billion in asset backed
securities•Significant recent dilution of shares•Still tied to risk on sale of CDO’s
▫As much as another $4.5 billion•Will core assets remain safe?
▫50% stake in Blackrock
Recommendation•Decrease sector weight 50 bps•Stock Recommendation
▫Sell: Bank Of America (BAC) – 181 bps
▫Buy: Merrill Lynch (MER) – 131 bps
Thank You
Questions ??