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4/11/2010 TONIGHT'S AGENDA
 

4/11/2010 TONIGHT'S AGENDA

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  • After expenses it represents an even larger portion of earnings.
  • When Lehman collapsed they were at 30x equity But recent WSJ article discussed how major banks would reduce their debt data prior to reporting each of the last 5 quarters and then boosted debt again mid-Q to make their trades.
  • Financials
  • Had a loss on the year but as a percentage of revenues, salaries and benefits are about 67%.

4/11/2010 TONIGHT'S AGENDA 4/11/2010 TONIGHT'S AGENDA Presentation Transcript

  • 4/11/2010
  • TONIGHT'S AGENDA
    • Portfolio Update
    • ARD M&A Special Situation
    • Goldman Sachs Re-Evaluation
    • Financial Elevator Pitches
  • PORTFOLIO UPDATE Anthony Vitiello
  • RECENT TRANSACTIONS
    • Sell 900 Shares of USG @ $17.57 on 3/30/2010
    • Buy 135 Shares of EQIX @ 97.32 on 3/30/2010
  • ALL-STARS 13.76% 6.33% 5.74% 5.99% 5.71%
  • DOGS 2.74% 0.93% 0.35% 0.10% 0.49%
  • LARGEST HOLDINGS
    • Winn Dixie Stores: 5.76%
    • jetBlue Corporation: 4.91%
    • Equinix 4.63%
    • Waters Corporation 4.65%
    • KBR Inc. 4.64%
  •  
  • SELL ARENA RESOURCES
    • It was recently announced that Arena Resources, a relatively new portfolio position, will be acquired by Sandridge Energy (SD) for roughly $40 per share.
      • We are getting paid largely in stock (only $2.50 per share in cash) and we do not want to receive a large position in SD (risky balance sheet, natural gas-heavy e&p with inherent execution risk integrating ARD)
    • Instead of waiting for the deal’s completion and receiving Sandridge stock, we should sell ARD and allocate the capital into a new energy stock.
  • BUY CONOCOPHILLIPS
    • Restructuring plan will drive shareholder returns in coming years
    • Sell-side hates uncertainty  room for analyst upgrades
    • Above-average dividend yield pays us to wait until market rewards stock for successful restructuring (12-18 months)
  • RESTRUCTURING
    • Management is focused on improving returns on capital
      • Selling ½ its position in Lukoil
        • Generate $5 billion in cash
        • COP was only receiving a cash dividend (insufficient return on capital)
        • Realize significant capital gains (paid $38 per share, Lukoil stock now at $56)
      • $10 billion in asset sales
        • These assets only generated $250 million in net income during 2009  will help improve returns on capital
  • RESTRUCTURING (CONT.)
    • Management is working to improve the balance sheet with operating cash flows and cash generated by asset sales (previous slide)
      • $5-8 billion to reduce debt during 2010/2011
        • From $28.5 billion in debt to $20.5-$23.5 billion in debt
      • Recently announced $5 billion in share repurchases
        • Reduce shares outstanding by 1-2% per quarter through 2011)
  • RESTRUCTURING SHOULD DRIVE THE STOCK HIGHER
    • By reducing interest payments & shares outstanding and divesting non-core assets, management will be able to continue increasing the percentage of cash flows distributed as dividends
      • Last five years: ~27%
      • 2010/2011: 50%+
      • After the completion of the restructuring: ~40%
    • As the chart to right demonstrates, investors in large oil companies reward dividend-friendly management teams.
  • ROOM FOR UPGRADES
    • Wall Street likes ‘predictability’ – the restructuring makes earnings/cash flow forecasts and estimates quite difficult.
    • The successful execution of its restructuring plan will compel analysts to upgrade COP.
      • Currently, 12 of 18 firms covering the stock rate it a hold (10) or sell (2)
    • “ We think it might be premature to venture into the stock and would opt to stay on the sidelines until we see more concrete evidence of an improving return trend.” – Barclays (Neutral)
    • “ While our view of ConocoPhillips has directionally brightened, there is no change to our Neutral rating.” – GS
  • RETURN POTENTIAL
    • The successful completion of the restructuring (18-24 months) should push the stock up 20-40%, due to improving returns on capital, multiple expansion, and fewer shares outstanding.
    • Management recently announced a 10% increase in the dividend, now at $2.20 per share or 4.2%
      • In other words, we—as shareholders—are compensated (in cash) to wait for the restructuring plans to materialize, the analyst community to jump on-board, etc.
      • S&P Yield: 1.79%; XOM, CVX, and OXY all between 1.50%-3.50%
  •  
  • GS
    • Purchase Date: 2/27/2007
    • Purchase Price: $209 (peak ~$250 in ‘07)
    • Number of Shares: 35
    • Last Trade: $179.12 (-.21%) (Friday’s Close)
    • Total Gain: -$1,045 (-14.3%)
    • Portfolio Weight: $6,270
      • Smallest Position in Our Portfolio
  •  
  • GS - WHO ARE THEY?
    • Often considered the savviest bank on Wall Street (and highest paid)
    • Operate in over 30 countries with 42% of the staff from outside the “Americas”
      • 2009  44% of revenues from outside “Americas”
    • Once the largest “pure investment bank” by NI, B/S, and Market Cap (prior to Sept. 2008)
      • Sept. 2008 – became a “bank holding company”
  • GS - BUSINESS
    • Operates in 3 main business segments:
      • Investment Banking
      • Trading and Principal Investments
      • Asset Management and Securities Services
  • 1. INVESTMENT BANKING
    • 2 Components:
      • Financial Advisory –
        • Mergers and Acquisitions advisory services
        • Financial Restructuring advisory services
      • Underwriting –
        • Equity and Debt underwriting
    • In 2009 Investment Banking represented 11% of their overall revenues
  • 2. TRADING AND PRINCIPAL INVESTMENTS
    • 3 Components:
      • Fixed Income, Currency, and Commodities (FICC) –
        • Consists of a lot of derivatives products and activities ranging across commodities, currencies, and credit
        • Also, mortgage related securities, loan products, and other asset-backed instruments
      • Equities –
        • Investing in equity securities and derivatives, and exchange-based market making activities (and even insurance activities)
        • Also, securities, futures, options clearing services
      • Principal Investments –
        • Made in connection with “merchant banking activities”
        • Investment in shares of Industrial and Commercial Bank of China Limited
    • In 2009 represented 76% of their overall revenues.
  • 3. ASSET MANAGEMENT AND SECURITIES SERVICES
    • 2 Components:
      • Asset Management –
        • Investment Advisory services, financial planning, and investment products across all major asset classes and to institutional and individual investors
        • Manage the merchant banking funds
      • Securities Services –
        • Prime Brokerage, Financing Services, Securities Lending
    • In 2009 represented 13% of overall revenues
  •  
  • BANK HOLDING COMPANY
    • Now a combination of investment-banking operations with larger capital cushions that come with retail deposits.
    • Submit themselves to greater regulation (under supervision by the Fed) – e.g. higher capital requirements (less leverage)
    • “The high-risk, high return days may be in the past for this firm…” (Morningstar)
      • Could be bad with 76% of revenues coming from principal investments (proprietary trading)
      • When economy picks back up, don’t expect GS profits to return to pre-crisis levels
  • 2009 2008 Total Assets 848,942 884,547 Total Liabilities 778,228 820,178 Total Equity 70,714 64,369 Debt/Assets 0.92 0.93 Debt/Equity 11.01 12.74
  • REGULATION
    • Volcker Rule:
      • Put forth by Paul Volcker (former Fed Chairman under Carter and Reagan)
        • Now chairman of the “Economic Recovery Advisory Board” under Obama
      • Prevents commercial banks from owning or investing in hedge funds, private equity, and limits the trading they do on their own account (“prop trading”)  the key to Goldman’s Business Model (~10% of revenues)
    • Dodd Bill?:
      • Goal: “Create a sound economic foundation to grow jobs, protect consumers, rein in wall street, end too big to fail, prevent another financial crisis”
  • PERFORMANCE
    • For the Year Ended 2009:
      • EPS of $22.13 vs $4.47 for Fiscal year 2008
      • Stock saw a total return of 101.9%
      • Beat Quarterly earnings consensus every quarter
      • Repurchased preferred Stock from the Government, one of the first banks to do so
        • Total return of $11.42B
  •  
  • GOING FORWARD
    • Short-Term (Gains or Flat?):
      • Selling at about 9.5x estimated earnings and 1.4x projected year-end book value (fair multiples for short-term)
        • Forbes – Goldman shrank its compensation by $10B (to about 36% revenue) which boosted ROE to 22.5%. If they maintain this level it could be good, if they boost compensation back to 40% Revenue range, stock could be flat.
      • Although facing pressure on trading portion of their business they are well-positioned in the investment banking field for the “comeback of M&A” (up 20% over 1Q 2009) – IB ~$5B in revenue (only 11%)
        • Goldman Ranks 3 rd in 2010 league tables for global M&A by volume
      • Lagging financials so far this year, so expect a continued comeback, but no expectations for it reach pre-crisis levels
      • Big Banks lowering leverage an average of 42% prior to reporting it to the public over the past 5 quarters (WSJ).
        • Although masking their risk levels, could still potentially boost profits once again at Goldman Sachs, but don’t expect it to last.
  • GOING FORWARD
    • Long-Term (conflicts of interest?):
      • “ We facilitate client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. We also take proprietary positions on certain of these products .”
        • “ Demanding unequal arrangements with hedge-fund firms, forcing them to post more cash collateral to offset risks on trades while putting up less on their own wagers. At the end of December this imbalance furnished Goldman Sachs with $110 billion, according to a filing . That’s money it can reinvest in higher-yielding assets.”
        • About a week ago Goldman sent out a letter to shareholders (8 pages, longest ever annual letter) defending its position that it did not take “short positions” to bet against their clients.
          • Yet they were one of the first banks to short the residential real estate market (MBS) claiming that they just used those short positions to “offset their long positions” – whether they did or not the possibility of it happening is not good.
  • FINANCIAL ELEVATOR PITCHES
  •  
  • GFI GROUP (GFIG)
    • What is an interdealer broker?
      • Limited capital commitment
      • Importance of employees, technology, and relationships
    • Used the crisis to add brokers from struggling firms
    • The stock should advance 100-150% as the operating environment normalizes.
      • Insiders agree – own 44% of shares outstanding
  • HOW TO THINK ABOUT THE STOCK
    • Brokerage
      • As the environment normalizes and brokers return to previous efficiency levels ($900k + in revenue), the brokerage business will earn $50-60 million, or 40 to 50 cents per share.
    • In a normal environment, the market values interdealer brokers at 20-30x earnings; making the brokerage worth $8-$15 per share
  • TECHNOLOGY GROWTH
      • Because of its place as a middleman in many transactions, GFI has access to important data flow. The company’s growing software division sells market data and analytics products for building pricing models, developing trading strategies, and to manage, price, and revaluing derivative portfolios.
      • Because the brokerage business is so undervalued by the market presently, we are getting this highly profitable, rapidly growing business for free at the current price.
  •  
  • EVR – WHAT DO THEY DO?
    • Independent Boutique Investment Bank founded in 1996 (went public in 2006)
      • “ Independent” = No commercial banking or proprietary trading activities.
      • Removed from the conflicts of interest often created in large financial institutions with multiple products (a lot of what regulation is aimed at)
    • Specializes M&A Advisory, other financial services advisory, and asset management.
      • 2 Segments: Advisory (e.g. M&A) and Investment Management
    • Offices in New York, San Francisco, Boston, D.C., Los Angeles, Houston, London, Mexico City, and Monterrey
      • Large objective to grow globally
  • MERGERS AND ACQUISITIONS
    • Thomson Reuters – 1Q 2010 value of global mergers and acquisitions = $573.3B, a 20.5% increase of 1Q 2009 – the “comeback of M&A”
    • Ranked 11 th in terms of M&A revenue
      • Last year not even ranked, now 2.3% market share
      • Advised restructurings of GM and CIT group, advised Wyeth on $68B takeover of Pfizer, Inc., and advised Burlington Northern on its sale to Warren Buffet’s Berkshire Hathaway
    • Reported 4Q 2009 profit of $16.5M ($0.41/sh) on $109M of revenue (2008 = -$0.25/sh)
      • $99.2M of that revenue due to M&A (87% total revenues for ‘09 came from advisory services) and restructuring activity – a significant portion from restructuring, but…
      • “ Restructuring likely to take a backseat to M&A in 2010…We are in the early stages of a classic 5-7 year M&A up cycle” – Roger Altman, founder and chairman of EVR
  • LOOKING AHEAD
    • Conference call (4Q 2009): firm expected to receive its underwriting license and license to trade equities in this quarter (2Q 2010).
    • Acquired Atalanta Sosnoff, an independent registered investment advisor.
      • Ralph Schlosstein (co-founder of Blackrock and EVR CEO as of May 2009) said: “should be immediately accretive to earnings”
    • Acquired Neuberger Berman: “expected to establish a broader presence in the United States and expand its reach across continental Europe and the Middle East.”
      • Also, plans to expand into Brazil and Mexico as they continue to broaden their global footprint
    • Goldman Added EVR to “conviction buy list”
    • As long as M&A volume continues to increase Evercore is well-positioned to take a growing piece of the market share (already have as seen above)
      • Moreover, with the underwriting license they will be able to offer a wider range of advisory services, continuing to boost their market share.
  •  
  • REINSURANCE GROUP OF AMERICA
    • Life Reinsurance (#2 in US, #3 Worldwide)
    • What is Life Reinsurance?
      • Customer is Primary “Cedent” Insurer
      • Transfers Risk, Frees Up Capital
    • More Specialized, Niche Business
      • $20 Trillion Life Insurance in Force in US
      • $8.1 Trillion of Life Reinsurance in Force
      • 5 Largest Reinsurers Have 71% of Market
  • HOW (RE-)INSURANCE WORKS
    • Companies Make Money (in theory):
      • Premium Income Less Claims Expense
        • Life reinsurance spread mainly driven by mortality
        • RGA has particular expertise in this area
      • Investment Income
        • “ Float” comes from the time delay between collecting premiums and paying out claims
        • Investment income is turning up after sub-par/poor performances in 2007 and 2008
  • WHY BUY?
    • Favorable Industry Economics
      • Primary Life Insurers Face Capital Constraints
      • Reinsurance Consolidation = Pricing Power
      • Stable Double-Digit ROE
    • Diversifies Financial Sector Exposure
    • Inexpensive Stock
      • Midpoint EPS = $6.60 (8x Earnings)
      • Over-Capitalized ($500 Million), 1x BV
  •  
  • EURONET WORLDWIDE
    • A global provider of electronic payment and transaction processing solutions for financial institutions, retailers, service providers and consumers
    • Operates in 3 Segments
      • Electronic Financial Transactions (EFT)
      • Prepaid (58%)
      • Money Transfer (22%)
  • PAYMENTS = STABLE BUSINESS
    • International business has seen sluggish growth during recession, but transaction volume returns with global consumer
      • ATM networks, Point of Sale solutions, Credit/debit card prepaid & outsourcing, prepaid mobile
      • India, Germany, Czech Republic, Egypt, China, etc.
      • ~80% revenues generated ex-US
  • VALUATION
    • Enterprise Value / EBITDA Multiple of 7x
      • $929 mln + $256 mln cash - $320 mln l-t debt
      • 2009 EBITDA @ $140 million
      • .9x sales
    • Recent weakness in prepaid segment could signal a bottom as volumes return
    • Management has been paying down debt with FCF, creating a more nimble company
  • ANNOUNCEMENTS & HOUSEKEEPING
    • Market Game– Keep Trading!!!
    • Tee Shirt Ideas– Email [email_address]
      • We will be order very soon!