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  • Bollinger Bands are a type of envelope plotted at standard deviation levels above and below a simple moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting -- widening during volatile markets and contracting during calmer periods. "The basic interpretation of Bollinger Bands is that prices tend to stay within the upper and lower band. The spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e. high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e. low volatility), the bands narrow to contain prices." - "Technical Analysis from A to Z" by Stephen Aechlis
  • Bollinger Bands are a type of envelope plotted at standard deviation levels above and below a simple moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting -- widening during volatile markets and contracting during calmer periods. "The basic interpretation of Bollinger Bands is that prices tend to stay within the upper and lower band. The spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e. high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e. low volatility), the bands narrow to contain prices." - "Technical Analysis from A to Z" by Stephen Aechlis
  • The default slow, fast and signal periods are set to 26, 12 and 9, respectively. Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The default MACD is represented as the difference between a 26-day and 12-day EMA of the price. A 9-day EMA of the MACD, referred to as the signal (or trigger) line, is plotted on top of the MACD to indicate buy/sell opportunities. Divergence, the difference between the MACD and the signal, is also plotted as a histogram. The MACD is most effective in wide-swinging trading markets. There are three standard ways to interprete the MACD: Crossovers The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It's also popular to buy/sell when the MACD goes above/below zero. Overbought/Oversold Conditions The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e. the MACD rises), it's likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions exist vary from security to security. Divergences An indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels. - "Technical Analysis from A to Z" by Stephen Aechlis
  • You have the option to change the period of the Relative Strength Index (RSI) above. The default period is set to 14. The Relative Strength Index (RSI) measures the price of a security against its past performance in order to determine its internal strength (in an attempt to quantify the security's price momentum). "A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a 'failure swing.' The failure swing is considered a confirmation of the impending reversal." - "Technical Analysis from A to Z" by Stephen Aechlis

- WB (Buy) - WB (Buy) Presentation Transcript

  • Wachovia Corporation (WB) October 4, 2006 Analysts: Kur Robin Samson Cheng Associates: Derek Carroll Arthur Lam Stanton Lenahan Justin Leow Wesley Tillu
  • 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
  • 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
  • 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
  • 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
  • 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
  • Interest Rate Sensitivity
  • Valuation Ratios -.02 1.4% 9.4 3.15 10.1 UBS Industry Citigroup BofA Wachovia .04 .05 .06 EV/ EBITDA 3.3 3.9% 4.2% 4.1% Dividend Yield 10.7 9.9 13.4 12.5 P/CF 2.0 2.16 1.89 1.79 P/B 18.1 10.1 13 12.59 P/E
  • 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
  • Profitability/Accounting 3.75 12.9% 33.4% 0.7% 68.4% 9.60B 45.22B U.B.S. 3.4 2.53 2.08 2.33 D/E 22% 27% 25.90% Profit Margin 16.7 21.9% 16.26% 13.99% ROE 1.4 1.5% 1.27% 1.27% ROA 57.1% 63.4% 58.1% EBITDA Margin 18.15B 5.19B 8.19B Cash Flow 79.16B 59.14B 26.97B Revenues Industry Citigroup BofA Wachovia
  • 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
  • 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
  • Technical Analysis
    • Trends
    • Support/Resistance
    • Moving Averages
    • Bollinger Bands
    • RSI
    • MACD
  •  
  • Moving Averages – 1yr
  • Moving Averages – 6mo
  • Bollinger Bands 1yr
  • Bollinger Bands 6mo
  • MACD 1yr Signal MACD
  • MACD 6mo Signal MACD
  • RSI
  •  
  • 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