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Financial Sector Stock Presentation Colin Smith

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Financial Sector Stock Presentation Colin Smith

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

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