Financial Stock Analysis Adam Riegle, Nikolas Ristev, and James Rochowiak.

Financial Stock AnalysisAdam Riegle, Nikolas Ristev, and James Rochowiak

Status Quo – Current Holdings

Stock Current Price

Cost Dollars Invested

Total Return

Deutsche Bank

$114.86 $107.84 $423,396 6.51%

Fifth Third Bank

$38.05 $37.96 $604,320 0.24%

Citigroup $48.66 $41.48 $1,011,744 17.31%

Merrill Lynch

$69.94 $58.13 $1,012,892 20.32%

Capital One

$82.48 $64.08 $1,013,820 28.71%

Industry Analysis – Interest Rates

• Interest Rates• Fed just raised interest rates another

0.25% and continued 2 years of consecutive rate hikes

• Undiversified regional banks suffer from rising interest rates that cause net interest margins to decline

• Fed expected to pause rate hikes in the short term as commodity prices decline and US bond activity rises over fears of a slowing economy

Industry Analysis – Yield Curve

• Inverted Yield Curve• Higher short-term yield rates create a situation

where overexposed banks cannot generate higher net interest revenues

• The traditional view of the banking business holds that banks pay interest on their deposits based upon shorter-term interest rates while making loans tied to longer-term interest rates

• The difference between interest paid and received—the margin—should be influenced by the slope of the yield curve

Industry Analysis – Yield Curve

Industry Analysis - BanksStockVal®BANKS E-Wtd (013) Price 31.45

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PRICE RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.4

0.5

0.6

0.7

0.8

0.9

1.1

HI 1.00 LO 0.47 ME 0.80 CU 0.82

05-17-199605-19-2006

PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.6

0.8

1.0

1.2

1.4

HI 1.25 LO 0.65 ME 1.09 CU 1.19

05-17-199605-19-2006

RETURN ON EQUITY RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0.68

0.72

0.76

0.80

0.84

0.88

0.93

HI 0.89 LO 0.68 ME 0.76 CU 0.88

06-30-199603-31-2006

Industry Analysis – Div. Fin. ServicesStockVal®DIVERSIFIED FINANCIAL SVC E-Wtd (040) Price 57.80

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20071996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


0.2

0.4

0.6

1.0

HI 1.00 LO 0.10 ME 0.15 CU 0.20

05-17-199605-19-2006

PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0

1

2

3

4

HI 99.90 +LO 0.97 ME 1.20 CU 1.33

05-17-199605-19-2006


0.2

0.4

0.6

0.8

1.0

1.2

HI 1.12 LO NEGME 0.84 CU 1.10

06-30-199603-31-2006

Industry Analysis – Sec. BrokeragesStockVal®SECURITIES BROKERAGE E-Wtd (135) Price 38.77

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


0.3

0.40.5

0.8

1.1

1.5

HI 1.43 LO 0.25 ME 0.36 CU 0.39

05-17-199605-19-2006

PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P FINANCIALS SECTOR COMPOSITE ADJ (SP-40) M-Wtd0

1

2

3

4

HI 99.90 +LO 0.28 ME 1.43 CU 1.02

05-17-199605-19-2006


0.4

0.8

1.2

1.6

2.0

2.4

HI 2.36 LO NEGME 0.55 CU 0.90

06-30-199603-31-2006

Fifth Third Bancorp

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

FIFTH THIRD BANCORP (FITB)PRICE 38.22 DATE 05-19-2006PRICE 38.22 DATE 05-19-2006StockVal®

1111

1313

1515

1818

2121

2424

2828

3333

3838

4545

5252

6161

72

84

98

The Ohio State UniversityFisher College of Business

Price Change % Diff SP5

1-Day 0.79 0.38

1-Week -1.57 0.30

4-Weeks -2.57 0.80

QTD -2.90 -0.75

YTD 1.33 -0.18

2005 -20.25 -23.25

2004 -19.97 -28.96

2003 0.94 -25.44 FYE Dec 2005 EPS 2.79

First Call Data 2006 2007 2008

Mean Estimate 2.74 3.03 3.37Change -2% +10% +11%

High 2.85 3.15 3.44

Low 2.64 2.83 3.30

Total 22 22 4

# Up 4 2 0

# Down 2 7 1

House Estimate

PE Ratio 13.9 12.6 11.4

Revenues ($Mil)

Market Value ($Mil) 21,269

Shares Out (Mil) 556.5

Volume 60-Day Avg (Th) 1,933

Volume 60-Day Avg ($M) 73.9

Dividend Estimate 1.52

Payout Ratio 55%

Retention Rate 45%

Dividend Yield 3.98%

Data Page # 1

Fifth Third Bancorp

• Risks• Flattening yield curve and rising interest

rates are narrowing net interest margins• NIM down 5% YTD despite 4% growth in

average earning assets• Recently switched to daily competitive

rates to attract core deposits, but this will create higher interest expense in 2006

• Potential acquisitions may distract management from organic improvement

Fifth Third Bancorp

• Target Price: $40.07• Current Price: $38.05• Potential: 5.3%• Technical Recommendation: HOLD• Yahoo! Finance Target Price: $39.18• However, we recommend that we SELL all

of our FITB holdings for a better investment• Trade a “single” for a “double” or “triple”

Capital One

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CAPITAL ONE FINANCIAL CORPORATION (COF)PRICE 83.73 DATE 05-19-2006PRICE 83.73 DATE 05-19-2006StockVal®

66

88

101012121414

1818

2424

3030

3838

4646

5858

7474

92

116

146



1-Day -0.17 -0.58

1-Week -2.64 -0.76

4-Weeks -2.74 0.63

QTD 3.99 6.13

YTD -3.09 -4.59

2005 2.60 -0.40

2004 37.40 28.40

2003 106.22 79.84 FYE Dec 2005 EPS 6.92


Mean Estimate 7.82 8.31 9.75Change +13% +6% +17%

High 8.54 8.65 9.94

Low 7.30 8.00 9.55

Total 27 26 6

# Up 16 10 0

# Down 2 5 1

House Estimate

PE Ratio 10.7 10.1 8.6

Revenues ($Mil)






Payout Ratio 1%

Retention Rate 99%


Data Page # 1

Capital One

• Current Price: $82.48• Yahoo! Finance Target Price: $99.83• Potential Upside: 21%• Technical Recommendation: BUY• Outlook:

• Acquisition of Hibernia Bank added $16.3 billion in loans, $23 billion in assets, and 262 banking centers located in Texas and Louisiana

• Auto finance division continues to outperform as auto loans increased over 16% YTD

• Credit card business is struggling from stiff competition and inverted yield curve impacts margins

Citigroup

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CITIGROUP INCORPORATED (C)PRICE 48.80 DATE 05-19-2006PRICE 48.80 DATE 05-19-2006StockVal®

1010

1212

1414

1616

1818

2222

2626

3030

3636

4242

5050

58

68

80



1-Day 0.14 -0.27

1-Week -0.39 1.49

4-Weeks 1.65 5.02

QTD 3.32 5.47

YTD 0.56 -0.94

2005 0.73 -2.27

2004 -0.74 -9.74

2003 37.94 11.56 FYE Dec 2005 EPS 3.86



High 4.60 4.85 5.23

Low 4.20 4.50 5.22

Total 20 18 2

# Up 13 3 0

# Down 0 0 0

House Estimate

PE Ratio 11.3 10.4 9.3

Revenues ($Mil)


Shares Out (Mil) 4,971.2




Payout Ratio 45%

Retention Rate 55%


Data Page # 1

Citigroup

• Current Price: $48.66• Yahoo! Finance Target Price: $55.35• Potential Upside: 13.8%• Technical Recommendation: HOLD• Outlook:

• Smith Barney Division experienced healthy increases in assets under management

• Result of steady internal growth and the acquisition of Legg Mason (124 branches and 1,200 financial advisors)

• Has a strong foothold across a number of businesses with solid growth prospects

• Credit card business has experienced poor performance in the past years due to high numbers of bankruptcy filings

• This effect should decline due to tougher legislation that is now in effect

Deutsche Bank

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

DEUTSCHE BANK AG (DB)PRICE 116.42 DATE 05-19-2006PRICE 116.42 DATE 05-19-2006StockVal®

2525

3030

3535

4040

454550505555

6565

7575

8585

100100

115115

130

150

170



1-Day 1.82 1.41

1-Week -5.23 -3.36

4-Weeks -1.81 1.56

QTD 1.91 4.06

YTD 20.18 18.68

2005 8.83 5.83

2004 8.27 -0.72

2003 80.96 54.58 FYE Dec 2004 EPS 6.81



High 10.04 11.40 12.46

Low 8.61 10.28 11.38

Total 3 3 3

# Up 1 2 2

# Down 1 0 0

House Estimate

PE Ratio 12.5 10.6 9.8

Revenues ($Mil)



Volume 60-Day Avg (Th) 166


Dividend Estimate None

Payout Ratio

Retention Rate

Dividend Yield

Data Page # 1

Deutsche Bank

• Current Price: $114.86• DCF Target Price: $137.39• Upside: 19.6%• Yahoo! Finance Target Price: $133.11• Technical Recommendation: HOLD• Outlook:

• Exposure to US interest rate risk limited• Recent announcement of acquisition of Chapel

Funding to strengthen residential mortgage backed securities business

• 1st qtr profits rose 55% over last year’s 1st qtr results

Merrill Lynch

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

MERRILL LYNCH & COMPANY INC (MER)PRICE 71.36 DATE 05-19-2006PRICE 71.36 DATE 05-19-2006StockVal®

1414

16161818

2222

2626

3030

3434

4040

4646

5454

6262

7272

84

96

112



1-Day 1.09 0.68

1-Week -1.90 -0.02

4-Weeks -10.98 -7.60

QTD -9.40 -7.25

YTD 5.36 3.86

2005 13.32 10.32

2004 1.91 -7.08

2003 54.55 28.17 FYE Dec 2005 EPS 5.27


Mean Estimate 5.16 6.83 7.63Change -2% +32% +12%

High 5.40 7.15 7.96

Low 4.83 6.43 7.04

Total 18 18 4

# Up 16 16 3

# Down 2 0 0

House Estimate

PE Ratio 13.8 10.5 9.4

Revenues ($Mil) 52,782






Payout Ratio 19%

Retention Rate 81%


Data Page # 1

Merrill Lynch

• Current Price: $69.94• Personal Target Price: $84.33• Upside: 20.6%• Yahoo! Finance Target Price: $88.00• Technical Recommendation: BUY• Outlook:

• 1st qtr profits were their highest quarterly net revenues ever, rising 28% over last year’s 1st qtr results

• 1st qtr EPS were $0.12 higher than analysts’ expectations

• 4 of the last 5 changes in analysts’ opinions have been upgrades to buy or overweight

MasterCard

Mastercard

Income Statement FY FY FY FY FY

(Mills$) 2007E 2006E 2005 2004 2003

Operations Fees $2,567.0 $2,232.2 $1,941.0 $1,637.0 $1,431.0

Assessments 1,318.5 1,146.6 997.0 956.0 800.0

Net Revenue 3,885.5 3,378.7 2,938.0 2,593.0 2,231.0

General and Administrative 1,756.2 1,527.2 1,352.0 1,186.0 1,099.0

Advertising and Marketing Development 1,352.2 1,175.8 1,008.0 916.0 851.0

US Merchant Lawsuit and other Legal Settlements 50.0 50.0 75.0 22.0 763.0

Depreciation and Amortization 106.9 109.8 110.0 122.0 120.0

Total Operating Expenses 3,265.3 2,862.8 2,545.0 2,246.0 2,833.0

Operating Income (Loss) 620.2 515.9 393.0 347.0 (602.0)

Total Other Income (Expense) 15.0 15.0 14.0 (23.0) (10.0)

Income (loss) before tax expense (benefit) and cumulative effect of accounting change 635.2 530.9 407.0 324.0 (612.0)

Income tax expense (benefit) 196.9 164.6 140.0 86.0 (221.0)

Cumulative effect of accounting change, net of tax - - - - 5.0

Net Income (loss) $438.3 $366.3 $267.0 $238.0 $(386.0)

Basic & Diluted EPS 3.65 3.05 2.67 2.38 (3.86)

Diluted shares 120.0 120.0 100.0 100.0 100.0

MasterCard

• IPO Price: $40.00-$43.00 • IPO scheduled for May 24th

• Target Price: $63.07• Upside: 46.7%• DCF Recommendation: BUY

Year 2007 2006 2005 2004 2003Sales Growth 15.00% 15.00% 18.57% 14.40%SG&A to Sales 80.00% 80.00% 80.33% 81.06% 87.40% Chg YoY 0.00% -0.33% -0.74% -6.34%Operating Margin 15.96% 15.27% 13.38% 13.38% -26.98% Chg YoY 0.69% 1.89% -0.01% 40.37%Tax Rate 31.00% 31.00% 34.40% 26.54% 36.93%

MasterCard Sensitivity Analysis

Terminal Discount Rate

8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0%

FCF Growth

1.0% $81.72 $70.53 $61.93 $55.13 $49.63 $45.09 $41.30

1.5% $85.26 $72.95 $63.65 $56.38 $50.56 $45.80 $41.84

2.0% $89.39 $75.73 $65.58 $57.78 $51.59 $46.58 $42.44

2.5% $94.28 $78.92 $67.78 $59.33 $52.73 $47.43 $43.08

3.0% $100.13 $82.66 $70.28 $61.09 $53.99 $48.36 $43.78

3.5% $107.29 $87.07 $73.18 $63.07 $55.40 $49.39 $44.55

4.0% $116.24 $92.36 $76.55 $65.34 $56.99 $50.53 $45.40

MasterCard Outlook

• Pros• 1st qtr revenue is up

12.3% from 2005• 1st qtr EPS were up

$0.34 an increase of 36.6%

• Increasing cash flows even in year with negative NI

• Decreasing A/R and steady A/P

• Cons• Did have a year with

negative NI (2003)• Currently involved in

several legal cases• Costs of more than

$700million since 2003

• Several more cases pending

Recommendation Summary

• Hold – DB, COF, C, MER• Sell all of Fifth Third

• Performing poorly for several quarters in a row• Fairly valued (both analysts and our opinion)

• Buy MasterCard• Use proceeds from Fifth Third and additional

money to buy• At $45.00, buy to make it 427 basis points of the

SIM Class portfolio • Has a strong upside potential even with

conservative estimates

Financial Stock Analysis Adam Riegle, Nikolas Ristev, and James Rochowiak.

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Transcript of Financial Stock Analysis Adam Riegle, Nikolas Ristev, and James Rochowiak.