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Transcript of - WB (Buy)
Wachovia Corporation (WB)
October 4, 2006
Analysts:Kur RobinSamson Cheng
Associates:Derek CarrollArthur LamStanton LenahanJustin LeowWesley 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
Wachovia BofA Citigroup UBS Industry
P/E 12.59 13 10.1 10.1 18.1
P/B 1.79 1.89 2.16 3.15 2.0
P/CF 12.5 13.4 9.9 9.4 10.7
Dividend
Yield
4.1% 4.2% 3.9% 1.4% 3.3
EV/
EBITDA
.06 .05 .04 -.02
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
Wachovia BofA Citigroup U.B.S. Industry
Revenues 26.97B 59.14B 79.16B 45.22B
Cash Flow 8.19B 5.19B 18.15B 9.60B
EBITDA Margin 58.1% 63.4% 57.1% 68.4%
ROA 1.27% 1.27% 1.5% 0.7% 1.4
ROE 13.99% 16.26% 21.9% 33.4% 16.7
Profit Margin 25.90% 27% 22% 12.9%
D/E 2.33 2.08 2.53 3.75 3.4
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 Bands1yr
Bollinger Bands6mo
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