Student Investment Management Financial Sector Grant Daniels Arvind Mukundan John Ohrstrom Logan Olson

Sector Overview Industries: Banks Capital markets Consumer Finance Diversified Financial Services Insurance Mortgage REITs Thrifts & Mortgage Finance

Companies Evaluated 10

Recommendation Overweight the sector as much as allowed Financial Sector Weight 14.55% Current Sim Weight 15.27% Proposed Sim Weight 15.55% Stock Current SIM Weight Current Price Target Price Upside % Recommendation Proposed SIM Weight Change Citigroup 2.80% $68.03 $70.23 3.23% HOLD 0.00% AMEX 1.58% $85.41 $95.86 12.24% BUY 1.72% 0.14% Metlife 4.34% $55.70 $59.00 5.92% Goldman Sachs 3.72% $221.58 $247.00 11.47% 3.86% Overweight the sector as much as allowed Divide remaining basis points amongst our two highest projected growth stocks

Citigroup Overview Key Data Stock Information Rising interest rates will allow Citigroup and other financial institutions to begin to participate in the economic recovery. Citigroup passed financial stress tests and are now allowed to raise dividends, which they did on June 28 There is the potential for deregulation and reduced taxes. It remains to be seen what Washington will accomplish, but these reforms have been on the short list. Key Data Recommendation BUY Current Price (7/26/17) $63.78 Target Price $70.23 Potential Updside 10.11% Stock Information Sector Financials Industry Banking Market Cap. $176.84 B Beta 1.57 P/E 11.8 52 Week Range $39.20 - $65.40 Dividend $0.64

Citigroup Risks Uncertainty with the Federal Reserve. They have suggested they will continue to raise rates, but going back on that would be bad for financials. Also, removing assets from the balance sheet could have a negative effect on the markets. Washington poses opportunities, but also risks. The inability of the current administration to pass any meaningful reform or tax breaks would be bad for the financial sector. Brexit. Citigroup has significant assets overseas and in the EU. The UK’s decision to leave the EU could cause Citi to face incredible costs to adapt to a new way of doing business in Europe. Further, we don’t know exactly what regulations will look like in the next few years in Europe.

Recommendation HOLD Citigroup Target price from DCF Analysis: 70.23 3.23% upside from current price Was originally a BUY rating, but stock price moved too much from time of DCF analysis to trade date

American Express Company Overview Q1 2017 (source Nasdaq) Amex provides charge and credit payment card products and Travel related services to consumers and business. Company operates through 4 segments: Consumer Services, Global Commercial Services, Global Merchant Services and Corporate and other Q1 2017 (source Nasdaq) In Q1, Amex saw a 13% decline in net income and 2% drop in revenues year-over-year The company posted earnings of $1.34 per share and Revenue figures of $7.9 billion , beating the Consensus Estimate of $1.28 and $7.7 billion respectively While profits and sales dropped, the credit card company acquired 2.6 million new card users globally and "card member spending grew 8%.“

American Express Profitability and Growth Drivers Purchasing Power - Per Forbes Magazine, the average payment volume per transaction for American Express cards is around $150, while Visa is around $50. Amex has fewer customers but with higher spending compared to its counterparts and hence higher revenues Closed loop service and End to end processing for merchants eliminates dependencies on third party vendors for merchant services which Visa and MasterCard do not own Consumer Spending - Consumer Spending in United States has risen steadily in the last decade with a growth close to 2% in 2015-16 and the disposable income also increased close to 3%

American Express Risks Economic risks and Crude Oil prices - With Crude Oil prices showing no signs of recovery, the value of company assets may not appreciate and also increase the discount rate Fees charged to Merchants - Intense competition may force Amex to reduce the fee charged to merchants in which case; assuming they cannot increase the number of merchants in proportion to offset the reduction fees, the Revenue and Profit may take a direct hit Merchant negotiations and Cobranding - Recent merchant loses like the Costco and JetBlue have highlighted the negotiations between Amex and its partners more prominently than ever. Getting a new merchant to a profitable level takes time. Legal, Regulatory and Compliance Risks – In an ongoing battle with DoJ on merchant discrimination lawsuit could impact Operations and merchant agreements in case of an adverse outcome causing fluctuations in the stock prices. Also, any changes in Visa or MasterCard’s agreements may also affect the profitability

Recommendation BUY American Express Target price from DCF analysis: $95.86 12.24% Upside from current price

Metlife Company Overview Metlife is the largest US life insurer Currently underperforming due to expenses associated with the spin-off of Brighthouse Financials In lieu of the spin-off, Metlife has implemented cost cutting measures which will, at the very least, provide earnings benefits that outlast the current one-off expenses related to the spin-off 10

Metlife Risks Investing Income & Derivatives Due to new financial regulations, Metlife has lower yields on investments. This causes a lower risk, highly capitalized portfolio with lower yields. Currency Risk Metlife is a global company and while their footprint is an advantage, there is also the risk of ever changing currencies to deal with Brighthouse Spin-off The spin-off has already caused excessive expenses. If it drags on it could be very burdensome for the company. 10

Recommendation HOLD Metlife Target price from DCF analysis: $59.00 5.92% Upside from current price

Goldman Sachs Goldman Sachs Ticker GS Recommendation: Buy Increase position to 14basis points Current Price: $220.18 DCF valuation: $247 Goldman Sachs is a global financial institution and has positioned itself as the leader in terms of investment banking and mergers and acquisitions. I expect continued leadership in these areas and with the possibility of a relaxed regulatory environment and more favorable tax conditions there is the possibility for substantial upside. That upside is tempered by the reality that the U.S. economy is currently in its second longest period of expansion ever and equity multiples are generally high.

Goldman Sachs Opportunities & Growth Since passing this years’ annual stress tests, the Firm’s capital disbursement plans have been approved by the SEC for amounts up to 93%. Bloomberg estimates that in 2018 the dividend yield will be 1.44%. Goldman Sachs remains the preeminent firm for mergers and acquisitions. They were the sole bank involved the Amazon / Whole Foods merger to this point. Research conducted by JPMorgan Chase sees a 3% rise in investment banking industry (excluding trading) and they consider Goldman the strongest player in the space. Their analysis did not include JPMorgan Chase. Stephanie Cohen, head of Goldman Sachs M&A, in a recent interview points out that there is approximately 600 billion dollars sitting idle with private equity. This number excludes pension funds and large institutional investors. As evidenced by the Amazon / Whole Foods merger, the Firm will be consistently involved in premier deals. The current expectations out of Washington are for at minimum a slightly more friendly regulatory environment. In a rising interest rate environment, financial institutions tend to perform well. Should the Federal Reserve continue raising rates as expected, it should bode well for Goldman, and the sector as a whole. The Firm is trading only slightly above its historical P/E average of 11.1, while the broader S&P is trading significantly higher than its average of 22.7 at 27.2. Other metrics reflect similarly making the equity relatively cheap.

Goldman Sachs

Recommendation BUY Goldman Sachs Target price from DCF analysis: $247.00 11.47% Upside from current price