1. FIN724/824 The Stock Market Company Recommendation Marsel J. Tadger Kyle M. Ward-Dahl Ke Wang Adam J. Wilson 3/2/20101

2. Size and Composition of Financial Sector Market Cap: 1.6 Trillion 16.00% of S&P 500 Industries – Banks – Consumer Finance – Diverse Financial Service – Insurance – Multi-sector Holdings – Real Estate Investment Trust 3/2/20102 Largest Companies (Market Cap in Billions) American Express (AXP) $44.8 Bank of American (BAC) $150.8 Berkshire Hathaway (BRK) $234.6 Citigroup (C) $93.8 Goldman Sachs (GS) $76.5 Bank of NY Mellon (BK) $35 JP Morgan Chase & Co (JPM) $153.4 Morgan Stanley (MS) $36.4 U.S. Bancorp (USB) $48 Wells Fargo (WFC) $145.3

3. Recap of Sector Presentation Increase 100 basis points for Financial Sector Sold 241 basis points for Berkshire Hathaway – New underweight: 234 basis points Feb 28 th S&P Value=16.00% Feb 28 th SIM Value=8.98% Necessary SIM Value=13.66% Additional needed=468 BP’s 3/2/20103

4. S&P Index and SIM Weights 3/2/20104

5. Current Sector Setup JPM – 172 bp GS – 305 bp TCB – 270 bp HCBK – 152 bp Total – 898 bp Underweight to expected– 468 bp 3/2/20105

6. Recommendation Increase holdings of Goldman Sachs (GS) Increase holdings Hudson City Bancorp Inc. (HCBK) SELL ALL TCF Financial Corp (TCB) BUY Progressive Corp. (PGR) Hold JP Morgan Chase & Co (JPM) 3/2/20106

7. Proposed Setup After Selling TCB – Underweight to expected by 468+270=738 JPM – 164 bp (stays the same) GS – 493 bp (increased by 188bp) HCBK – 452 bp (increased by 300 bp) PGR – 250 bp (New Stock) 3/2/20107

8. Recommendation 1: GS Market Cap: $80.38 B Outstanding diluted shares: 550.9 M Stock Price: $158.75 Beta: 1.74 Market Consensus: $215 Lines of Businesses: – Investment Banking (10.62% of total sales) – Trading and Principal Investments (76.09% of total sales) – Asset Management and Securities Services (13.29% of total sales) Competitors: – JP Morgan Chase Co. – Morgan Stanley – Merrill Lynch (privately held by Bank of America) 3/2/20108

9. Historic Prices of GS 3/2/20109

10. Relative Performance of GS 3/2/201010

11. Sales of GS Sales  Red numbers are forecast in Assignment 2  Strong rebound in Trading and Principal Investments FY20112010200920082007200620052004 Investment Banking7,1316,6654,7975,1797,5555,6133,5993,286 Trading & Principal Investments 30,43028,43928,8798,09529,71424,02714,99611,583 Asset Management & Securities Services 5,5855,2194,0904,6724,7314,5273,0902,655 Total49,20645,98745,17322,22245,98737,66524,78220,550 Consensus47,33345,41445,678 EPS20.4119.0722.134.4724.7319.6911.218.92 Consensus20.4718.6018.95 3/2/201011

12. DCF of GS 3/2/201012

13. Valuation of GS Relative to IndustryHighLowMedianCurrent P/Trailing E1.20.050.960.05 P/Forward E1.10.130.940.82 P/B1.50.81.0 P/S1.20.30.60.8 P/CF1.80.51.10.6 Relative to S&P 500HighLowMedianCurrent P/Trailing E2.10.380.700.38 P/Forward E1.40.520.720.56 P/B1.10.40.70.6 P/S2.10.51.11.5 P/CF1.70.51.10.6 Absolute ValuationHighLowMedianCurrent#Target Multiple*Target E, S, B, etc/ShareTarget Price (F x G) A.B.C.D.E.F.G.H. P/Forward E21.58.012.28.011$19.07$210 P/S3.60.41.7 $89.77$153 P/B5.70.72.11.32$114.4$229 P/EBITDA4.010.522.303.093.2$48.13$155 P/CF21.33.912.15.712$26.09$313  Target price to buy: $213 (average of DCF and Valuation prices) 3/2/201013

14. Key Ratios of GS 3/2/201014

15. Catalysts of GS The increase of employees Global and emerging markets – Opened offices in Mumbai, Moscow, Sao Paulo, Dubai, Qatar, Riyadh and Tel Aviv – Became licensed broker-dealer in Russia, India and China – Opened banks in Brazil, Ireland and Russia – Entered asset management business in South Korea and India The recovery of economy and financial markets FY200920082007200620052004 No. of Employees36,20030,06730,52226,46722,42520,722 3/2/201015

16. Risks of GS Uncertainties – Real estate market – Interest rates Lack of investors’ confidence – Record high unemployment rate Regulations – Liability tax bill (0.15%) – Limitation of proprietary trading – Prohibition of Private Equity business 3/2/201016

17. GDP Forecast 3/2/201017

18. Interest Rate Forecast Federal Reserve is going to keep the current interest rate Interest rate rise is beneficial in the long term 3/2/201018

19. Quantify key risks or benefits Liability tax – -$1.17 B, -$2.12 per share Prohibition of Private Equity Investment – $14 B of PE holdings, 2% of $849 B total assets – Probably spin-off if the bill is passed Limitation of Proprietary Trading – Hard to determine the definition and size – Probably not being passed Preferred Stock of Sumitomo – Converted to Common Shares – $1.1 B, not included in financial statements, $2 per share  No material impact on Goldman Sachs 3/2/201019

20. Recommendation 2: PGR Mitigate risk – SIM has no insurance industry stock. – Hedge against Goldman Sachs – PGR = Auto Insurance – No mortgages, no hurricanes, no bailouts. – Focused strategy vs. nearly all competitors are vertically integrated. Low cost – Companies such as Nationwide and AllState are losing customers to no-agent based player like Progressive. 3/2/201020

21. Progressive DCF 3/2/201021

22. Correlation of GS and PGR Correlation -.60 3/2/201022

23. Progressive has a strong correlation to auto sales (.79) 3/2/201023

24. Automotive sales are expected to increase significantly in next 5 years. 3/2/201024

25. Valuation of PGR Average = $26.17 3/2/201025

26. Recommendation 3: HCBK Add 300 basis points to Hudson City Bancorp (HCBK) Remarkably safe bank-stock No exposure to commercial real estate Comparatively very low foreclosure risk High yield

27. Safe Bank Stock During the recent credit crunch, while competitors were consolidating losses, HCBK was able to grow its assets substantially Only fell ~50% from peak to trough, as opposed to 90%+ for many of its competitors No risky investments (CDS, derivatives, foreign assets etc)

28. No Commercial Real Estate HCBK has no exposure to any commercial real estate risk Solely focused on consumer loans HCBK focuses on one distinct asset class – High-value jumbo home loans – Wealthy areas of New York, New Jersey, and Connecticut Able to specialize in this asset class

29. Low Foreclosure Rate Low acceptance rate – They finance only top value clients – Most clients have the net worth that they could finance the home with their own personal assets Very high down-payments – 30% down payment is their most common variety

30. Example (Homes bought at peak in 2006) HCBK 1 loan to high wealth customer $1,000,000 home $300,000 down payment Loan value=$700,000 Competitor 5loans to unknown value customers $200,000 homes $10,000 down payment per house Loan values=$950,000

31. Housing Market Falls 35% From Peak to Trough in 2009 HCBK Loan value=$700,000- principal already paid Home value=$650,000 Negative equity=~$25,000 – Average customer still has plenty of net worth to ride out the storm Competitor Loan value=$950,000- principal repaid Home values=$650,000 Negative equity=~$250,000 – I think we know the result here

32. Expanding Markets Looking to purchase a bank in Florida, where many of its high-value customers have summer homes Looking to expand its banking operations in the New York Metro area, to further serve its high-value customers

33. High Yield HCBK Yielding 4.44% as of 02/09 HCBK has consistently and rapidly increased its dividend since its IPO in 2000 – Company expects these increases to continues

34. DCF Current Price13.30 Implied Equity Value/Shr24.54 Upside/(Downside) to DCF84.5% Terminal Discount Rate =11.50% Terminal FCF Growth =4.00%

35. Multiples Valuation Absolute Valuation HighLowMedianCurrent#Your Target Multiple *Your Target E, S, B, etc/Shar e Your Target Price (F x G) A.B.C.D.E.F.G.H. P/Forward E31.69.819.811.2181.1821.24 P/S19.44.412.95.5122.4128.92 P/B5.71.11.81.31.7510.2117.87 P/EBITDA15.461.2910.162.9164.5627.36 P/CF33.510.924.111.5201.1523.00 Average=23.67

36. Q&A 3/2/201036