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Risk Is Going Down. Buy UBS For Long.

|Includes:GS, JPM, MS, UBS Group AG (UBS)
Our Thesis

It isn't long ago in history when negative news about UBS caused much unrest among investors. The company was found involved in string of scandals including heavy losses on US mortgages during the financial crisis, losses incurred by the rogue London trader Kweku Adoboli, and UBS involvement in Libor-rigging. The most notorious of all scandals was the US mortgage crisis which UBS faced because of recessionary trend in the past decade. It entered into a deal with FHFA to sell mortgage backed securities to housing agencies during the US property bubble in the past decade. However, later on the underlying investment mortgages went quite bad and as a result, many borrowers were unable to pay their loan off.

Finally, the negativity attached to the string of scandals (especially the US mortgage one) seems over. UBS now seems to be on a sound path of organic development. Because of the following reasons, we are bullish on UBS and expect a total gain of 14% on investment.

Firstly we are quite optimistic about UBS because of company's agreement with US housing agencies to settle the claims on the mortgage investments sold between 2004 and 2007. This deal relates to the residential mortgage- backed securities sold by company during period of US property boost as mentioned above. Unluckily the mortgages behind investments went bad as many borrowers defaulted on their loans. FHFA accused UBS of mis-representing the mortgages and pretending them to be of better quality than they really were. But finally, UBS has done settlement with FHFA to pay them 865m francs in this quarter and cover the litigation.

Secondly, with the announcement of second quarter earnings, we observe a significant improvement in financial performance of company. Although for the previous quarter, UBS had a very low net profit margin of 9.54% compared to competitors average of 15%, the reported earnings in this quarter jumped to 690m francs from 425m francs. This also beats the analyst's expectations of 560m francs giving greater room to optimism about UBS.

Company

Industry

Net Profit Margin

Operating Profit Margin

ROA

ROE

Revenue Growth

gs

financial

0.2223

0.3569

0.008

0.1012

0.014

jpm

financial

0.2597

0.3957

0.0103

0.1218

0.146

ms

financial

0.0411

0.1743

0.0024

0.0263

0.178

ubs

financial

0.0954

0.0692

0.0018

0.0423

0.21

             

Industry average

 

0.154625

0.249025

0.0056

0.0729

0.137

Click to enlarge

Thirdly, we feel that the profitability of UBS will rise in the coming quarters. This is because of the serious cost cutting measures being adopted by the management. In the very first step of cost cutting, company has fired 100 employees and aims at firing 10000 more employees in the near future.

Fourthly, we appreciate company's new more conservative credit policy. The scandals it faced in the past were mainly because of the risk associated to customers. But now the company aims at learning from the mistakes and tightening the lending policies for coming future. This will be done by restricting loans to the small and risky customers and increasing relationship with long term less risky customers.

From a relative perspective, we strongly feel that UBS can generate greater capital and total gains. Because of its higher Q2 earnings, we set a forward EPS of $1.43. Based on a historical EPS of 15.56x and forward EPS of $1.43, we set a target price $22.25. This will generate a total gain of 14% to the investors. This 14% return is greater than the competitors' average of 10% and at par with the Globenum's average of 14.21%.

 

 

Company

Industry

Price to Sales

EV/EBITDA

PEG

Forward P/E

P/E (for price calculation)

EPS (Forward Estimate)

Price Estimate

Current Price

Dividend Yield

Estimated Capital Gain

Estimated Total Gain

(NYSE:GS)

financial

2.12

(blank)

1.95

10.51

10.78

15.68

169.0304

165.62

0.012

0.020176

0.032176252

(NYSE:JPM)

financial

2.27

 

1.46

9.24

9.52

6.08

57.8816

56.54

0.028

0.023178

0.05117835

(NYSE:MS)

financial

1.98

(blank)

1.27

10.74

13.46

2.57

34.5922

27.71

0.008

0.198952

0.206952365

(NYSE:UBS)

financial

2.44

(blank)

(blank)

13.03

15.56

1.43

22.2508

19.37

0.009

0.12947

0.138469502

Industry average

 

2.2025

#DIV/0!

1.56

10.88

12.33

6.44

70.93875

67.31

0.01425

0.092944

0.107194117

Click to enlarge

In recapitulation, we strongly feel that UBS seems on a fast track to generate returns for investors and is a good stock to keep for the long run. The risks associated to its credit policies of UBS also seem to be low given the new credit policies and deals. We have a buy rating for the stock.

**Globenum Average refers to the average estimates for different financial parameters like P/E, EV/EBITDA, PEG, P/S, Capital Gain, Total Gain, Dividend Yield, Current ratio, Net Margin, Operating Margin, Debt ratio etc which we have developed for analytical purposes. We manage these averages for the stocks of wide range of companies belonging to different sectors. We have a fairly well managed and up to date database for this. These average values are mostly used as benchmarks during the research analytics and reporting.

Stocks: UBS, GS, JPM, MS