The FDIC Picks Regional Bank Stock Winners: Who Is Getting The Zero Acquisition Cost Assets Of Failed Banks?

• On 2:54 pm EDT, Monday October 26, 2009

67 WALL STREET, New York - October 26, 2009 - The Wall Street Transcript has just published its TWST Large Cap Value Report offering a timely review of the sector to serious investors and industry executives. This 62 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Price to Earnings -- Relative Valuation -- Free Cash Flow -- Cheap Valuations -- Improving Products -- Company Transparency -- Short Term Performance -- Diversification -- Auto Industry -- Risk Management -- Large Cap Value Fund -- Acquisition -- Profits -- Revenue Growth -- Aggressive Cost Cuts -- Cable Industry -- Capital Base -- Credit Downturn -- Market Share -- Restructuring -- Change in Business Fundamentals -- Market Volatility -- New Opportunities -- Adding Value -- Technology Sector -- Technological Growth -- Credit Market -- Advantaged Economics -- Competitive Position -- Consumer Discretionary Exposure -- Flexibility -- Building Value -- Valuation -- Dividends -- Employment Normalization -- Profit Margins -- Focus on Middle Market

Companies include: Vodafone (VOD); SUPERVALU (SVU); Safeway (SWY); Kroger (KR); Microsoft (MSFT); American Express (AXP); AutoNation (AN); Goldman Sachs (GS); IBM (IBM); ConocoPhillips (COP); JPMorgan (JPM); PowerSecure (POWR); Innovative Solutions & Support (ISSC); Cablevision Systems (CVC); Viacom (VIA); Vivendi; Groupe Danone (BN:FP); Honeywell (HON); Crane (CR); BB&T (BBT); Aon (AOC); Caterpillar (CAT); Schering-Plough (SGP); Merck (MRK); JPMorgan (JPM); State Street (STT); Emerson Electric (EMR); Aetna (AET); Harris (HRS); Honda Motor (HMC); Symantec (SYMC); Magna International (MGA); Cisco Systems (CSCO); JPMorgan (JPM); American Express (AXP); Bank of America (BAC); Citigroup ©; Syngenta (SYT); MasterCard (MA); Monsanto (MON); Avon Products (AVP); Chesapeake Energy (CHK); Apollo Group (APOL); Automatic Data Processing (ADP); Colgate-Palmolive (CL); Berkshire Hathaway (BRK); Praxair (PX); Oracle (ORCL); Coach (COH); Jefferies Group (JEF); Granite Construction (GVA); Potash Corp. of Saskatchewan (POT); Schnitzer Steel Industries (SCHN)

In the following brief excerpt from just one of the in depth interviews in the 62 page report, a top tier money manager discusses the outlook for the sector and for investors.

Jerrold K. Senser serves as Chief Executive Officer and Chief Investment Officer of Institutional Capital LLC. As CEO and CIO, Jerry heads the portfolio management team and is the lead portfolio manager for all of ICAP's investment strategies. Jerry has been with the firm since 1986. Jerry graduated with a BA degree in economics from the University of Michigan and an MBA degree from the University of Chicago. He is a CFA charterholder. Prior to joining ICAP, Jerry spent seven years at Stein Roe & Farnham as an associate involved in economic and fixed-income analysis. He began his career at Data Resources, Inc., an economic consulting firm. Jerry has been featured in publications such as Barron's, The New York Times, The Chicago Tribune, and The Wall Street Transcript, and has been a guest speaker on Consuelo Mack's "Wealthtrack" show.

TWST: Would you give us more reasons on the financial companies and capital spending theme as to why you think they are going to improve?

Mr. Senser: Investors currently are very nervous about financial stocks and the potential exposure they may have to credit-generated losses. Similarly, when you look at a sector like capital spending, there is some question about the degree to which sales will recover and how this will impact earnings. In both cases, we feel that if economic conditions generally improve, these fears may fade and stocks in these sectors could do very well as a result. However, the emphasis must be on individual stock selection within these sectors. We are therefore looking for names in those sectors where there are important stock-specific catalysts that can help drive returns.

TWST: What shifts in emphasis have you made or seen in your portfolio over the last 12 months? Did you go, for example, from a defensive posture into to more open?

Mr. Senser: The biggest changes in the portfolio over the past 12 months were increases in sectors like financials, capital spending, and technology and reductions in sectors like health care and consumer staples. As indicated earlier, this reflected a combination of improving economic conditions and valuation shifts where many financial and cyclical sectors became very attractive, while more defensive sectors like health care had outperformed.

TWST: What are some of the specific stock selections that you have found of interest and reasons why you're attracted to them?

Mr. Senser: One of the financial names that we have added to the portfolio is BB&T (BBT). BB&T has a problem-fixing catalyst. Investors are concerned about credit exposure, but its credit experience so far is good and management has a history of solid underwriting. In addition, the company has a strong retail banking footprint in the Southeastern United States. BB&T's solid capital base enabled it to take advantage of the recent credit downturn by increasing its market share. BB&T recently acquired Colonial Bank in mid-August after the FDIC had taken control. Colonial ran into trouble because of its outsized exposure to sectors like residential construction. To reduce this risk, Colonial's loan portfolio has been written down, and BB&T has entered into a loss-sharing agreement with the FDIC covering the remaining exposure. We view this as a very favorable deal. The acquisition will expand BB&T's branches by 20% and put it into markets like Florida where we have a positive long-term view. BB&T also expects to extract savings of about 30% of Colonial's cost base. There is additional upside that can be realized from this deal as the Colonial branches are brought up to BB&T's productivity level. This should therefore be an earnings-enhancing deal. BB&T was one of the early companies to repay the capital injection as part of the TARP program. We believe this is a good example of the strong getting stronger theme and demonstrates the kind of company we are looking for in the financial sector.

Another name that was a more recent addition to the portfolio is Aon Corporation (AOC), which is an insurance services holding company and largest insurance broker in the world. Aon has management and restructuring catalysts. Under the leadership of Greg Case, the management at Aon is in the middle stages of transforming the company into a very efficient insurance broker. Over the past few years, Aon divested all of its primary insurance operations and became much more focused on integration and cost cutting at its core brokerage business. This has already significantly improved the profitability profile for the company. As a result, we expect the company to be able to generate a return on equity above 20% going forward. At the end of 2008, the company used its strength to take advantage of distressed market conditions by acquiring the reinsurance broker Benfield Re. This acquisition should help Aon achieve its longer-term operating margin target for the brokerage business. The company is also one of the few financial companies without investment asset exposure. It has a very solid balance sheet and extremely strong free cash flows.

In the capital spending sector, we own Caterpillar (CAT). Caterpillar is the world's largest manufacturer of construction and mining equipment and is a leading producer of diesel engines and gas turbines. Caterpillar is a problem-fixing situation. Sales at Caterpillar suffered sharply from the decline in global economic activity as a result of the company's exposure to construction, mining, petroleum and other cyclical sectors. But we believe that these same business lines should position CAT well for a recovery in economic conditions. We are seeing evidence not only that the U.S. economy is starting to do better but that Asia and China already have moved to a higher growth path. This should significantly benefit Caterpillar. In addition to those macro-related considerations, we believe that Caterpillar is in the early stages of expanding margins at its basic manufacturing level. At a recent analyst meeting, management provided much more detail on their operational and manufacturing challenges and we now think that they are moving much more aggressively to lower the company's cost base. Management believes they can take out $3 billion to $3.5 billion in costs by 2012 as a result of their Cat Production System. Machinery margins should also benefit from initiatives to reduce the complexity of products offered, an intensified focus on quality and efforts to bring down material input costs. One example of how the company plans to do this is management's plan to sharply reduce the company's supplier base. We think management has finally started to implement the programs necessary to transform the company into a world-class manufacturer and believe that this creates an attractive investment opportunity.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 62 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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