Q2 Sector Preview: Banks, Aerospace & Defense, Life Insurance
Monday, July 11, 2021 10:48 AM


According to Deutsche Bank, bank stocks are down 14 percent from Feb 14 highs, although up 6 percent off the 6/8 bottom. U.S. macro conditions are showing signs of stabilizing and other regulatory uncertainties declining. The dark cloud could possibly be behind us.

  1. After seasonality hurt Q1 results, quarter-on-quarter it is positive in Q2. BBT, USB and WFC should benefit the most.
  2. Loans have inflected, but growth is expected to be modest for several years, maybe 3-4 percent. The Loan Library shows that consumers and small businesses remain over leveraged, while banks continue to lose massive market share in commercial lending.
  3. Few capital deployment options are expected to result in more M&As —possibly later this year.

Action: The bank believes that revenue growth is likely to be a challenge for several years and some, but not a lot of, M&A opportunities will present themselves. Banks need to be more focused on cutting costs

Valuation: According to the bank’s estimates, the industry is trading at a current 8x EPS estimate, 12-13x 2011E and 1.3x tangible book. Primary downside industry risks include declines in real estate prices and economic weakness. Upside risks include a faster-than-expected economic recovery, rising home prices and a more favorable political landscape.


Aerospace & Defense

A&D companies will begin reporting Q2 results on July 20 and the broad expectation is that strength in commercial aerospace will continue where growth appears to be accelerating and management confidence in the recovery increasing. As for defense, it is expected to remain a valuation/cash deployment story, according to the Deutsche Bank report.


After market-exposed suppliers underperformed at the start of the year on concerns about rising fuel prices. But the group has seen solid gains in 2Q, which continues to show strong growth despite macro uncertainty


The defense group has enjoyed a nice rally over the past 6 months (up 15 percent on average, out pacing the commercial group, up 12 percent, and the S&P 500,  up 5 percent) as investors weigh an uncertain budget environment with cheap valuations and plenty of cash deployment options.


  1. In terms of individual commercial stocks, the bank recommends Goodrich (GR), Triumph Group (TGI), Boeing (BA), Hexcel (HXL), and B/E Aerospace (BEAV) into the quarter. However, it remain cautious on SPR into the quarter.
  2. A good buy, according to Deutsche Bank, in defense continues to be General Dynamics (GD), as it offers commercial exposure for defense-like multiples. However, we are cautious on HII into the quarter.

Valuation: Commercial aero multiples, at 13.9x 2012e EPS, while not cheap, seem reasonable given 2012 is the second year of a multi-year recovery. The bank's bias remains favored toward commercial given potential for additional erosion on defense sentiment, according to the same report.


Life Insurance

Research by Deutsche Bank reveals that life insurance stocks are expected to meet Q2 EPS expectations, but beating analysts expectations seems a little far fetched. Although the S&P 500 declined by 0.4 percent in 2Q ’11, the average level of the S&P during 2Q’11 was 1.2 percent higher than the average level in 1Q’11. Thus, large charges or gains related to deferred acquisition costs are unlikely.

  1. Life stocks have decreased by 3 percent on average in 1H’11 vs. a 5 percent increase in the S&P 500.
  2. Although the equity market and interest rates need to rise for life stocks to outperform, life stocks were not expected to have underperformed to this degree.
  3. The equity market and interest rates are still running above management assumptions for 2011 EPS guidance.

Action: DB recommends the following:

  1. Hartford: There are multiple catalysts: (1) sale of the mutual fund business; (2) resumption of share repurchases; and (3) acceleration in VA sales
  2. Unum: The company is expected to see increased top-line growth as competitors continue to increase group disability prices. Valuation seems extremely attractive at 0.93x book for an 11 percent ROE.
  3. Aflac: The valuation multiple is expected rise as the company aggressively de-risks its investment portfolio in 2011. The valuation is well below historical levels with the absolute P/E at 7.9x and relative P/E at 54 percent.

Risks: According to DB are the following:

  1. Downside risks include deterioration in the equity and credit markets, rating agency downgrades, and additional capital raises.
  2. Upside risks include an equity market rally, credit spread narrowing, easing of insurance regulations, and improved disclosure on variable annuity living benefits.