Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – February 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Hudson City Bancorp Inc. (HCBK) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Hudson City Bancorp, Inc. serves as the holding company of its subsidiary, Hudson City Savings Bank (the Bank). The Bank is a federal stock savings bank. The Company is a community and consumer-oriented retail savings bank offering traditional deposit products, residential real estate mortgage loans and consumer loans. It purchases mortgages and mortgage-backed securities and other securities issued by United States government-sponsored enterprises as well as other investments. It operates through 135 branches in the New York metropolitan area. It operates approximately 97 branches located in 17 counties throughout the State of New Jersey. In New York State, it operates 10 branch offices in Westchester County, 12 branch offices in Suffolk County, one branch office each in Putnam and Rockland Counties and five branch offices in Richmond County (Staten Island). It also operates nine branch offices in Fairfield County, Connecticut.
Defensive Investor – must pass all 6 following tests: Score = 3/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score = 1/3
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$2.60|
|Value Based on 0% Growth||$1.52|
|Market Implied Growth Rate||22.99%|
Balance Sheet – December 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Hudson City Bancorp is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years along with the high PEmg ratio. The Enterprising Investor is concerned with the lack of earnings stability or growth over the last five years. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $0.94 in 2010 to only $0.18 for 2014. This lack of growth does not support the market’s implied estimate of 22.99% growth, leading the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the price.
Be sure to check out previous ModernGraham valuations of Hudson City Bancorp Inc. (HCBK) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Hudson City Bancorp Inc. (HCBK)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Hudson City Bancorp Inc. (HCBK) at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.