In the wake of the great financial crisis it can sometimes be difficult for Intelligent Investors to find a solid financial company in which to invest, because they require specific achievements over the historical period. Â Many investors may simply decide to throw out the worst years with the rationale that they are outliers that shouldn’t be considered when evaluating the company’s prospects, but doing so would involve speculation. Â We don’t know whether the financial crisis will happen again, but we do know that if it does, we can expect to see similar results as we did before. Â By continuing to require the same standards for the historical period, Intelligent Investors are able to widdle down banks to only those with the best financial position, and then they are able to determine an intrinsic value toÂ get a sense of whether the company is a good investment. Â In addition, a company must have strong financial statements to prove that it is stable enough for Intelligent Investors. Â This isÂ 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. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Hudson City Bancorp fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Hudson City Bancorp, Inc. (Hudson City Bancorp) 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. In addition, it purchases mortgages and mortgage-backed securities and other securities issued by United States government-sponsored enterprises (GSEs), as well as other investments permitted by applicable laws and regulations. It retains substantially all of the loans it originates in its portfolio. Its traditional consumer products, such as conforming one- to four-family residential mortgages, time deposits, checking and savings accounts appeal to a customer base. Its jumbo mortgage lending proficiency and its time deposit and money market products have allowed the Company to target higher-income customers.
Defensive Investor – must pass all 6 of the 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||$2.55|
|Value Based on 0% Growth||$1.50|
|Market Implied Growth Rate||23.56%|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Hudson City Bancorp does not qualify for either the Defensive Investor or the Enterprising Investor. Â The company has not shown sufficient earnings stability or growth over the ten year period and has a PEmg ratio that is too high for the Defensive Investor. Â For the Enterprising Investor, the company’s insufficient earnings growth and stability over the five year period are the determining factors. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Wells Fargo & Company (WFC) and ModernGraham’s valuation of JP Morgan Chase (JPM). Â From a valuation perspective, the company appears to be significantly overvalued after seeing a drop in its EPSmg (normalized earnings) from $0.82 in 2009 to $0.18 for 2013. Â This drop in earnings leads the ModernGraham valuation model to return an estimate of intrinsic value that falls well below the market’s price, largely due to the market implying an estimate of 23.56% which is clearly not supported by the historically demonstrated level of growth.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Hudson City Bancorp (HCBK)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave a comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Hudson City Bancorp (HCBK) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.