On 6/16/06 AOL Money's Hilary Kramer posted a strong buy recommendation on Brookline Bancorp (NASDAQ:BRKL), stating among other things that at current valuations BRKL is a possible acquisition target.
Brookline Bancorp has been rumored to be on the block for a long time. Back in April 2003, Anton Schutz marked Brookline as a ‘long-term target’. Everyone has noticed that last week Brookline’s average trading volume more than doubled. The question is why? Is the long anticipated acquisition about to happen?
Before we publish some of our fundamental analysis we must clarify that Hilary is not privileged to inside information. Those of us that follow Hilary’s picks and pans religiously will recall that on 5/17/06 Hilary placed a strong buy recommendation on Maverick Tube (MVK) based on primary fundamental analysis. On 6/12/06 Tenaris S.A. (NYSE:TS) announced that it was acquiring Maverick @ $65.00 per share in cash. The purchase price represents a generous 41% premium on top of the share's closing price. Hilary had no way of knowing 3 weeks earlier that Maverick would be acquired. No crystal ball, just good old fashioned analysis led her to conclude that the stock could go from 50 to 70. Who knows, maybe someone from Tenaris read her article and decided to act before it was too late.
Don’t expect the same to happen with Brookline. We agreed with Hilary’s analysis on Maverick (see comment on archived article), but we disagree with Hilary regarding Brookline.
As a group, the Thrift & Mortgage Finance sector was down 11.4% in 2005. This was largely due to rising interest rates. The actions of the Federal Reserve have little impact on Brookline’s net interest margins, as the vast majority of their loan portfolio is either ARMs (adjustable rate mortgages) or variable rate commercial loans. This is not a factor.
What is a compelling factor though, is that lower refinancing transactions coupled with a slower housing market will result in reduced demand for Brookline’s services and products.
In addition to a slower housing market, the competition is a major factor. As interest rates increase, the prospects of growing the balance sheet - for all players in the sector - is limited to forcing the weaker players out of the market. Until the excess capacity is removed, margins will contract.
Brookline has done an excellent job at reducing structural costs since its acquisition of Mystic Financial in 2005. Any profit margin growth to be tweaked out of improved efficiency ratios is already factored in the stock price.
A quick look at competitors' stats reveals that Brookline is trading at the high end of the P/E (price earnings ratio) spectrum:
BRKL = 37/39, CAPX = 9/11, MASB = 18/20, PBCT = 33/35, PROV = 8/10, WBS = 13/15.
The ROE (return on equity) is a bit below average:
BRKL = 7.6%, CAPX = 9.8%, MASB = 11.1%, PBCT = 0.0%, PROV = 11.7%, WBS = 11.6%.
The catalyst for the Maverick acquisition was the fact that the energy sector and Maverick in particular are in a strong growth cycle. Brookline is faced with a possible contraction. Even if there is a buyer out there, we doubt that the stock would fetch more than the current market value.
Why the exuberant trading volume? That’s a tough one. Maybe Hilary does have a crystal ball after all.
Disclosure: This article is the consensus of the CrossProfit - IL analysis team. Data compiled by Vered Matalon. Proprietary analysis published with permission of CrossProfit.com.