Hudson City and Wells Fargo - Two Attractive Picks 3 comments
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Have all banks run amok? Not quite. I’ve gone out on a limb lately and recommended a couple of banks in the advisory I edit, Cabot Benjamin Graham Value Letter.
Hudson City Bancorp (HCBK) owns and operates 127 savings bank branches in northern New Jersey and New York City. The bank specializes in writing jumbo mortgages in the more affluent counties of New York and New Jersey. High loan standards and the avoidance of the sub-prime market have led to Hudson City’s strong balance sheet and low mortgage defaults.
Hudson City is taking advantage of the current favorable interest rate environment and the lack of competition in writing jumbo mortgages. However, the company’s banking area includes residents who work in NYC’s hard-hit financial district. We expect earnings per share growth of 13.3% during the next 12-month period, which we believe will be sustained in future years. The dividend has been increased every quarter for the past six quarters and now provides an attractive 4.6% yield.
HCBK are undervalued at 11.6 times forward EPS. The bank’s unique niche in the banking sector and conservative lending practices make HCBK an attractive long-term holding. We expect HCBK shares to advance to our Minimum Sell Price within two to three years.
And …
Wells Fargo (WFC) provides banking, insurance, investment, mortgage, and consumer finance services throughout North America. Wells Fargo, founded in 1929, has been conservatively operated and therefore has experienced lower loan losses than most major banks.
The acquisition of Wachovia at the end of 2008 will more than double Wells Fargo’s loan portfolio to $850 billion. The purchase, however, added a greater percentage of delinquent loans and mortgages than the company’s recent experience. Wells Fargo has raised additional capital to meet new Federal requirements, but will need to raise additional capital soon.
We expect loan losses to diminish substantially before the end of 2009. We believe the banking industry faces challenges that will linger for several more years. Wells Fargo, though, is in good position to take market share from other banks, because Wells Fargo is generating strong cash flow and is improving its balance sheet. In addition, the acquisition of Wachovia at a fire-sale price presents a huge opportunity for the company to cut costs and streamline operations during the integration process.
WFC’s EPS were only $0.83 in 2008 but will increase to about $2.00 in 2009. At 11.5 times our $2.00 estimate, WFC shares are a bargain. The dividend, which was reduced recently, now yields 0.9%, but dividend payments could be increased as early as 2010. Warren Buffett is a major investor and Whitney Tilson, co-founder of the Value Investing Congress, recommends purchase.
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On WFC, I think it is a better bank than, say - BAC. But it also trades like it! It is an expensive stock, and they will have plenty of problems on the commercial side of their loan book (ask almost any bank analyst how WB's underwriting was...).
If you like paying a high P/TBV multiple for a suspect balance sheet (just because they have a name you recognize) - that's your prerogative. I suggest finding smaller gems that have been thrown out with the sector.