Financials often throw up a mixed bag in terms of risk and upside. This ambiguity is well showcased by how the Street is bullish about New York Community Bancorp (NYB), but bearish about Hudson City Bancorp (HCBK). Based on my multiples analysis, review of the fundamentals, and DCF model, I share the Street's sentiments and expect outperformance by New York Community Bancorp (NYCB).
From a multiples perspective, NYCB is the cheaper of the two. It trades at a respective 11.6x and 11.3x past and forward earnings, while Hudson City Bancorp (HCB) trades at 12.2x forward earnings when net income turns positive. NYCB also offers a dividend yield that is 340 bps higher at 7.9%. It is currently rated a "buy" versus a "sell" for its competitor. Both firms are 20% less volatile than the broader market.
At its recent-fourth quarter earnings call, NYCB's CEO, Joe Ficalora, noted strong performance:
"[The fourth quarter] was notable not only for the continued strength of our earnings and margin, but also for our increased efficiency and high volume of loan production and the continuing improvement of our asset quality. Notwithstanding the decline in market interest rates over the course of the quarter, we generated fourth quarter earnings of $117 million or $0.27 per diluted share. Our earnings provided a 1.23% return on average tangible assets and a 15.89% return on average tangible stockholders equity.
The continued strength of our earnings is reflected in our solid capital position, with tangible stockholders equity representing 7.95% of total assets excluding accumulated other comprehensive loss".
The AmTrust acquisition will help unlock value in several respects. First, it renders the firm less dependent on wholesale debt, while improving interest margins. Cost of funds will diminish as greater scales in deposit help mitigate risk in securing markets. Revenue was up for the recent quarter, as operating expenses fell. Further, greater provisions for loan losses was noted. Going forward, I believe dividend yield will be relatively stable and an increase in distributions will overpressure capital growth.
Consensus estimates for NYCB's EPS forecast that it will decline by 2.8% to $1.06 in 2012, and then grow by 5.7% and 11.6% in the following two years. Modeling a CAGR of 4.7% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $16.08, implying 26.7% upside.
HCB, on the other hand, is expected to have an increasingly smaller balance sheet as loan holdings decline. Accordingly, we can only assume at this point that management is focused on restructuring its portfolio. The recent quarter experienced no gains in securities and, excluding the impact of addressing debt concerns, EPS was 36.4% below consensus. Gross loans are being negatively impacted by several factors: (1) a general leftward shift in demand for purchase mortgages, (2) lower liquidity, and (3) higher repayment levels. The Fed's extension of low interest rates into 2014 will further put pressure on loans. NIM further narrowed to 1.72%.
Consensus estimates for HCB's EPS forecast that it will turn positive at $0.61 in 2012, decline by 3.3% in 2013, and then grow by 13.6% in 2013. Assuming a multiple of 13.5x and a conservative 2013 EPS of $0.57, the rough intrinsic value of the stock is $7.70, implying 7.1% upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The distributor of this research report is not a licensed investment adviser or broker-dealer. Investors are cautioned to perform their own due diligence. We seek business relationships with all of the firms in our coverage. Always discuss investments with a licensed professional before making any financial decision. Statements made within this report may include “forward-looking statements” as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.