Published:
May 20, 2009
I'm not sure
where the term "harder to find than
a needle in a haystack" first
originated, or why anyone would look
there in the first place. But that's
what it must feel like for
frustrated investors in search of
that rare company unscathed by this
vicious economic downturn.
From retailers to commodity producers, just about every
industry has suffered some degree of slowdown -- it's just a
matter of how slow. Look all you want, but there just aren't
too many businesses that are still humming along and
churning out record profits these days.
So imagine my surprise when I recently uncovered a tenacious
little company whose earnings climbed for the
10th straight
year in 2008 -- a whopping +50% increase at that. And this
was no creative accounting gimmickry. In fact, the firm had
the financial stamina to increase its dividend payments
all
four quarters last year.
So what is this recession-proof business? A regulated
utility unfazed by the sluggish economy, or maybe a
counter-cyclical discounter like Family Dollar (NYSE:
FDO)
that is feasting on these conditions. Not exactly. What if I
told you it was actually a savings and loan that specializes
in mortgage lending.
Sometimes truth is indeed stranger than fiction.
The
company in question is Hudson City Bancorp (Nasdaq:
HCBK),
a tight-knit thrift that manages 140 branches spread
throughout affluent regions of New York, New Jersey and
Connecticut. The firm has been around since the Civil War,
but few know of it outside its home turf.
So what
makes this particular bank unique?
Well, for
starters it has been ranked one of the nation's three
strictest mortgage underwriters. Management never fell prey
to the
subprime
mortgage mania, balked at exotic option adjustable-rate
loans, and refused to even dabble in auto or credit card
lending.
Instead,
the company deals primarily with wealthy customers sporting
top FICO scores who can make hefty down-payments and easily
afford their monthly notes. In fact, the firm's branches are
concentrated within 10 of the nation's top-50 counties in
terms of median household income.
This
conservative approach has kept Hudson City at arms length
from the problems plaguing other banks -- it said "thanks,
but no thanks" to government TARP money. And because the firm
doesn't package and sell its loans to investors (or invest
in private mortgage-backed debt) it hasn't run into
liquidity issues or been forced to take write-downs because
of problems in the secondary market.
Amid the
greatest crisis for the banking industry since the Great
Depression, Hudson City reported bad debt charge-offs of
just $4.4 million last year -- a trivial
1/100 of
1% of its $29.4 billion loan portfolio.
But
cautious lending is just one reason why the firm has thrived
during this downturn. Much of its success can be traced back
to an industry-leading efficiency ratio below 20%. That
means this lean organization
needs just $0.20 in overhead
to bring in $1.00 in
revenue -- by comparison, the average large bank has a
bloated ratio three times that size, or about 62%.
That
efficiency enables Hudson City to offer better rates to
prospective customers -- higher yields for depositors and
lower interest rates for mortgage borrowers.
Despite
all the turmoil, the firm originated more than $5 billion in
new loans last year. Meanwhile, customers flooded the bank
with $3.3 billion in new deposits. Remarkably, the average
Hudson City branch now holds roughly $145 million in
deposits -- double the national average of around $70
million.
Customers
certainly recognize Hudson City's sterling reputation. In
fact, the bank gained share in 20 of its 22 markets last
year. Unfortunately, investors have painted the stock with
the same brush that has tarnished the rest of the banking industry.
Despite posting record first quarter profits that were up
+44% over last year, the shares have still wilted below $13
-- down from a peak above $20.
But
there's a good reason why
HCBK
has vaulted +935% since its
IPO
in 1999, versus a -20% drop in the Dow.
it speaks
volumes that when most other banks have slashed or
eliminated their dividends, Hudson City has raised its
distributions
six times
since this mess started. Looking ahead, a steeper yield
curve should translate into fatter profits -- net interest
margins have already widened considerably.
Plus,
let's not forget that industry consolidation has thinned the
herd and left even more business on the table. There aren't
too many other lenders hunting in Hudson's "jumbo" mortgage
stomping grounds.
My
discounted cash flow models suggest a fair value in the
low $20s. So in addition to a generous yield near 5%,
investors could see upside potential of +80% or more.
Who would
have though that under all that hay, the needle would turn
out to be a bank?
-- Nathan
Slaughter
Editor
Half-Priced
Stocks
Nathan Slaughter
Editor
Half-Priced Stocks
About Half-Priced Stocks
Written by value investing expert
Nathan Slaughter, Half-Priced Stocks is a monthly newsletter designed to
help readers identify securities that are trading at the steepest discount to
their intrinsic net worth. In some cases this discount can reach up to 50% or
more, giving savvy value investors the chance to purchase quality stocks for
just pennies on the dollar.
(Learn More)
About Nathan Slaughter
Nathan Slaughter
has developed a long and successful track
record over the years by investing in both exchange-traded funds (ETFs) and
deeply discounted value securities. When it comes to ETFs, Nathan has created a
proprietary ranking system that helps him zero in on today's most promising
funds. And on the value front, Nathan uses advanced discounted cash flow
techniques, along with a host of fundamental research, to uncover quality stocks
that are trading well below their actual intrinsic value.
Nathan's previous
experience includes a long tenure at AXA/Equitable Advisors, where he provided
comprehensive investment advisory services to small businesses and high
net-worth clients. He also honed his research skills at Morgan Keegan, where he
performed asset allocation, retirement planning, and consultative portfolio
management services.
Several years ago Nathan
switched gears and decided to devote his time exclusively to financial analysis
and writing. He has since published hundreds of articles for a variety of
prominent online and print publications.
Nathan's educational
background includes NASD Series 6, 7, 63, & 65 certifications, as well as a
degree in Finance/Investment Management. He currently resides in Shreveport, LA
with wife Julie and sons Aidan and Riley.
To learn more about Nathan's value investing newsletter --
Half-Priced Stocks -- please
visit this link.
|
