Financial Stocks
Kate Farley
Ryan O’Connor
Agenda
 Brief overview of Sector
 Business Analysis
 Reasons for our stock pick
 Financials and Valuation
 Recommendation
Financial Sector
 Worst performing sector of the S&P 500
 Down over 41% YTD* compared to –14.75% of index
 Uncertainty regarding Gov’t bailout
 Potential bank nationalization
 Increased stake in Citigroup and AIG
 Currently underweighted by 113bps
 Will increase underweighting by 150bps
*As of 2/23/09
Who is HCBK?
 Hudson City Bancorp Inc.
 Regional Holding Company based out of New Jersey
 Traded on the NASDAQ
 Currently part of S&P 500 Index
 Weathered the storm better than most
Business Analysis of Stocks
 Goldman Sachs
 2008 10-K is 731 pages
 Bank holding company and
global investment banking,
security, and investment
management firm
 Investment Banking, trading
and principal investments
and asset management and
securities services are main
segments
 Current Market cap of $37B
 Hudson City Bankcorp
 Holding company for only




Hudson City Banking
127 banks in NJ, NY, and CT
Sources of revenue: interest
on mortgages, MB securities
and interest and dividends
on investments
Sources of funds: deposits,
borrowings, payments on
mortgages, maturities on
investments
Current Market cap of $5
billion
Why HCBK?
 Never underwritten subprime, negative amortization or





Option ARM loans
Strict Maximum Loan-to-Value
0.43% non-performing assets
Refused TARP money in November
Kramer recommended staying away ( Jan 26, 2009)
Named Best-Managed Bank in America Two Years in a
Row- Forbes Magazine
http://community.investopedia.com/news/IA/2009/Hudson-City-Flourishes-During-DownturnHCBK0211.aspx?partner=YahooSA
Loan to Value Maximums
Max Loan Amounts
Max LTV
Up to $600,000
90%
$ 600,100-$1,000,000
80%
$1,000,100-$1,500,000
75%
$1,500,100-$2,000,000
70%
$2,000,100-$2,500,000
65%
$2,500,100-$3,000,000
60%
Recent Earnings and Dividends
2009*
2008
2007
2006
2005
2004
Actual
Earnings
Y-o-Y
Growth
Actual
Dividend
Y-o-Y
Growth
$1.06
$0.90
$0.58
$0.52
$0.48
$0.43
17.78%
55.17%
11.54%
94.12%
119.84%
$0.56
$0.45
$0.33
$0.30
$0.27
$0.22
24.44%
36.36%
10.00%
11.99%
22.69%
* Estimates from finance.yahoo.com
Hudson City Valuation
High
Price/forward earnings
Price/book
P/E/G
ROE
30.6
29.3
7.2
18
Price/forward earnings
Price/book
P/E/G
ROE
2.27
99.99
2.63
3.65
Price/forward earnings
Price/book
P/E/G
ROE
1.78
99.99
0.91
2.13
Low
Mean Current
HCBK v HCBK
9.8
20.9
9.8
11
25
11
2.3
4.9
2.3
5.5
8.5
9.3
HCBK vs SP-40
0.24
1.43
0.65
0.31
0.85
1.87
0.63
1.48
0.67
0.35
0.68
3.65
HCBK vs SP5A
0.46
1.13
0.8
0.17
0.54
0.64
0.44
0.65
0.46
0.57
1.25
0.58
Hudson City DCF Model
 Used average expenses percentage over past 3 years
 Using 14.5% discount rate due to financials cyclical
nature
 Assuming no change in number of shares outstanding
 Terminal Growth Rate of 4%
 Assuming constant margins and tax rates based on
historic figures
Valuation and Price Targets
 DCF approximately $22 with 123% upside
 Terminal Discount Rate of 14.5%
 Terminal FCF Rate of 4.0%
 Ratio Analysis
 Gave us price target between $9 and $23 depending ratio
 P/B was $21.53
 Our price target is $18.00 (77% upside)
Goldman Sachs Valuation
High
Price/forward earnings
Price/book
P/E/G
ROE
40.2
8.9
3
20.9
Price/forward earnings
Price/book
P/E/G
ROE
2.03
3.62
2.3
8.27
Price/forward earnings
Price/book
P/E/G
ROE
2.63
1.05
1.1
3.07
Mean
Low
GS vs GS
18.8
9.7
3.4
1.7
1.5
0.8
18
13.8
GS vs SP-40
1.48
0.22
1.62
1.24
1.35
0.88
1.1
0.93
GS vs SP5A
0.61
0.32
0.73
0.35
0.76
0.42
1.18
0.34
Current
15.8
2.1
1.3
20.4
0.96
3.62
1.2
8.27
0.78
0.53
0.72
0.34
Reasons to dump GS
 2 students dropped this class after being assigned GS
 ROE (ttm) 4.3%
 Sales growth predicted to drop 21% in the next quarter
and 19% in 3Q09*
 Took $10 billion in TARP funds and now has to dance
to the Gov’t tune
 In order to repay has to raise the money in a government
approved equity offering of similar amount
 Price Target of 97.00
 Berkshire Hathaway has a $5 billion investment
* finance.yahoo.com
New SIM Financials Portfolio
Name
Symbol
% of SIM
Financials
Berkshire Hathaway
Inc.
BRK.A
47.2%
Wells Fargo
WFC
11.7%
Hudson City
Bancorp
HCBK
41.1%
Recommendations
 Sell entire GS position (~400bps)
 Purchase 340 bps of HCBK
 Consensus growth rate higher than S&P 500
 Undervalued compared to financials and itself
 No exposure to Real Estate
 Sell off 68 bps of BRKA and 22 of WFC
 Should bring us to underweighting of 263 bps
What questions do you have?
Off Balance Sheet Commitments
Payments Due By Period
Contractual Obligation
Total
Less Than
One Year
to
Three
Year
s to
More Than
One Year
Three
Year
s
Five Years
Five Years
(In thousands)
Mortgage loan originations
$
337,590
$
337,590
$
—
$
—
$
—
Mortgage loan purchases
219,117
219,117
—
—
—
Mortgage-backed security purchases
516,000
516,000
—
—
—
Operating leases
149,776
8,404
17,311
16,925
107,136
Total
$
1,222,483
$
1,081,111
$
17,311
$
16,925
$
107,136
Not Selling all of WFC…
 DCF still gives about 25% upside with more
conservative estimates than other analysts
 Ratio valuation gives target in high teens/low twenties
 EPS of about 28 cents in first quarter expected
 Still have dividend
 Lowest weight in ratio