Keep a Sell on Hudson City
On April 2, 2008, Hudson City Bancorp, Inc. (HCBK) announced its intent to release 1Q08 financial results on April 22, 2008. Though we are not opposed to purchased mortgages to aid growth and geographic diversity of a loan portfolio, we remain concerned as to the level HBCK has employed.
With current industry overhangs for mortgage lending, we take some exception to the company's significant use of purchased mortgages given credit and capital metric trends at this time. Thus, we are retaining our Sell rating on the shares of this company. Our new six-month price target of $15.75 per share equates to a negative 14.3% expected total return.
Though the company does not participate in sub-prime loans, we fear that a viral type contagion might creep upwards and negatively impact its mortgage loan portfolio. The recent rate cuts by the Fed to reverse the sub-prime crisis will take some time. The negatives with respect to credit quality for the banking industry has yet to fully been realized and should continue to weigh on the industry as home sale continue to wane at this time.
While the shares of HCBK have rebounded as of late, we will maintain our rating recommendation until sustainable data points have emerged. Relative pricing continues to look attractive on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate. HCBK's PEG ratio is now 1.21 a sizable discount (59%) to the peer group median. On a price-to-book basis, the 43% premium is only modestly attractive given that ROE is above median.
Our new six-month target price of $15.75 per share equates to a P/B multiple of1.65x our projected book value for 2Q08 of $9.55 per share. We view the annual dividend as secure, implying a potential total return of -14.3% over the next six-months.
Target Upped on Banco Bradesco
We are continuing our Hold on Banco Bradesco S.A., or Bradesco (BBD), but raising our target price to $32. Bradesco is expected to report first quarter earnings on May 12, 2008. We are maintaining our 2008 EPADS estimate at $2.30. Revenues should benefit from growth in the lending portfolio, though net interest margins are declining and loss provisions should rise.
Bradesco reported fourth quarter earnings of R$1,854 million, up 15% from a year ago, but below consensus and our estimate, largely due to compensation costs growing more than expected. Other costs were generally well controlled, and the efficiency ratio improved 30 basis points to 41.8%. We believe the $0.85 indicated annual dividend, which provides a 2.8% yield, is safe.
In addition, increasing international interest rates are always a threat for emerging markets, particularly for Brazil, due to the large size of its public debt load. Furthermore, the changing political situation in Brazil, with charges of corruption hurting the ruling party, could produce economic instability, leading to negative investor sentiment, which could depress Brazilian stock prices as a whole.
Moreover, Bradesco's stock has witnessed strong gains, and we do not believe that Bradesco's valuation is particularly attractive. At its current price, Banco Bradesco's ADS are now trading at 12.9X the 2008 consensus earnings estimates and 11.2X the 2009 consensus estimates, with both years well above the industry medians of 10.2X and 8.7X, respectively, based on consensus estimates as shown in the table following.
We believe the shares are fairly valued at present. Banco Bradesco's estimated future growth rate of 11% is less than that of the industry, as is its dividend yield. Furthermore, the company's exposure to the volatile Brazilian economy adds to uncertainties. Our $32 price target represents a 14X P/E multiple of our 2008 estimated EPADS of $2.30.
NSM at an Attractive Valuation
National Semiconductor Corporation (NSM) is an OEM of analog and mixed signal integrated circuits.
