Hudson City Remains a Sell
Hudson City Bancorp, Inc.'s (HCBK) 1Q08 results were a penny below our expectation. While the company has increased its EPS results over the past four quarter, we remain concerned as to the relationship of provisions and non-performing assets as well as the adverse trends with respect to credit quality metrics and regulatory capital ratios.
On a price-to-book basis, the shares trade at a substantial premium of 50% of the peer median, versus a 43% premium in early April. 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 1.24x, a sizable discount to the peer group median.
Given HCBK's second-step conversion in June 2005, it has an enormous base of excess capital, which it can use to take advantage of attractive spreads that have materialized in the mortgage market due to a dearth of lenders, especially as it applies to non-conforming loans, and we believe that much of its value lies in this huge capital base.
While the shares of HCBK have rebounded as of late and positive earnings results may have begun to emerge, we could hold off any change in our ratings recommendation until several more data points have emerged. Our new six-month target price of $15.60 per share equates to a P/B multiple of 1.65x our projected book value for 3Q08 of $9.75 per share as well as to a negative 8.3% expected return. Thus, we are retaining our Sell rating on the shares of this company.
Weak 1Q Results for CEMEX
We are keeping our Sell rating on CEMEX, S.A. de C.V. (CX). First quarter results were weak, even though the sale of a stake in Axtel improved net income. The continued weak cement volumes/revenues in the key U.S. and Mexican markets are problematic.
We believe the construction business in the U.S. is already facing a more difficult environment, and that the short-term outlook for this industry remains highly uncertain, mainly due to the continued problems in the subprime mortgage segment. Moreover, concerns about real estate prices in Spain are also troublesome.
CEMEX is currently trading at 9.5x our 2008 earnings estimate, and 7.4x EV/2008 EBITDA. The stock's P/E multiple represents a considerable discount to the industry mean of 16.3x. We believe this discount can be explained by the company's considerable exposure to emerging economies, the risks of the continued acquisitions and its bloated balance sheet. The EV/2008 EBITDA valuation also seems to be below the industry mean or median.
In our opinion, the stock's valuation deserves a discount. Even though the company has given good guidance for 2008, we are keeping our Sell recommendation on CX. We expect the stock to trade with an EV/2008 EBITDA multiple between 6.0x and 6.5x.
