Hudson is arguably the best valued MHC in the country. There are others that are cheaper (SERC) and others that have a better and more diversified earnings stream (PBCT) but none combine the quality of this business at this price. It's not hard to understand why the long-term performance of MHC's is better than the All Publicly Traded Thrift Index. Depositors were able to buy Hudson at the Adjusted P/B of 58% BECAUSE it was an unloved MHC. MHC's work in the long run because most, if not all, will eventually second-stage and trade on the same fundamentals as any other fully converted thrift but we were able to buy them out of the gate cheaper.
Harbor Florida Bancshares provided a good example of what we can expect from Hudson. Harbor came out in 1994 when MHC's were also selling cheaply and 3 1/2 years later when the market was stronger, second-staged. It provided a wonderful return to those patient shareholders who bought and held. There is no better way to maximize our total return than doing an MHC in a bad market and second-staging in a good one. Let's look at the Hudson specifics.
Every month SNL looks at the MHC's and adjusts the P/B ratios to reflect a second-stage offering. They factor in a 16% cost for all the expenses associated with the offering such as ESOP, MRP, and underwriting. The current price represents 66% P/B assuming an offering at 90% pro forma P/B. That means that if Hudson did a second-stage tomorrow at 90% of book, we could expect a 36% increase in the value of our shares. This is all theoretical and some would say we'd never get those kinds of returns now. I agree because of the current market conditions but investors have a way of projecting the current malaise we are all suffering from in the thrift industry, to well into the future. This is a cyclical business and in 3-4 years from now, it's highly unlikely valuations will be anywhere near here. If anything, SNL's projections understate the future returns we can expect from Hudson.
As a mutual institution, Hudson's returns have been remarkable over the last 4 years. They've increased their equity by 59%. They've increased assets and deposits dramatically without any acquisitions. As a stock company, they now have the tools to move to the next level. Hudson has stated that they plan on aggressively managing their capital. Over the next 4 years they will (1) annually buyback at least 5% of their shares
(2) issue an increasing dividend yearly (3) grow organically by buiding up the branch network (4) make acquisitions It's highly likely our equity per share will be much higher in 4 years from now and any second-stage will reflect that value. It's important to note that the gains don't stop at second-stage. (Some would say this is when the real fireworks start). Independent Hudson at 90% of book would be on everybody's radar screen. Takeout at 150-200% P/B is a very real possibility. So these projections assume a total return of 20%+ annualized...well into the future.
JJR - excellent post. Since it looks like the fed may be done raising interest rates since rising oil and natural gas prices should act as an additional break on the economy, I would think that the mortgages which are being put in place today at current rates, should add to HCBK's earnings. If the economy slows, the market (and probably eventually the Fed) will ratchet down interest rates thus increasing the spread between the cost of the money and the actual rate the money is loaned at. I welcome all opinions. Thanks.
There are many fine posts on this board but, in my opinion, your posts are the most intelligent and analytical ones. And perfectly typed to boot. I certainly appreciate the effort you put into these tutorials...not to mention the time it takes to type them out.
Have downloaded your posts for study but, for now, thanks again for all your insights on thrifts in general and HCBK in particular.