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What an Analyst Who Likes Astoria Financial Is Missing

NEW YORK (TheStreet) -- There are more than 900 publicly traded banks and thrifts in the U.S. including Astoria Financial (AF - Get Report). Which are solid performers? It's a complicated question.

The place to start is return on tangible common equity, or ROTCE. The better the bank, the higher the ROTCE. Why? Because banks pay out a percentage of their earnings as dividends and retain the rest to support asset growth. Higher ROTCE banks can grow faster or pay higher dividends or do both than low ROTCE banks.

Of course, banks that use aggressive leverage or take on excessive risk to boost ROTCE can end up destroying shareholder value, a painful lesson that bank stock investors learned in recent years.

But the story doesn't end there. Every bank stock has a price, and price reflects operating performance in theory but not necessarily in practice. So price can trump performance; at the extremes, a great bank may be just too expensive to own, or a mediocre one may be too cheap not to.

Which brings me to Lake Success, N.Y.-based thrift Astoria Financial. In a Jan. 2 TheStreet article, Meaningful Upside' for Astoria Financial in 2014, Says KBW, analyst Brian Kleinhanzl raised his 2015 earnings estimate for Astoria to $1 a share from 85 cents, based on a repositioning of Astoria's balance sheet that should enable the company to benefit from increases in interest rates. His 2014 estimate remained unchanged, at 70 cents. He also raised his 12-month price target to $17 from $13.

Should an increase in projected EPS lead to an increase in expected share price? Sure, unless the stock you're looking at was overvalued to begin with. It's hard not to think Astoria is overvalued given its longstanding mediocre operating performance. The bank's market cap at the market close on Monday was $1.36 billion.

For the 84 banks and thrifts with market caps between $500 million and $2 billion, the average price/tangible book value multiple is 1.9. Astoria's is only 1.2. So Astoria must be cheap, right? Not so fast. The average ROTCE year to date through the third quarter for this peer group is 11.9%. Astoria's is only 4.9%, and it hasn't been materially above this level since the beginning of 2011. So Astoria isn't cheap. It has a relatively low trading multiple for very good reasons.

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