Bank of New York Co.'s soaring stock price shows investor confidence in the company - but it also is about to trigger a jolt to earnings per share.
Next week the price, which was $42.25 on Thursday, will likely exceed the $31 for the 11th week in the same quarter. Under the terms of the bank's 1988 hostile takeover of Irving Bank Corp., this means that former Irving shareholders can now exercise warrants to buy 27 million Bank of New York shares at $31.
As a result, potential dilution from the warrants' eventual shift into new shares must be accounted for, although the warrants' 10-year life has over three years to run.
Bank analyst George M. Salem of Gerard Klauer Mattison & Co., New York, Thursday reduced his earning estimate for Bank of New York, saying he anticipates dilution ranging from 3% to 7%.
"The dilution isn't that enormous," he said. "And it shouldn't come as a surprise to investors. The warrants have been around since 1988 and their effects have probably already been discounted, to a large degree, in the stock price."
Mr. Salem continues to rate the stock a "buy" and views the company as among the industry's best-managed and most sharply focused institutions.
The analyst cut his second-quarter earnings estimate for the bank to $1.05 a share, down 3.7% from $1.09 without the effect of the warrants. The company made $1.06 a share in the first quarter
He has trimmed his 1995 estimate to $4.28 a share from $4.40 and his 1996 estimate to $4.80 from $5.10.
Warrants are rarely seen as investment vehicles in the banking industry. "Its the first time in my career I've dealt with them," said Mr. Salem, an analyst for 25 years.
Bank of New York offered the warrants in late 1988 to sweeten its bid for Irving, then its New York rival in many lines of business, in an effort to end Irving management's lengthy and acrimonious resistance to a takeover.
As of Dec. 31, there were 13,771,936 warrants outstanding, each carrying rights to two shares of common stock, for a total of 27,543,872 shares.
The bank now has 201 million fully diluted shares outstanding.
Mr. Salem said the warrants themselves offer "an exciting leveraged play" in Bank of New York common and may appeal to investors "with greater risk tolerance."
With the warrants triggered, each dollar upside move on the common stock produces a $2 move in the warrant, he noted. The warrants recently traded at $26, up from $5 when they were first offered.
"With three and a half years until expiration, it would not be out of the question for the stock to reach, say $70, at which price the warrants would be worth about $80, or roughly a 200% gain," he noted.
In the nearer term, Mr. Salem noted that his one-year target price for the stock is $55 a share, a 28% gain, which would produce a warrant value of roughly $50, or a 92% gain.
But the warrants are not for faint-of-heart investors, he cautioned. Average trading volume in the warrants has been very volatile, ranging from 20,000 to 600,000 a day.
Unlike the stock itself, the warrants offer no income. Finally, if Bank of New York's stock price should fall below the warrants' $31 exercise price, he pointed out, "the investment is wiped out."
Warrants, technically known as subscription warrants or purchase warrants, are typically offered with an exercise price higher than the price of the associated stock at the time they are issued.
In investment terms, they are the mirror image of stock subscription rights, which usually have an exercise price lower than the market price of the stock involved.
