Valuation Metrics - Book Value: Umpqua, Marcus

 |  Includes: MCS, UMPQ
by: Asif Suria

Investors often have preferred valuation metrics that they look at to get the feel for a company before digging in for further research. One could compare this with a lender looking at your FICO score before requesting additional supporting documentation to see if you would qualify for a loan.

One such metric I tend to use is the Book Value of a company. In very simple terms the book value is the sum of all assets of the company minus the liabilities. In more personal terms, book value could be compared to an individual's net worth. To figure out your net worth, you would add up all your assets including your home, your car, your cash, your jewelry, etc and then subtract your liabilities such as credit card debt, student loans, the remaining loan amount on your home, the loan on your car if you financed it, etc. What is left over after you subtract your liabilities from your assets is your net worth. Similarly for companies when you add all the asse ts on the balance sheet (cash, investments, inventory, accounts receivables, etc.) and subtract the liabilities (debt, accounts payables), you get the book value.

While you could go through each line on the balance sheet and calculate the book value of a company, websites like Yahoo Finance and Reuters provide this information to you either as "Book value per share" or as the Price/Book ratio. If the company has a book value of $100 million and has 20 million shares outstanding, the book value per share would be 100/20 = $5. If the stock of that company is trading at $10, the Price/Book ratio will be $10/$5 = 2. Essentially you are paying 2 times the book value of the company when you purchase those shares for $10. If the stock of the company were to fall precipitously to $4, you would be paying less than the book value for the stock, as the Price/Book ratio will drop to 0.8. This may appear to be a great bargain because you are buying the business at less than the liquidation value of the company.

However just as you are relishing the thought of picking up a business for 80 cents on the dollar, you should keep in mind that the book value you see on Yahoo Finance also happens to include intangible assets.

Wikipedia defines intangible assets as

identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset. There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how, knowledge), collaboration activities, leverage activities, and structural activities).

This presents a problem as you may not recover your investment if the company were to be liquidated and its intangible assets were substantial. Removing intangible assets from your calculation of book value will give you Tangible Book Value, which is a more useful metric. Once again, you can get the Price/Tangible Book Value ratio directly from Reuters without having to calculate it from the balance sheet.

It is important to keep in mind that companies that are selling below tangible book value are usually in trouble of some sort because the market is valuing those companies below their liquidation value and essentially assigning no value whatsoever to its ongoing business. These companies are usually unprofitable and it makes sense that the market is anticipating that the company will eventually burn through its liquid assets like cash, thereby reducing its book value.

Umpqua Holdings (NASDAQ:UMPQ) $11.95

We have covered Oregon based regional bank Umpqua Holdings a number of times in the past including the April 2010 newsletter with its focus on regional banks as well as in a section of the February 2008 newsletter titled Umpqua Holdings: Can the free cookies last?. Following the April newsletter, I decided to keep Umpqua on our watch list instead of adding it to our portfolio due to the bleak macro environment but now think it is time to consider starting a position in the company.

Three events have transpired over the last three months that have made me look at Umpqua once again. The FDIC once again picked this Pacific Northwest bank to acquire the assets of Reno based Nevada Security Bank when the bank failed in mid-June, making this the third FDIC assisted acquisition for Umpqua this year. After taking over $492 million in assets and $480 million in deposits from Nevada Security Bank, Umpqua's total assets have now increased to almost $11 billion.

Umpqua's Troubled Asset Ratio or TAR has fallen to 20.1 from 23.1 even as the national median has gone up from 14.5 to 15. Finally Umpqua's stock has dropped more than 9% from $13.14 in April to its current price of $11.95 and was much lower earlier this week before the sharp two day rally we just experienced. At current prices, the bank is trading at a Price/Book ratio of 0.79. The Price/Tangible Book Ratio according to Reuters is 1.39. Given this increase in assets, drop in TAR and drop in price, I think it is time to once again initiate a long-term position in Umpqua. I will be purchasing 1,000 shares of Umpqua for the SINLetter Model Portfolio. The closing price of the day on June 9 will be used as the purchase price. I will also purchase Umpqua for my personal portfolio after this newsletter goes out to subscribers.

Marcus (NYSE:MCS) $9.02

Marcus is yet another stock that we have featured in the newsletters and SINLetter blog numerous times. If you are not familiar with this small-cap movie theater and hotel operator, check out this February 2010 blog entry titled Marcus Revisited: The Avatar Effect, which led us to picking the stock up when it had dropped below book value. We sold the stock less than a month later from the Special Reports Portfolio for a gain of 14% when the stock rose above book value.

With the recent market slump the stock has once again fallen below book value and currently trades at a Price/Book ratio of 0.80 and a Price/Tangible Book Ratio of just 0.93. Marcus is a profitable company with a dividend yield of 3.9%. Having written off its investment in an ill-timed Las Vegas condo development, the key risk the company faces is continued softness in its hotels segment. The movie theatre business has held up well and has supported the overall company even as the hotels division has suffered through this downturn. I am going to purchase 1,000 shares of Marcus for the SINLetter Model Portfolio. The closing price of the day on June 9 will be used as the purchase price.

Disclosure: I am long Marcus in my personal portfolio.