Wilbur Ross is one of the most acknowledged industry leaders in the fields of bankruptcy, restructuring and privatization, as well as one of the most eminent financial advisors and investors to be engaged in some of the largest out-of-court restructurings and bankruptcies. Ross has helped to restructure more than $200 billion of corporate liabilities and is quite well known as a deft negotiator and as a specialist in bankruptcy proceedings. Ross has worked in different complex bankruptcy cases in a large number of industries. He was the Executive Managing Director of Rothschild Inc. during 24 years before acquiring its private equity partnerships during 2000. As such, Ross holds an M.B.A. (with distinction) from Harvard University as well as an A.B. from Yale University. Furthermore, he is the CEO and Chairman of WL Ross & Co. LLC, which is among the largest and most important firms that specialize in purchasing distressed companies.
Ross, who is not usually typified as a value investor, has at times been called "the king of bankruptcy," since he has purchased distressed assets in several industries, from coal, steel and auto parts to insurance, mortgage services and telecommunications.
In America, Ross says that the smaller banks he has purchased will outsmart their larger competitors, like Bank of America (BAC), which he considers hampered by its size and its need to fulfill new regulations for megabanks. Across the Atlantic, this investor is purchasing larger banks. According to Ross, the plan for Northern Rock is to mix the 75 branches of the traditional bank with Virgin Money's Internet operations. Ross stated that he decided to pay 36% of the book value for his stake in the Bank of Ireland, which he deems, in his own words, a steal. Ross thinks that Ireland will be among the first of the countries in Europe to bounce back from the euro crisis. Thus, he applauds its citizens for having supported the austerity measures without having taken to the streets: "There have been no riots, no picketing, no car burnings, no nothing."
As regards this analysis, I focus on businesses that attain good returns on equity while they incur little to no debt. Highly leveraged companies are usually vulnerable in economic slowdowns. I believe that Ross also shares this concept, which is why I consider it interesting to analyze his main picks in order to find good "seed" investment ideas.
The Governor and Company of the Bank of Ireland- ADR (IRE)
The Governor and Company of the Bank of Ireland is considered one of the most important financial services groups in Ireland, as it holds total assets amounting to 194 billion (US$257 billion) as of March 31, 2009. This company works in four business segments: UK Financial Services (34%), Retail Republic of Ireland (27%), Capital Markets (39% of gross revenue in the fiscal year ending on March 31, 2009) and Bank of Ireland Life (0%).
Why did Ross invest in IRE? The Irish government has introduced capital into the Bank of Ireland as part of its plan to recapitalize most Irish banks. According to the new proposal, the Bank of Ireland has received 3.5 billion (rising from 2 billion) of 8% perpetual core tier one non-cumulative preference shares together with warrants, which represents 25% of the existing share capital and is exercisable after 5 years. Such warrants will be diminished pro rata to a minimum of 15% of the existing share capital in case that the Bank of Ireland increases its new core tier one capital of up to 1.5 billion before December 31, 2009. The Irish government manages 25% of total ordinary voting rights as regards specific functions like board appointments and the change of control. Moreover, the Irish government has announced its intention to create the National Asset Management Agency (NAMA) with a view to taking control of development assets as well as land of the Irish financial institutions concerned. Furthermore, other capital-enhancing activities would encompass eliminating the common dividend and the purchase of a portion of the Bank of Ireland's outstanding debt securities at a considerable discount, which would increase equity capital by nearly 1 billion.
A further motivator of Ross in his decision to invest must have been that the Bank of Ireland has progressed in its shift to a rather more conservative funding profile. It has increased deposits by 19% since September 2007. Meanwhile, the loan-to-deposit ratio has been improved to 161% as of March 31, 2009, from 174% by the end of September 2007. In turn, this movement has also impacted positively on net interest margins, which in 2009 rose 8 basis points year over year to 1.71%. The Bank of Ireland has reduced substantially its overall costs. A strict control is being enforced regarding all discretionary expenditures. Staff numbers have been reduced due to a recruitment freeze, a policy of non-replacement of leaving staff as well as some redundancies caused by the closure of the downsizing of the Business Banking UK activities, the UK intermediary mortgage business and the winding down of a number of non-core international capital markets businesses. As of March 31, 2009, staff numbers were reduced 5% to roughly 15,500. As such, staff variable compensation costs were cut down considerably by means of the non-payment of bonuses.
The Current Net Profit Margin of IRE is -10.03, currently lower than its 2010 margin of 2.04. I do not like it when companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its Current Return on Equity is -8.35. It is lower than the 20% standard I look for in companies I invest in, and lower than its 2010 average return on equity of 1.04.
In terms of income and revenue growth, IRE has a 3-year average revenue growth of -1.40 and a 3-year net income average growth of -64.95. Its Current Revenue Year-over-Year growth is 46.65, higher than its 2010 revenue growth of -38.91. The fact that revenue increased from last year shows me that the business is performing well. The current net income year-over-year growth is -96.88, lower than its 2010 average of 2.57. I do not like it when current net income growth is less than the past year. I look for companies that increase both profits and revenue.
In terms of valuation ratios, IRE is trading at a Price/Book of 0.6x, a Price/Sales of 0.7x and a Price/Cash Flow of -0.7x in comparison to its industry averages of 0.6x Book, 0.9x Sales and -0.3x Cash Flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
In terms of valuation, the company has highly increased its loss provision estimates for the period 2009-2011, done away with the dividend and sold to the Irish government 3.5 billion preferential shares. After the recent fast appreciation since March, I do not find any triggers that will accelerate share movement during the near term.
The Bank of Ireland's capital strength is one of the best in Europe. At year-end 2011, the Bank of Ireland posted a 15.1% core Tier 1 ratio. I thus reckon that the bank's corresponding tangible common equity/tangible assets ratio had to be 6.2%, which is actually almost unrivaled among other European banks.
BankUnited Inc. (BKU)
By means of its subsidiaries, BankUnited, Inc. offers several financial products and services to consumer and commercial customers in the U.S. Those offered by the bank include, among others, money market deposit accounts, savings accounts, checking accounts and certificates of deposit; while the loan portfolio comprises small business loans, equipment loans, term loans, commercial and residential real estate loans, letters of credit, residential mortgage loans, asset-backed loans, commercial credit lines as well as lease financing, not to mention consumer loans: home equity loans and auto, boat, and personal installment loans. BankUnited also offers: wealth management products, including annuities, life insurance, mutual funds and individual securities; and planning, estate planning as well as financial planning services to business owners and individuals. The company's headquarters are in Miami Lakes, Florida.
As regards quarterly results, loans that were originated or purchased by BankUnited since May 21, 2009, also called "new loans," rose by $447.0 million in the fourth quarter. Moreover, for the year that ended in December 31, 2011, new loans rose by $1.2 billion to $1.7 billion. In 2011, the new loan growth surpassed the resolution of covered loans, which resulted in a net growth in its loan portfolio. BankUnited believes that this trend will continue during 2012. During the fourth quarter of 2011, the deposits rose $416.3 million to $7.4 billion, which represents an annualized growth rate of 24%. In the year ending in December 31, 2011, the deposits rose $201.0 million. As such, the cost of deposits remained at 1.0% in the fourth quarter of 2011 in comparison to 1.4% in the fourth quarter of 2010. Book value as well as tangible book value per common share were $15.71 and $15.01, respectively, as of December 31, 2011. In 2012, BankUnited expects that it will open up more 10 branches. Subject to the fulfillment of a number of conditions established in the Merger Agreement between the Company and the Herald National Bank, the company expects to finish off the Herald acquisition in the first quarter of 2012.
John Kanas, the Chairman, President and Chief Executive Officer, has stated: "We are extremely pleased with the quarter's results as well as those of the entire year. The bank has very strong momentum of both balance sheet growth and earnings as we head into next year. We look forward to completing the Herald National Bank acquisition in the first quarter of 2012."
The Current Net Profit Margin of BKU is 9.54, currently lower than its 2010 margin of 26.88. I do not like it when companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its Current Return on Equity is 4.53. It is lower than the 20% standard I look for in companies I invest in, and lower than its 2010 average return on equity of 15.74.
There is currently no information on BKU's 3-year average revenue growth and 3-year net income average growth. Its Current Revenue Year-over-Year growth is -3.62, lower than its 2010 revenue growth of 36.23. I do not like it when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year-over-year growth is -65.81, lower than its 2010 average of 55.18. I do not like it when current net income growth is less than the past year. I look for Companies that increases both profits and revenues.
In terms of valuation ratios, BKU is trading at a Price/Book of 1.5x, a Price/Sales of 3.4x and a Price/Cash Flow of -9.0x in comparison to its industry averages of 0.9x Book, 1.8x Sales and 4.1x Cash Flow.
Exco Resources Inc. (XCO)
EXCO Resources, Inc. is an independent oil and natural gas firm that acquires, develops and exploits onshore North American oil and natural gas properties. EXCO usually targets acquisitions of these onshore North American oil and natural gas properties, with particular attention on Appalachia, Eastern and Western Texas, the Rocky Mountains and the Mid-Continent regions. Its main objectives are to create value for shareholders by acquiring properties of quality and to increase the value of assets by controlling the operations, property development and the reduction of costs.
It is my belief that Ross invested in XCO because, in the last three years, EXCO Resources has changed its acquire-and-exploit strategy into an exploratory resource development strategy. This process may be best described with the name "reconstructive surgery." XCO has shed legacy assets, has refocused on two shale assets (namely, Haynesville/Bossier and Marcellus), has retooled the company's staff and has joined its partner BG Group BRGYY throughout its progression in its metamorphosis.
A further factor that enters into the investment equation is that, currently, XCO holds two important growth assets in its portfolio: its Haynesville/Bossier position and its Marcellus Shale position. The company's Haynesville asset is in fact further in terms of development, since it has grown from practically nothing to 419 mmcfe/d net to XCO during the third quarter of 2011. With 80,000 net acres that are prospective for Haynesville and 50,000 net acres that are prospective for an additional production from the known shallower Bossier, the company has probably more than a decade of drilling opportunities at its current levels of activity. In the midstream side, XCO has an advantage in Haynesville/Bossier due to its 50% stake in gathering and pipeline business TGGT, which are bound to reduce XCO's risk of facing considerable midstream bottlenecks in its Louisiana Haynesville operations and, last but not least, in its Shelby County Haynesville/Bossier operations once its system has been built at the site.
The Current Net Profit Margin of XCO is 3.00, currently lower than its 2010 margin of 130.41. I do not like it when companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its Current Return on Equity is 1.46. It is lower than the 20% standard I look for in companies I invest in, and lower than its 2010 average return on equity of 55.99.
In terms of income and revenue growth, XCO has a 3-year average revenue growth of -20.31. There is currently no information on the company's 3-year net income average growth. Its Current Revenue Year-over-Year growth is 46.38, higher than its 2010 revenue growth of -12.05. The fact that revenue increased from last year shows me that the business is performing well. The current net income year over year growth is -96.64. There is currently no information on the company's 2010 net income year over year growth.
In terms of valuation ratios, XCO is trading at a Price/Book of 1.0x, a Price/Sales of 2.0x and a Price/Cash Flow of 3.5x in comparison to its industry averages of 1.9x Book, 3.0x Sales and 6.4x Cash Flow.
EXCO's financial health has improved significantly since the year 2008. Beginning with the conversion of nearly $2 billion worth of debt into equity and concluding with multiple asset sales as well as joint ventures, the company has cut down its debt by approximately $3 billion since the year-end of 2007. Currently, as its financial flexibility has been improved, the company is pouring investment into its two new shale plays and paying dividends as well as initiating a share-repurchase program.
Assured Guarnty Ltd. (AGO)
Assured Guaranty is a holding company based in Bermuda, that offers credit-enhancement products to the structured finance markets, the municipal finance markets and the mortgage markets.
I am positive that Ross decided to invest in Assured, among others, because the company managed to avoid insuring the most dangerous bonds in connection with the housing boom. Assured stopped insuring collateralized debt obligations, also called CDOs, well before the very worst of the lot had been issued. Such forbearance managed to save Assured from incurring the severe rating downgrades that had been imposed on the industry-leading competitors MBIA and Ambac, which in turn has basically driven these two former market leaders into a critical runoff. Thus, Assured has been catapulted to the lead in the field of insuring municipal bonds. Holding a unanimous AAA rating during most of 2008, Assured could write more business at better-than-ever prices. The insurer has been capturing 40%-50% of all new insurance written on municipal bonds during 2008 as well as the start of of 2009, which has increased net written premium by about 50% during 2008. During 2010, Assured proved to be the only active bond insurer, as it insured about 10% of new bonds coming into the market. Since municipal bond insurance is usually paid up-front, Assured will hold investment income from such premiums well into the future.
I am sure that Ross' research contemplated that Assured also managed to acquire its competitor, Financial Security Assurance (FSA), belonging to the Belgium/French bank Dexia, in July of the year 2009. Much like Assured, also FSA fell victim to a downgrade from AAA by the agency Moody's, although Standard & Poor's still today does rate both Assured and FSA at AAA, although with a negative outlook in both cases. However, if municipal bonds are going to be insured, the markets will have to make a certain allowance for the almost perfect rating of this now combined entity. Furthermore, with MBIA and Ambac being on the sidelines and reeling from worse downgrades, I believe that growth, although it may slow slightly from recent trends, it will still be rather above average. Although nearly half of all municipal bonds used to be insured, only under 10% or so are in fact insured nowadays. In time, the bond insurance market may actually recover, but it is my belief that it could well be a rather slow process.
The Current Net Profit Margin of AGO is 42.63, higher than its 2010 margin of 39.17. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its Current Return on Equity is 18.21. It is lower than the 20% standard I look for in companies I invest in, and higher than its 2010 average return on equity of 15.00.
In terms of income and revenue growth, AGO has a 3-year average revenue growth of 48.71 and a 3-year net income average growth of 124.14. Its Current Revenue Year-over-Year growth is 38.51, lower than its 2010 revenue growth of 43.21. I do not like it when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year over year growth is 57.10, lower than its 2010 average of 474.22. I do not like it when current net income growth is less than the past year. I look for companies that increase both profits and revenue.
In terms of valuation ratios, AGO is trading at a Price/Book of 0.7x, a Price/Sales of 1.8x and a Price/Cash Flow of 4.8x in comparison to its industry averages of 0.9x Book, 1.1x Sales and 12.5x Cash Flow.
According to current claims, Assured Guaranty enjoys an adequate financial health. Its debt/capital lies at 21%, while the company generates enough of a cash flow to honor interest payments with comfort. Moreover, the company has recently received the benefit of a $1.1 billion settlement with Bank of America by reason of violations of warranties and representations on insurance policies. Nonetheless, if housing keeps sliding during a longer time period, the company could find itself on the hook for more claims, which in turn would wind up eating into its capital.
Air Lease Corporation (AL)
Air Lease Corporation is an aircraft leasing firm that purchases commercial aircraft and leases them to airlines all over the world. The firm offers leasing services in Asia, Latin America, the Pacific Rim, Eastern Europe and the Middle East. It is headquartered in Los Angeles, California.
In respect of quarterly results, the fourth consecutive quarter of profitability growth looked as follows:
- Basic EPS was raised 39% to $0.25 per share in comparison to $0.18 per share for Q3 2011.
- Pretax profit margin was raised to 33.6% in comparison to 30.8% for Q3 2011.
- Revenues was raised 25% to $115.1 million and pretax income was raised 37% to $38.7 million in comparison to Q3 2011.
- Net income was raised 36% to $24.8 million, in comparison to Q3 2011.
- Adjusted net income (1) was raised 26% to $31.7 million and adjusted EBITDA (1) was raised 28% to $102.2 million, in comparison to Q3 2011.
- Quarterly cash from operations was raised 22% to $101.0 million, in comparison to Q3 2011.
Moreover, the firm grew its fleet and entered into lease placements for deliveries from its order book:
- From 79 aircraft by the end of Q3 2011, the firm purchased 23 aircraft, growing its fleet by 29% to 102 aircraft by the end of Q4 2011, which exceeded its goal of 100 aircraft at the end of 2011.
- It entered into lease transactions covering 34 aircraft with four customers
"ALC surpassed its fleet size goal by finishing the quarter with a fleet of 102 aircraft. As we have grown the fleet, we have also increased our profitability in four successive quarters posting our highest quarterly pre-tax profit margin of 33.6%. It truly took a team effort to achieve these results in less than 2 full years of operation," stated Steven F. Udvar-Házy, the Chairman and CEO of the Air Lease Corporation. "ALC expanded its business during the fourth quarter of 2011 by increasing its fleet size by 29% and adding 6 more customers in 3 more countries. Additionally, ALC successfully broadened our capital base through capital markets transactions, additional banking relationships, and private placements. Our focus remains on building a strong balance sheet that will support the commercial success of our business," claimed John L. Plueger, the President and Chief Operating Officer of Air Lease Corporation.
There is no information on the AL's Current Net Profit Margin, Current Return on Equity, 3-year average revenue growth, 3-year net income average growth, Current Revenue Year over Year growth and current net income year over year growth.
In terms of valuation ratios, AL is trading at a Price/Book of 1.1x, while there is no information on its Price/Sales Price/Cash Flow. The industry averages are 2.2x Book, 0.9x Sales and 3.8x Cash Flow.