Seeking Alpha

Fabian Renauer

View as an RSS Feed
View Fabian Renauer's Comments BY TICKER:
Latest  |  Highest rated
  • Weight Watchers International - Is The Fat Lady Singing? [View article]
    I just realized I actually had it in my notes. Thanks though
    Apr 23 05:55 PM | Likes Like |Link to Comment
  • Weight Watchers International - Is The Fat Lady Singing? [View article]
    where did you obtain the 2013 Monthly Pass penetration statistic of 75%? I could not find this anywhere. Also, is that globally or NACO?
    Apr 23 02:07 PM | Likes Like |Link to Comment
  • Express Scripts Has More Upside Potential Than You Might Expect [View article]
    For anybody who is interested, I've eliminated my position in ESRX because I think the transparent PBMs could have a pretty big impact on the pricing power of the traditional PBMs in the long-run and could totally change the pricing model (the opaque nature of the current pricing (wherefore companies have to hire consultants to assess PBM contracts etc.) is an important factor for ESRX and the other traditional PBMs). The transparent PBMs are still fairly small and currently have around a 14% market share, so building up a similar capacity and infrastructure as ESRX might take a while, but it's a definite threat so I prefer to watch from the sidelines for the time being.
    Dec 4 03:56 PM | Likes Like |Link to Comment
  • Updated: WFC Is Still Undervalued [View article]
    It's actually a breakdown of the commercial loan portfolio, sorry for not specifying that.
    It's on page 47 of the 10-k.
    Alternatively, just hit ctrl+f and search for "variable". It's the third result
    Jul 9 09:03 AM | 1 Like Like |Link to Comment
  • Updated: WFC Is Still Undervalued [View article]
    WFC had a residential mortgage loan servicing portfolio of $1.9T as of Dec. 31, 2012.
    Of the $1.9T, 4% ($76B) is private label securitization for which WFC originated the loans and has some repurchase risk.
    The average LTV for the $76B is 75%
    Of the $76B for which WFC is reponsible, 9% ($6.84B) is subprime with LTV close to or exceeding 100%.
    WFC currently has an MRL (=allowance) [for their 4% portion of the servicing portfolio] of $2.2B which is based on 39.5% expected losses on repurchases. A 25% higher loss rate (rather unlikely) would result in an additional $518M loss and a 25% higher repurchase rate in an additional $485M loss.

    Even assuming that they have to repurchase all of their subprime loans and don't recover anything on them would only mean a $4.64B loss net of the MRL relative to an ~$19B FCF in 2012. Considering that this very pessimistic scenario would not be of any problem to WFC in the long run, I think we shouldn't be overly pessimistic about WFC's position.
    Jul 8 11:54 AM | 2 Likes Like |Link to Comment
  • Updated: WFC Is Still Undervalued [View article]
    3. Agreed. There's simply not enough information in those sections to make grand conclusions.

    Don't apologize, discussions such as these are great. It's important to analyze every single line and if you have other comments about any line in the write-up please let me know.
    Jul 7 10:09 PM | Likes Like |Link to Comment
  • Updated: WFC Is Still Undervalued [View article]
    Thank you, I appreciate your points as I am always trying to disprove my theories/ assumptions - never fall in love with your own theories.

    1. It wasn't my intention to say that we are 6M to 1 Year away from a hike in short-term rates. I try never to predict such events as I have no particular insights that would enable me to do so. My comment was a reference to your earlier comment that it would take 6M to 1Y for interest rates on deposits to adjust to rate increases, and I meant to say that that's still a relatively short time frame as compared to the long-term, fixed nature of WFC's earning assets.

    You may well be quite right though in your thoughts about the NIM. While it was my perception that earning assets would be slower to adjust to rising rates than liabilities due to their long-term, fixed rate nature (i.e. MBS and consumer real estate mortgages) which I thought was substantiated by WFC's calculation that a 200 bps rise in interest rates would result in a $1.9B unrealized loss on MBS and by the fact that most people likely refinanced their fixed-rate loans at the lowest possible rates during the past few years, it seems as though WFC also thinks that their earning assets will adjust faster to interest rate rises than their liabilities.
    WFC does have a lot of dry powder and if the yield curve steepens enough they can probably widen their yield on earning assets sufficiently by keeping newly issued loans on their books to outpace increases in the funding costs and changing mix in funding sources.
    I guess we will have to wait and see how it plays out, however your assumption would be better for WFC than mine so I am rooting for your train of thought.

    3. I am aware of the existence of interest rate hedges but derivatives sections are never very clear/ easy to understand to be honest so it's tough to know how well and to what extent WFC is hedged for interest rate increases. If you have any additional insights about the derivatives part I would appreciate it if you would share them here.
    Jul 7 09:02 PM | 1 Like Like |Link to Comment
  • Updated: WFC Is Still Undervalued [View article]
    Rising rates will definitely be beneficial to banks in the long term.
    Currently, their yield on earning assets is actually lower than what their NIM used to be - the yield on assets is at around 4.2% at the moment yet the average NIM over the last 45 years was 4.54%, over the last 20 years it was 5.13%, and the last 10 years it was 4.64%.
    The stickiness of their deposits definitely enables them to slow down how quickly they have to pass on rising rates to depositors but you have to put that in perspective to the long-term nature of their portfolio. WFC has ~$252B in first mortgages and $74B in junior lien mortgages which tend to be fixed-rate and are long-term loans.
    They also have $138.7B in 10+ year MBS which are fixed rate. Together that's ~$450B of which most is long-term, fixed rate.

    Obviously it depends on what WFC does. If they start to aggressively sell the lower-rate MBS when interest rates start to go up they can counter-act quite a bit of that pressure and they also have a lot of dry-powder with which they can originate new loans at higher rates and keeping those on their own books. But overall, it naturally takes longer to replace long-term fixed rate loans than to adjust short-term deposits that need to move somewhat in line with interest rates.
    You also have to look at the current funding mix. Due to the low rates post 2007, the spreads between higher-rate accounts (savings accounts etc.) and lower-rate/ no interest rate accounts narrowed substantially and lower-rate accounts obviously offer better features than higher-rate accounts (lower fees etc.), so WFC was able to shift most of their depositors to their very low-cost market rate and other savings accounts as well as noninterest-bearing accounts beyond what was normal previously, so it can't get much better in terms of funding mix with the odds being that some people who used to favour higher rate accounts but are now with low-rate deposit accounts switching back when those spreads widen again.

    Relative to 30 year fixed-rate mortgages [with most people having refinanced in the low rate environment] as well as 10+ year fixed rate MBS, 6 months-1 year is a stone's throw.
    Jul 7 06:51 PM | 2 Likes Like |Link to Comment
  • Updated: WFC Is Still Undervalued [View article]
    Thanks everyone for the comments, the discussions are great.

    1) As jclyak pointed out, WFC didn't need nor want the TARP money but it was a decision by the treasury and FED to provide TARP funding across the board to avoid singling out individual banks which would, according to their argument, subsequently suffer from a loss of faith from the public.
    2) Again, as jclyak pointed out, WFC was probably the best bank when it came to underwriting standards for the following reasons:
    a. WFC did not have any negative amortizing option ARMs or variable rate mortgages whith fixed payment amounts - it only received those through the acquisition of Wachovia (think Pick-A-Pay)
    b. The majority of WFC's MBS were federal agency loans (i.e. loans insured through Freddie and Fannie). To be specific, 85.5% in 2007 and 84.7% in 2006 (68.2% in 2008 because of Wachovia). In the beginnings of the MBS frenzy, banks still insured most of their loans through Freddie and Fannie, however, as is always the case with asset bubbles, standards became progressively lax. So banks started to originate increasing numbers of loans without insuring them through Fannie or Freddie because the loans were either too crappy even for Fannie or Freddie (hard to imagine) or because they simply wanted to have even higher margins which they could do by not insuring the loans. Either way, WFC didn't engage in that folly. Contrast this with Citigroup which at Dec. 31, 2008 had $37.7B of held-to-maturity MBS (on their own books) of which only 4.55% were government agency sponsored securities (hence 95.45% weren't insured).
    c. WFC's net charge-offs in 2008 were 1.97% of avg. total loans whereas they rose to 2.21% in 2009, largely due to Wachovia. Considering that, WFC's loan origination standards were even better compared to its competitors than my net-charge off table would have you believe as it is distorted by Wachovia's crappy loans (mostly Pick-A-Pay)
    i. The banks were clearly vastly different in their engagement in the sub-prime folly
    3) As Munger rightly asserts, most problems have their roots in inappropriate incentive structures. I agree with Misho that it was about far more than Freddie and Fannie. It's hard to pin down a single cause although I would say that it had a lot to do with the fact that securitization split up the connection between deposit taking and loan origination. It allowed entire institutions to fund themselves through securitization and enabled financial institutions in general to make a quick profit only by originating and selling without having to worry about eventual collection (it's easy if you don't have to clean up your own mess). Encouraging people to create new loans and to sell them without worrying about their quality is clearly a misalignment of incentives. A very interesting article about this which was released in early 2007 and included some very smart insights can be found here: http://bit.ly/12uShZs (some conclusions about the nature and future unraveling of the financial crisis turned out to be wrong though)
    Jul 7 02:53 AM | 3 Likes Like |Link to Comment
  • Express Scripts Has More Upside Potential Than You Might Expect [View article]
    Good observation. Yes I used FCF/ avg. tangible assets. Because PBMs operate with such a small asset base relative to their size as most of their economic assets are intangibles, in acquisitions there are always huge amounts of goodwill and intangibles created, so it will automatically distort the RoA. You see the effects in RoE as well. RoTA obviously avoids that distortion by providing you with a picture of how the new earnings compare only to the enlarged infrastructure/ PPE and also excludes any 'false' future growth in RoA from subsequent depreciation of intangibles (lowering the asset base and faking RoA growth).

    I excluded goodwill and intangibles in the RoTA calculation. As I mentioned above, there is tons of goodwill created in such acquisitions which distorts the RoA as it has nothing to do with the infrastructure and hard assets needed to run the business.
    To invert your question, why would you want to include Goodwill in the RoA calculation?
    Rather than using RoA, split it up into the following 2 components:
    1) the cost of acquisitions (consists largely of goodwill and intangibles. Calculate the cost of acquisitions by comparing the incremental normalized earnings power attributable to old shareholders to the price paid for the acquisition)
    2) efficiency of operations (i.e. infrastructure, PPE. Assess this through RoTA)

    Yes, RoTA is probably the best metric to compare different PBMs if you want to compare them based on operating efficiency
    Jul 7 02:46 AM | 2 Likes Like |Link to Comment
  • Updated: WFC Is Still Undervalued [View article]
    Peace4, why are you trimming your WFC position? Unless you have other positions that you believe have more potential, I think WFC is a very safe investment with good prospects. It is not a bad thing to be concentrated as your best idea is by its very nature very likely to be better than your 9th or 10th best idea. If you want to have a stock that pays dividends - which I am inferring based on your comment about the reduction in dividends - WFC is a perfect fit for you anyways as it will probably raise the payout back to ~40% and has a lot of share-price growth potential as well
    Jul 7 02:39 AM | Likes Like |Link to Comment
  • Updated: WFC Is Still Undervalued [View article]
    Ray, thank you, I appreciate your comments. It will take a while until I post my next article though as it usually takes me over two months to do the research.

    About the charge-offs, I think we are already back at fairly normal levels. Net charge-offs are currently 1.15% of average gross loans which is in line with pre-bubble days. Keep in mind that 2003-2006 have unnaturally low charge-off rates.

    I very much agree with your comment about USB and am long USB myself.
    Jul 7 02:39 AM | Likes Like |Link to Comment
  • Express Scripts Has More Upside Potential Than You Might Expect [View article]
    Thank you, I appreciate the comment.

    1. The deferred tax liability arises mostly from intangibles (~$6.18B) b/c the intangibles are written up for book but not for tax purposes (hence there will be higher depreciation for book than for tax purposes). All this means is that over the next 15.5 years book taxes will be lower each year than actual taxes due to the higher GAAP intangibles depreciation (holding everything else constant). Since GAAP taxes are only an approximation of actual taxes they will never be 100% accurate. In normal business operations, companies actually tend to have a deferred tax liability 'float' as GAAP taxes are generally higher than cash taxes if the business is continuously growing its asset base (faster amortization for tax purposes) wherefore the deferred tax liability grows and grows. If you look at the 2001 to 2011 stretch, ESRX's cash taxes were lower than GAAP taxes every single year. So it's not like ESRX will have to pay out $6B in a single year; it simply means that GAAP taxes will be unduly low over 15.5 years but then again they were never meant to be 100% accurate anyways. In those future years you will just have to adjust FCF for the actual cash taxes b/c GAAP taxes will inflate earnings. I think one is conceptualizing it wrongly if he thinks that this is an actual liability.. it's the normal taxes that would be due anyways but rather than overstating taxes, GAAP will simply be understating them a bit in the future.

    2. The margins are low because ESRX is a middleman that uses gross accounting, so that's pretty typical I would say - if they used net accounting their margins would be more meaningful. What is important is the returns ESRX has relative to equity and tangible assets. If I'm the middleman between two institutions, i don't care about the size of their transactions but only about the earnings i can squeeze out relative to the capital I have to put up, and that's minimal for ESRX wherefore their margins (if you did net accounting) are actually very large

    3. for two reasons. a) to exclude distortions resulting due to changes from net to gross accounting (that was more in the earlier years though). b) SG&A relative to GP is simply a different scale so comparisons across competitors and over time still reflect the benefits of economies of scale, but by using GP you get a more important insight in my opinion: ESRX can have a million contracts but if its spreads on them are tiny their SG&A will still eat up all of their gross profit despite their scale. So SG&A relative to revenue doesn't tell you much about the size of SG&A relative to the company's spreads as it doesn't reflect the GP margin quality [e.g. doesn't differentiate between plain drug discounts (result in low margins) and lower discounts + management/ utilization programs (result in higher margins)]. But by using SG&A relative to GP you have a more valuable picture as you put the SG&A relative to the dollars that actually accrue to ESRX.

    4. Pre 2012: FCF/ avg. CSE
    2012: normalized FCF/ 2012 CSE
    Jul 6 11:59 AM | 2 Likes Like |Link to Comment
  • Express Scripts Has More Upside Potential Than You Might Expect [View article]
    As of May, the S&P500 was at around a 16x P/E multiple and the TMC/ GDP metric is currently at ~107% (which makes it modestly overvalued relative to historic standards). Predicting market corrections - unless you have an extreme case such as profit margins at historic highs (generally unlikely to be sustainable) and obvious excesses such as 25-30x P/E ratios across the board (e.g. 29 times in 1999) - is borderline impossible.. too hard for me at least. Especially with other factors such as uncertainty regarding interest rates which obviously have a big impact on stock as they are the gravitational force of asset prices. In that sense, to tweak Graham's saying a bit, don't try to predict Mr. Market's reversion to the mean until he is so excessively euphoric that even he must soon realize his irrationality. Instead, I just focus on the fundamentals of companies as everything else is too hard to predict most of the time. Unless you expect interest rates on gov't bonds to rise to 10% anytime soon, ESRX is lucratively valued at an 8% earnings yield and 5-6% FCF growth rate as this makes it around a 13-14% ROI opportunity. Also, to put it in perspective, think of all the financiers venturing into new areas in their quest to reach for yield. A great example of this is subprime auto loans which has seen a heavy influx of financing from financial institutions/ investment funds because they can get 15-20% interest rates, however, they also face 25%+ loan charge off rates (which will come to bite them at some point), so considering all that risk to get what they think is 15-20% returns, ESRX is a very safe 13-14% investment with no skeletons in the closet.
    Jul 6 02:12 AM | 1 Like Like |Link to Comment
  • Express Scripts Has More Upside Potential Than You Might Expect [View article]
    Thank you, I'm glad if it provided some insights.
    Jul 5 08:17 AM | Likes Like |Link to Comment
COMMENTS STATS
15 Comments
14 Likes