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Jeffrey Gall
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Private investor interested in undervalued stocks, ETFs, and bonds.
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  • Prospect Capital Q3 2012 Earnings Analysis - Superior Performance Continues

    This article provides an analysis of Prospect Capital's (NASDAQ:PSEC) 3rd quarter 2012 earnings report. PSEC is a business development company that lends to and invests in private and microcap public businesses. A large majority of their holdings are in industries related to the Energy Sector.

    PSEC continues to:

    • grow book value
    • increase dividends
    • cover dividends with net investment income
    • superior credit quality of underlying portfolio
    • execute secondary offerings above book value (thereby increasing book value on a per share basis)

    For the quarter, PSEC delivered solid numbers, and appears to be well-situated to continue its trend of gradually increasing its dividend and growing book value for the quarters ahead.

    Highlights

    • Net investment income per share of income of $0.46 per share, which covers the quarter's dividend by a factor of 1.5
    • increased books value by $0.05 Q-over-Q while paying out just over $0.30 in dividends
    • This is the trend I like to see: PSEC's net asset value (NYSE:NAV) in the last eight quarters is as follows (from oldest to newest): 10.25, 10.30, 10.36, 10.41, 10.69, 10,82, 10.83, 10.88
    • During the last 8 quarters, PSEC has increased book value by 6.1% while paying out $2.44 in dividends
    • Zero loans placed on non-accrual status in 5 years. Per the earnings report:

    We are pleased with the overall credit quality of our portfolio, with many of our companies generating year-over-year and sequential growth in top-line revenues and bottom-line profits. None of our loans originated in approximately five years have gone on non-accrual status.

    • Portfolio fair value: $0.99 on the dollar (cost of 2.698B versus fair value of 2.664B). To put this metric in perspective, another business development company that I follow, Gladstone Capital (NASDAQ:GLAD), currently values its portfolio at $0.77 on the dollar.
    • Continued improvement in portfolio credit metrics

    The fair market value of our loan assets on non-accrual as a percentage of total assets stood at approximately 1.5% on September 30, 2012, down from 1.9% on June 30, 2012 and 3.5% on June 30, 2011.

    • Equity offerings at: $11.86, $11.59, $11.53, $11.15, and $10.96 - all of which were done above NAV and therefore accretive to NAV
    • Strong balance sheet:

    Our debt to equity ratio stood at less than 45% (and less than 35% after subtraction of cash and equivalents) at September 30, 2012.

    Disclosure: I am long PSEC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Nov 08 7:27 PM | Link | Comment!
  • A method for estimating a shipping company's quarterly revenue

    1.  Motivation

    This note presents a method for predicting the quarterly revenues of Freeseas Inc. (FREE, FREED) prior to earnings release.   This method is shown to be unbiased (i.e. no systematic overestimation or underestimation of revenues), and accurate to with +/- 5% of FREE’s actually quarterly revenues.  It is the hope that readers will be able to apply this method to other shipping companies, and ultimately estimate other aspects of a shipping company’s balance sheet (e.g. quarterly free cash flow, earnings per share, etc.).

    2.  Method

    The following steps are based on actual numbers from FREE’s 4th quarter of 2009.

    Step 1.  Create a new spreadsheet and add all ships and their charter rates in units of dollars per day.  FREE’s current charter rates are found on their webpage and their subsequent updated charter rates are provided via press releases.   The first set of rates were the charter rates as of 9/1/2009.

     

    09/01/09

    Destiny

    10000

    Envoy

    7900

    Goddess

    12500

    Hero

    14500

    Impala

    8750

    Jupiter

    25216

    Knight

    8300

    Lady

    51150

    Maverick

    9500

    Neptune

    15000

     

    Step 2.  Every time FREE updates its charter rates, update the spreadsheet accordingly.  Be sure to note the date of the press release at the top of the column.  For example, during Q4 2009, FREE updated its charter rates two other times during the quarter – 11/19/2009 and 12/15/2009.

     

    09/01/09

    11/19/09

    12/15/09

    Destiny

    10000

    9075

    14000

    Envoy

    7900

    7200

    7200

    Goddess

    12500

    12500

    12500

    Hero

    14500

    11500

    11500

    Impala

    8750

    11500

    13500

    Jupiter

    25216

    25216

    25216

    Knight

    8300

    7000

    15000

    Lady

    51150

    51150

    51150

    Maverick

    9500

    10000

    14000

    Neptune

    15000

    20000

    16000

     

      Step 3.  Calculate the number of days between charter changes, and make sure the total number of days sum to the total number of days in the quarter.  For example, in Q4 2009:

    # days 9/1 – 11/18

    # days 11/19 – 12/15

    # days 12/16 – 12/31

    total

    49

    27

    16

    92

     

    Step 4.  Multiply the number of days by the appropriate charter rate and sum over all ships.  For example, in Q4 2009:

    Ship name

    cum. Revs

     

    cum. Revs

     

    cum. Revs

    Destiny

    49

    490000

    27

    245025

    16

    224000

    Envoy

    49

    387100

    27

    194400

    16

    115200

    Goddess

    49

    612500

    27

    337500

    16

    200000

    Hero

    49

    710500

    27

    310500

    16

    184000

    Impala

    49

    428750

    27

    310500

    16

    216000

    Jupiter

    49

    1235584

    27

    680832

    16

    403456

    Knight

    49

    406700

    27

    189000

    16

    240000

    Lady

    49

    2506350

    27

    1381050

    16

    818400

    Maverick

    49

    465500

    27

    270000

    16

    224000

    Neptune

    49

    735000

    27

    540000

    16

    256000

    SUM

     

    7977984

     

    4458807

     

    2881056

     

             

    cummulative revenues

    Step 5.  Sum all of the cumulative revenue values:

    sum 1

    sum 2

    sum 3

    total

    total (million)

    7977984

    4458807

    2881056

    15317847

    15.32

             
           

    16

    224000

    Step 6.  In order to calculate the total revenues, we need to multiply the total from step 5 by the utilization rate.  The utilization rate is essentially the percentage of time that FREE’s ships were actually earning revenues (i.e. transporting goods).  I assumed an utilization rate of 0.94, which was pulled from the previous quarter’s earnings report.  The estimated quarterly revenues then become:  0.94 x 15.32 = 14.25 million.

    This is a simple method for estimating FREE’s quarterly revenues.

    Verification

    I applied this method to Q409, Q110, and Q210.  The table below highlights my performance. 

     

    forecast

    actual

    % off

    Q4 2009

    14.2456

    14.5

    -1.8

    Q1 2010

    15.1076

    15.66

    -3.5

    Q2 2010

    16.9608

    16.5

    2.8

    Conclusion

    This method can be used to estimate a shipping company’s revenues prior to an earnings release.  The drybulk company, Freeseas, was used as an example since it operates in the spot market and updates its charter rates often.  It should be noted that sometimes charter terms include a ballast bonus.  These are one-time fees earned that must also be added to the quarterly revenue estimate.  Future comments will provide methods for analyzing other aspects of Freeseas balance sheet.

     



    Disclosure: long FREE
    Oct 25 11:40 PM | Link | Comment!
  • One year later: high-yield bond fund investment recap
    Overview

    HSA and HMH are diversified closed-end bond funds managed by Brookfield Investment Management. 

    On 9.22.2009, I went long HSA @ 4.93 per share cost.  A month later, I established a similar position in HMH @ 4.63.  With dividend reinvestment, I have an unrealized 22% and 19% gain, respectively, in HSA and HMH.  What's interesting is that on 9.22.2009, I established a positon in SPY, a S&P 500 spider.  With dividend reinvestment, that position is only up 10% even with the S&P's rally this past month.  HSA and HMH have clearly outperformed the broader market over the past 12 months.

    Discussion

    I will highlight why HSA/HMH were attractive at the time, and continue to be so today.

    1.  diversified holdings with well known companies

    Hold bonds in all sectors of the market, e.g. energy, consumer staples, etc.

    HSA/HMH is comprised of bonds from companies such as:
    • Alcoa
    • Rogers Communications
    • Domtar Corp
    • Bombardier
    • Levi Strauss & Co
    • Chesapeake Energy Corp
    2.  expense ratio worth the cost

    Purchasing bonds as a private investor is not always easy.  One, we don't have access to all types of bonds via standard brokerage accounts (e.g. Schwab).  Two, some of these bond deals were done via private transactions.  

    Also, if I were to attempting to create a diversified portfolio of individual bonds the cost of being each bond would most likely be well above the small expense ratio paid to Brookfield.

    3.  HSA,HMH trade below NAV

    HSA and HMH trade at roughly a 10% discount to NAV.  Buying the stock today is analogous to buying these bonds at 90 cents on the dollar.  

    4.  Nice dividends

    Both of these stocks yield close to 9%.  With dividend reinvestment, I have increased substantially to the number of shares owned, and am continually purchasing below NAV.   Both recipes for long-term success.

    Conclusion

    I remain bullish on my HMH/HSA holdings.   I look forward to updating my position in the fall of 2011.


    Disclosure: long HMH HSA
    Tags: bonds
    Oct 10 1:10 AM | Link | Comment!
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