Seeking Alpha

Kerrisdale Capital Management

 
View as an RSS Feed
View Kerrisdale Capital Management's Comments BY TICKER:
Latest  |  Highest rated
  • Cardtronics: Aggressive Accounting And Secular Decline Drive 40-70% Downside [View article]
    We are not particularly impressed by this small insider transaction, especially when put in the context of other such trades. For instance, throughout 2012 and 2013, based on Form 4 filings with the SEC, CATM's CEO sold 35,000 shares at prices near the current level (below $31), with a weighted-average price of $29.23, and surrendered an additional 77,835 shares to cover tax liabilities, at a weighted-average valuation of $25.97 (again, all below $31). Similarly, the company's CFO in 2012 and 2013 sold 237,974 shares at prices below $31, averaging $28.31, and surrendered another 35,655 shares at a weighted-average valuation of $26.94. CATM's highest-ranking executives have been perfectly willing to part with shares at or well below current prices.
    May 29, 2014. 10:38 AM | Likes Like |Link to Comment
  • Cardtronics: Aggressive Accounting And Secular Decline Drive 40-70% Downside [View article]
    We prefer using EBITA for comparison across business models (e.g. CATM relative to NCR, Deluxe, etc.) because depreciation is a very important cost for an asset owner like CATM but far less so for others facing analogous secular pressures. As a result, EV/EBITDA will always tend to paint an overly rosy picture of a company like CATM on a relative basis. Ultimately, as you point out, it does come down to cash flow. If CATM's actual replacement capex over time is more in line with the long average life it uses for depreciation purposes, then the fact that its accounting is an outlier won't matter much, although it still tends to raise one's eyebrows. But given all the challenges surrounding ATM upgrades today, and given the company's track record of underestimating its own capex, we think that capex will continue to come in high despite modest organic growth in ATM counts.

    We're open to feedback on our DCF analysis and are acutely aware of the hazards of making long-term forecasts, which is why we don't rely on the DCF as the only element in our valuation case. Still, we think it's very important for investors to think carefully about the financial consequences of secular decline ahead of time, because they can be counterintuitively large and can emerge very suddenly. That's why we like the payphone analogy -- plenty of smart people knew that mobile phones were a threat to that industry but, because the impact took a while to set in, they underestimated just how damaging they would be.
    May 27, 2014. 03:48 PM | Likes Like |Link to Comment
  • Cardtronics: Aggressive Accounting And Secular Decline Drive 40-70% Downside [View article]
    From 2011 to 2013, CATM's capex ("additions to property and equipment") totaled $225.6mm. Meanwhile, depreciation expense totaled $170.3mm. So capex was 32% higher. You may be looking at capex relative to depreciation *plus amortization*.
    May 27, 2014. 01:02 PM | Likes Like |Link to Comment
  • Cardtronics: Aggressive Accounting And Secular Decline Drive 40-70% Downside [View article]
    We agree that CATM's balance sheet is bloated, though, to be fair, debt relative to current earnings is not especially high, and in our illustrative analysis of a slow-decline scenario, the debt outstanding would still be covered, though the equity value would be greatly impaired. In a less favorable but still plausible outcome (like a 6-8% perpetual decline), all bets are off, but we are not calling for that to happen in the near term.
    May 27, 2014. 12:43 PM | Likes Like |Link to Comment
  • Cardtronics: Aggressive Accounting And Secular Decline Drive 40-70% Downside [View article]
    Of course that is possible, but it would be tantamount to an admission that organic and inorganic growth opportunities were no longer attractive, which would mark a sea change in how CATM presents itself and how investors view it. A company in that situation typically trades for a far lower valuation -- as we document in our report, firms like NCR and DLX are at substantial discounts to CATM, despite reasonably good track records of paying out and deploying excess cash generated by core businesses that face the risk of secular decline.
    May 27, 2014. 10:50 AM | Likes Like |Link to Comment
  • Bank Of Internet: Higher Rates Will Compress Margins For Bank Priced At 3.5x Book Value [View article]
    By your logic, any bank could super-charge its ROE just by selling its branches and then leasing them back. In reality, many bank branches are already leased, making this a moot point. The real issue is not costs -- we already assume these are far below peer levels -- but asset yields vs. funding costs. If NIM declines, then ROE will be crushed even if, as we assume in our calculations, costs stay low.

    Your mileage may vary, but we do in fact deal with Ally online, and we think it has a good product and good customer service. There's a reason it keeps winning awards and growing its customer base.

    The idea that BOFI will be acquired by Citi, of all companies, is ludicrous. Given its nose-bleed valuation, BOFI would be a supremely difficult acquisition to justify as accretive for any buyer; for one thing, given its low cost structure, synergies would be hard to find. We also find it absurd to argue that a large bank would want or need to buy BOFI to "fast track its internet exposure." In 2013 JPM was adding digital users at a rate of 500,000 *per month*; BOFI has 39,000 accounts *in total*. The problems of security, scaling, and compliance that even mid-sized banks already address every day with their online offerings dwarf what BOFI has ever dealt with.
    Apr 17, 2014. 02:33 PM | Likes Like |Link to Comment
  • Bank Of Internet: Higher Rates Will Compress Margins For Bank Priced At 3.5x Book Value [View article]
    As we pointed out in our piece, we recognize that BOFI management has done a good job over time, which is part of why we're not arguing that the company is worth, say, 1x book value. You are basically saying that the management is so good that it can sustain a very abnormally high NIM forever, regardless of adverse moves in interest rates and competition; there will always be another rabbit to pull out of the hat. With this kind of optimism priced into the stock, it looks like the odds of disappointment are high.
    Apr 17, 2014. 02:33 PM | Likes Like |Link to Comment
  • Bank Of Internet: Higher Rates Will Compress Margins For Bank Priced At 3.5x Book Value [View article]
    From a long-term perspective, the most important question is not what ROE BOFI will earn over the next few years but what ROE it can sustain over many, many years to come. Since the company's current growth rate is close to its ROE and the stock pays no dividend, everything hangs on the terminal value, which in turn hangs on the long-term NIM. For a bank whose key pitch to depositors is paying higher rates, we struggle to see how it can sustain NIMs far higher than its peers' forever. If it doesn't, then even with its attractive cost structure it will not be able to post high ROEs any longer. For a firm with unsustainably high profitability, PE ratios, though worth considering, can easily be misleading.

    Again, we wonder why the fact that "banking is rapidly changing to online" is supposed to be especially helpful to BOFI in particular. Just because it has "internet" in its name doesn't mean that it's going to outperform in an environment where consumers now have many more choices of online banks. Chase, for instance, has a great mobile app, and Ally and Barclays pay high rates and are easy to work with. Few people who seek to bank online have even heard of BOFI, and it's far from obvious what the value proposition is that would make them care.
    Apr 17, 2014. 02:33 PM | Likes Like |Link to Comment
  • Bank Of Internet: Higher Rates Will Compress Margins For Bank Priced At 3.5x Book Value [View article]
    We disagree that BOFI is so different from other banks that metrics like book value don't matter. BOFI's return on equity, though currently strong, is not outlandishly high; it's well within the range observed in the US banking industry. A lack of physical branches doesn't magically liberate the bank from the reality that in, a fiercely competitive market, high returns on capital will tend to fall back to normal. Nor does it imply a far-above-average valuation: ING Direct was an online-only bank much larger and more established than BOFI, yet it sold to Capital One for only 1x book value. ING Direct's costs were indeed ~100bps lower than large-bank peers when measured relative to deposits, but this was no great net benefit, because the rate it paid on liquid deposits was ~80-100bps *higher* than what large banks paid. BOFI has escaped this fundamental trade-off primarily by taking more risk on the asset side of its balance sheet, but in the long run this is no free lunch.

    We also note that as other banks become more adept at making use of online channels and more consumers grow comfortable with them, the novelty of BOFI's offering evaporates.
    Apr 17, 2014. 02:33 PM | Likes Like |Link to Comment
  • Bank Of Internet: Higher Rates Will Compress Margins For Bank Priced At 3.5x Book Value [View article]
    Thanks, Jake. That's a good point. By now, the vast majority of BOFI's liabilities have already repriced downward to reflect the current low-rate environment, but its interest-earning assets still have a ways to go, which will put pressure on margins even if rates stay flat.
    Apr 17, 2014. 02:32 PM | Likes Like |Link to Comment
  • BofI Holding: After H&R Block Transaction, Still Overpriced At Almost 4x Book Value [View article]
    US Bancorp is a great company and an interesting example. Back in 2001, it had a valuation a bit shy of BOFI's: 3.4x book value. And it had a trailing return on equity a bit better than BOFI's: 24%. From then till now, though, the ROE has compressed 43%, to 14%. And, sure enough, the price-to-book multiple has also compressed, down to 2x -- a 42% decline.* As a result, the stock has only appreciated 4% a year over that 13-year period. It's still well-run and still has a premium valuation, but that doesn't mean it was a fantastic investment. The bank business is very competitive; even with a talented management, BOFI won't sustain super-normal returns forever, particularly as its asset base grows.

    *Note: comparison is from 4/16/01 to 4/16/14. Source: Capital IQ.
    Apr 17, 2014. 02:27 PM | Likes Like |Link to Comment
  • JGWPT: Dominant Franchise In A Lucrative Niche Has 75% Upside [View article]
    Thanks. Like others, we were disappointed with volume in the fourth quarter and guidance for the first, though we would note that gain-on-sale margins continue to expand from the mid-2013 trough level, validating JGW's ability to adjust to swings over time to swings in interest rates. Even with a weak fourth quarter, TRB grew more than 5% in 2013. Time will tell on the volume hiccup, but we have bought more shares because even with minimal growth the stock is still too cheap at just 7x adjusted earnings. Note that, when it was reported in late 2012 that private-equity firms including Blackstone, Apollo, and TPG were interested in buying JGW (though not at JLL's asking price), the rumored bid side was approximately $800mm. Adjusting for the term loan put in place thereafter, this maps right onto the current share price -- and of course equity prices overall are up approximately 30% from then to now. JGW remains an undervalued consumer franchise with a lot of upside.
    Apr 16, 2014. 07:36 PM | Likes Like |Link to Comment
  • JGWPT: Dominant Franchise In A Lucrative Niche Has 75% Upside [View article]
    Ravi, we agree that the financial statements are difficult to follow and have suggested that management make more of an effort to explain the underlying cash-flow dynamics each quarter. The exact timing of warehouse financings and securitizations can move the needle in any one period. For example, in the fourth quarter, the overall increase in cash was -$294k, or -$16.6mm when backing out the impact of the IPO and term-loan repayment. But unencumbered finance receivables -- in other words, settlements purchased but not yet borrowed against -- increased by $24.7 million. Adjusting for this temporary build-up, cash flow was +$8.1 million; adjusting for the new, lower run rate of term-loan interest expense, we estimate it was +$13.7 million. In the prior quarter, without a similar build-up in unencumbered assets, total cash flow was $9.2 million or, pro forma for the now lower term-loan interest, almost $15 million. At this rate, the company is generating a cash-flow yield on its market cap in the low- to mid-teens. Regardless, we would appreciate better disclosure from the company on this front in the future.
    Apr 16, 2014. 07:36 PM | Likes Like |Link to Comment
  • JGWPT: Dominant Franchise In A Lucrative Niche Has 75% Upside [View article]
    The CFPB is certainly a powerful agency, but we think it behooves investors not to overreact to regulatory headlines. Ultimately the CFPB's mandate is to root out "unfair and deceptive acts and practices," and, in light of the existing court-approval process for structured-settlement transfers, we believe that the core business model has a low risk of giving rise to such acts. Besides, JGW is far from the only company that has recently received a civil investigative demand from the CFPB: Discover (late 2013/early 2014), Sallie Mae (September and December 2013), Equifax (February 2014), and even eBay (August 2013 and January 2014) have also disclosed CIDs. Yet few would argue that this is a good reason for investors to stay away from, say, eBay -- certainly Carl Icahn doesn't seem to think so. Given the CFPB's wide-ranging supervisory powers over banks, should one avoid the entire sector? Such a stance would have stood in the way of good returns over the past few years.

    While we don't know the precise nature or final outcome of the CFPB's inquiry, it's instructive to consider its investigation of mortgage insurers, which began in 2012: it took more than a year to resolve and ultimately only cost a few million dollars, trivial for these firms. In another instance, a CFPB CID from April 2012 still hasn't resulted in any penalties. Thus we wouldn't bet on any major or near-term impact.
    Apr 16, 2014. 07:36 PM | Likes Like |Link to Comment
  • JGWPT: Dominant Franchise In A Lucrative Niche Has 75% Upside [View article]
    Thanks, I'm waiting for the conference call and then will share thoughts. My initial thoughts are that the numbers were fine, and the CID shouldn't be too concerning. But it makes sense to see what management discusses on the call. I'm long for now and haven't sold a share post-earnings.
    Apr 1, 2014. 10:03 AM | Likes Like |Link to Comment
COMMENTS STATS
175 Comments
93 Likes