Matthew Ganucheau, CFA

LandAmerica Financial Group Will Recover on Top

Classy reply...

LFG hit $50 after my original recommendation at $37 after the Fed's interest rate cuts started. That's a 35% gain in a few months. That was when we got out.

Following that, I kept up with the company and saw that they couldn't cut costs quickly enough, and that they were going to have to write of goodwill. I posted about how I thought they were going to declare bankruptcy before the end of 2008 and gave a very detailed analysis on Yahoo! Finance's LFG message board, which is no longer available.


On 2008 Jul 30 10:08 AM User 155569 wrote:

> Tangible value should be OK--but it will decline due to negative
> EPS over the next few years. Now that the stock is down near $10,
> I am considering buying. The price seems alot more fair than when
> Matt was pumping the stock.

Gamestop: Priced to Play

I agree with the author. There are a number of reasons that the digital download issue is overblown, in my opinion. Here are just a few:

Digital Downloading- Not a Threat Without MassiveTechnological Innovation:

Reasons that digital downloading is not yet a practical alternative to having a physical copy of a game:
 
 1) No instruction manual; reduced Christmas/Birthday gift excitement/capability; loaning and swapping of games, portability, and renting all are impossible with digital downloads.
 
2) Downloading times, charges. ISPs are getting concerned about bandwidth use, and are now limiting the speeds and total bandwidth a user has, charging 'per gigabyte' fees. Also, many games are around 50 gigabytes, which would take a very long time to download.
 
3) The majority of the world cannot even obtain high-speed broadband internet, let alone broadband fast enough to download 50gb games within minutes. At current speeds, it would take days to weeks to download games, so people would buy a game, and then have to wait for days to weeks for it to download. This eliminates the instant gratification that many gamers want when buying a video game.
 
4) Physical back-up issues. Consumers like having games in a case, not on a hard drive. They don't trust the reliability of hard drives. For example, many consumers would rather buy a cd instead of downloading an album from iTunes. When a drive fails they are afraid of losing everything. If that happens, not only would it be a pain to get a new hard drive, but then consumers would have to download gigs and gigs of data again, which would be a very time consuming and potentially costly effort.5) Hard drives get fragmented, they slow down, they produce an awful lot of heat, and in the end a download system would result in a limited amount of games you could have (to around 20 for a 1 terabyte drive). Serious gamers who buy a lot of games would run out of hard drive space fairly quickly. 
6) Digital downloads with no hard copy game eliminate the trade-in value that games currently have. For a digital download model to work, game makers would have to drasticly reduce prices to compensate consumers for the lack of trade-in value and also for the other shortcomings mentioned above. Given that fact, it may not make sense for game producers to pursue a full game digital download model.

 Conslusion: For digital downloads to be desirable, technology will have to evolve to the point where downloading a video game will take less time than going to a store and purchasing it and ISPs do not charge for or restrict heavy downloading access. This may happen eventually, but near to medium term it is hard to see how digital downloads could replace the current physical game copy delivery model. However, another approach of cloud-based gaming systems where the controlls are sent to the server and the compressed video is sent to a tv is more of an issue. One such company is coming to the market place in 2010 called OnLive.


Also, it can be argued that the downloads of additional content for video games are extending the useful lives of used games, which makes them more valuable in the secondary market and actually helps GameStop's business. The console cycle being longer is an issue, but there are several new things coming out that could excite the marketplace like XBox's Project Natal that could help drive sales.

The digital delivery of the gaming content through services like OnLive will no doubt run into issues with gamers, especially not wanting to pay for a monthly service, not wanting their gaming to hog all of their household's bandwidth, and last but not least, not wanting their games to be lower quality looking then they are currently. OnLive only sends content in 720 HD resolution, which for gamers currently getting their games in 1080p is not an exciting prospect.

It will be interesting to see how this plays out, but in a market where gamers tend to have multiple consoles and want the fastest and best graphics, I believe that the market share estimates that OnLive will receive will not effect GameStop's business as much as is currently being priced into the stock. After considering all of these factors, it seems to me that GME could provide great returns as the market realizes that the competitive pressures are not as great as the market had anticipated.

Investment Bank Regulation: Beware the Dawn of This New Era

Do you know of any publicly traded companies that will directly benefit from the coming increased regulation of the investment banks? That is what I would like to know. Thanks for the good piece.

LandAmerica Financial Group Will Recover on Top

the 30 year conventional mortgage rate has dipped below 6% for the first time since 2005.

Research from Bear Stearns indicates that the average conventional borrower is paying a coupon of 6.14%, and actual mortgage rates are 5.90%, making 37% of the mortgage universe within the minimum 40 basis point refinancing window, and if mortgage rates decline another 25 basis points to 5.65%, that exposure increases to 50% of the market or $2.47 trillion in conforming mortgages. A 50 basis point decline would take mortgage rates to a record low of 5.4%, increasing exposure to 72%, of $3.53 trillion in mortgages.

It is my belief that a major mortgage refinancing wave will be coming, and whenever someone refinances their mortgage they will need to buy title insurance. LFG will directly benefit from these refi's.

LandAmerica Financial Group Will Recover on Top

Thank you for your comments. I appreciate all responses.


User 155569 said- “Assigning an EBIT margin of 10% is amusing.”

LFG’s EBIT margins 2002-2006:

2002 2003 2004 2005 2006
9.6% 9.8% 8.5% 7.7% 5.1%

LFG has earned EBIT margins near 10% in the past, and they should be able to earn higher EBIT margins when the mortgage market recovers due to their reduced expense base coupled with a more normal level of mortgage originations. A 10% EBIT margin expectation is a long-term expectation and is not unreasonable given what the company has earned in the past. Even if margins only return to 6%, you get a $60 stock, so I don’t see how you get hurt long-term. Moreover, FNF, a large competitor, says that they can earn 15% EBIT margins in a $2.4 trillion mortgage market, which I believe to be a normal market. LFG should be able to earn 10% EBIT margins in that environment, especially if management is able to implement some of its long-term initiatives to improve margins once the mortgage market recovers. Also realize that history has acquisitions that were not fully consolidated.


User 155569 said- “2006 was their best year ever.”

LFG’s EPS from 2002-2006:

2002 2003 2004 2005 2006
$8.06 $10.33 $8.02 $9.31 $5.68

Looking at LFG’s earnings per share from 2002 to 2006, it is evident that this company does have to potential to produce earnings at levels way above what they are currently producing. A simple average produces an earnings number of $8.28, and with the stock currently at $38.41, LFG is selling for 4.6x the average of what they earned from the 2002 to 2006 period.


User 155569 said- “Revenues will not improve from current levels for 4 or 5 years.”

If it does take four or five years, and earnings return to $10+, you could have a stock that is selling for $100+ that is giving you a 3.2% dividend yield on your cost basis. With LandAmerica’s large dividend yield, you are afforded the luxury of being paid to wait. Also, this was meant to be a long-term investment idea.


User 155569 said- “I would be very surprised if they don’t start writing off goodwill soon.”

On goodwill, yes there could be write downs but it is very unlikely that they will write it all off (will the banks write off all their goodwill through this cycle? I doubt it).


Near-term, the stock could be weak as incurred losses increase to build reserves, and the closing rate will probably be weak on this refi boom for a number of reasons. I just think this thing could be north of $100 in 4 years, which is a return that I would like to have. I would look to initiate positions in the low $30's and below.

Amazon Shares Showing Resilience as Analysts Defend Stock

I would think that people shop Amazon when their prices are lower, and that the company has no pricing power. I don't believe that they can both achieve their projected revenue growth and improve margins. The stock is extremely expensive, and I think that this bubble too will burst.

Jarden Remains a Compelling Short

Amit,

Thanks for sharing your thoughts about JAH. I find your articles to be very easy to read and well thought out. Thanks again for sharing your analysis.

Crocs Stopped Dead In Its Tracks; Can They Step It Up From Here?

How can the analysts that cover the company and the market disagree so much?

Three Reasons Why I'm Going Short and Buying Puts

Thanks for the links to the articles. They were great reads. Just one question about the second one though, why is November 15th important with regard to the SFAS157 regulation? I thought the disclosure of level 3 assets was required by the end of the first quarter of 2008. Thanks.

The Bear's Lair- Level 3 Decimation
"From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradeable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models."

Three Reasons Why I'm Going Short and Buying Puts

Thanks for the links to the articles. They were great reads. Just one question about the second one though, why is November 15th important with regard to the SFAS157 regulation? I thought the disclosure of level 3 assets was required by the end of the first quarter of 2008. Thanks.

The Bear's Lair- Level 3 Decimation
"From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradeable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models."