Shareholder Watchdog

Long/short equity
Shareholder Watchdog
Long/short equity
Contributor since: 2009
36141355 - thanks for the insight. I write this tongue-in-cheek, but did you miss the compliance class were they discussed talking about the company / stock in message boards, tweets, comments?
So the b/s has a $361.5 million preferred on it that requires annual payments of $29 million of dividends which are not tax deductible, so in the long-run will require $46 million of annual pretax cash flow (once a tax payer) to support dividend. Given earnings history I'm not sure how that is "safe."
The author does not appear to understand Ladenburg's confusing (and as evidence by this article the misleading) balance sheet presentation. I would disagree with the assertion that the balance sheet is "clear" or that they have limited liabilities. The liquidation preference of the preferred shares is included and hidden in the shareholder equity line. Instead of your assertion that mgt has "managed to improved its shareholders' equity through organic growth and acquisitions," really only improved the shareholder equity line by issuing more preferred stock. You must adjust the shareholders' equity by the liquidation preference of the preferred, so common shareholders' equity is only $36 million and tangible common equity is a NEGATIVE $236 million.
Agree there is some value in EV / EBITDA, but it should to be supplemented with PE or price-to-book analysis. Here is a helpful exercise: the cumulative redeemable preferred stock dividend is NOT tax deductible, so assuming a 37% tax rate (long-term) LTS needs to generate $46 million of pretax earnings to JUST BREAK-EVEN on a GAAP earnings basis. their record pretax earnings year (at least back to 2005) was last year at $10 million (this year will be less), so they are likely a long way off from generating GAAP earnings (to the point you could argue most or all of the value is in the preferred stock).
Your enterprise value did not take into effect 1) the $361 million face value of the preferred or 2) large potential dilution from options and warrants (diluted shares 25 million higher than actual out if they were profitable). if you adjust your EV / EBITDA table above all of the sudden LTS trades is extremely expensive. good luck but this appears to be faulty analysis.
Thanks for the article. I also have a few questions / comments on your valuation / methodology. #1 TEX appears to be the best comp given MTW's high multiple food service biz and is trading at 10x their '15 EPS and 6.5x '15 EBITDA. This equates to a $10.20 valuation for MNTX at your $1.02 2015 EPS estimate. #2 You appear to give full credit for 100% of the EBITDA and revenue from ASV even though they own only 51%, and at the same time appear to ignore the liabilities associated with the recent acquisitions in your EV. For example, your 6.5x EV / EBITDA target multiple to arrive at your $18.91 price target implies an EV of $320mm ($49.2mm EBITDA * 6.5x multiple) = market cap of $320 (16.9mm shares * your $18.91 target), so you are ignoring the roughly $200mm of consolidated debt after the acquisitions. If I reduce your EBITDA estimate by $6.3mm (49% of your ASV EBITDA) and add their pro forma corporate debt and 51% of ASV's debt I calculate ~$375-$390mm EV, so currently trading at 9x EV / 2015 EBITDA, or a 40% premium to TEX. If those numbers are correct, it seems like investors have not only factored into the acquisitions, but may have overshot. I would love your thoughts on this approach.
Run-rate estimates are likely far lower than your $3.90-$4.50 "'14 estimate." Most of the 1H '14 earnings were driven by Statoil project, which is now over (thus, unlikely anyone pays a multiple on those earnings). Rev this quarter ex Statoil was $44 million. They may be pressed to make more to 40c-50c per quarter on that type of run-rate. They need multiple large GSX and OBX orders to stem the pain. They now have a whopping 133k channels in their rental fleet (why buy when you can rent on the cheap) and there is an overcapacity of channels in North America. If SGS doesn't close (who knows?), then OBX inventory will be a disaster. Lots of risk here still. Good luck.
I think estimates assume the delivery has been pushed out (although they have come down a bit since that announcement). Why a possible value trap? Because possible not really trading at "10x 2015" estimates. Things could change, but 2015 estimates may be materially lower than current expectations. Good luck.
Stated in other articles that this is likely a value trap. The market is figuring out that forward estimates look tough to achieve.
HV, it is a value trap (potentially) in that they have been overearning, given the benefits of multi-year $170 million project (that provided them visibility / stability that never had before) and a handful of tiny companies buying $135 million plus of equipment from them (and don't appear to be in a position to spend that much going forward). Estimates appear to assume they fill these holes and then some. Mgt has been very optimistic that some large OBX orders are in the pipe, so maybe it happens. Good luck.
Thanks for the article, but this GEOS has all the makings of a value trap. GEOS benefited from a flood of orders that appear to have slowed down dramatically. The bridge to 2015 estimates looks extremely difficult. They have beat estimates on Statoil and a bunch of microcap companies spending large capex $ on their GSX wireless system. TGE, DWSN, MIND, SAEX look pregrant after their big spend on GEOS equipment. GEOS' customers are struggling, and looks like it is starting to impact GEOS. They need large GSX and OBX orders to start flowing to have a shot at bridging estimates. Good luck.
>40% frequency and 70% severity from last quarterly cc, although framed it as recovery rate I believe (so 30% recovery down from 32%).
Thanks again for spending the time. Sorry to follow-up again.
1) I think it would only be similar to DE or F if CRMT was a manufacturer. I think mortgage gain on sale is pretty shady too, but at least with mortgage gain on sale, a portion of that gain on sale is allocated to an asset with a relatively liquid market (the MSR). The company's disclosures does imply there is a large gain on sale component (FV the portfolio results in a $154mm estimated hit / $63mm net reserve). from q:
"The Company estimated the fair value of its receivables at what a third party purchaser might be willing to pay. The Company has had discussions with third parties and has bought and sold portfolios, and had a third party appraisal in November 2012 that indicates a range of 35% to 40% discount to face would be a reasonable fair value in a negotiated third party transaction. The sale of finance receivables from Car-Mart of Arkansas to Colonial has been at a 37.5% discount; however, due to the increased credit losses the discount will be 38.5% effective February 1, 2014."
2) Where do you get 35% gm and average mark-up of "$3,000"? I calculate ~42.5% gross margin on car sales and 49% overall. A quick glance at GPI, AN, PAG suggests a used car gross margins around 7.5%-8.5% vs 42.5% for CRMT.
At $9,750 "retail price" w/ 6.6% down (at least the average in fiscal '13) = ~$9,100 financed. and they recognize $4,150 upfront at 42.5% and are currently running at 70% severity of loss (another indicator of the aggressive mark-up) and now "greater than 40%" frequency of loss. It sure seems like there is significant economics recognized upfront and the imbedded costs to finance a book w/ 40% freq and 70% severity is multiples of what you implied above.
Thanks for the reply FT. I would also like to state that I like mgt, but think they are in a pickle and their aggressive response to the competitive environment still may bite them in the arse further (in the form of significantly worse credit performance). One thing has always bothered me though: they often bring up their fixed interest rate (as a reason they might avoid regulatory or CFPB scrutiny). As stated above, the monthly payment is likely the #1 driver of a sale. The sticker price of the vehicle is often an afterthought. they sell an old car w/ 100k miles for "$10k" that cost them $6k wholesale. There would likely never be a cash buyer at $10k w/ that massive mark-up. The mark-up inbeds a dramatically higher financing costs relative to the 15% stated interest rate. Bc they recognize 100% of that gross margin day one, ever though they may only collect $600-$1k down, all the economics are front loaded. it is basically GAIN ON SALE accounting. The accounting works as long as credit is ok. It could unravel (further at least) if the more aggressive term, downpay and mods continues to result in deteriorating credit.
Thanks for the article and 909's thoughtful response. not sure why you think you risk only a "20% draw-down." The aggressive competition likely ends as a result of some dramatic change in financing market or more likely, elevated credit losses. CRMT's response to competition has been more aggressive underwriting: extension of term and lower down payments. We are very still early in the more aggressive credits flowing through peak charge off periods. If credit frequency increases across subprime it would likely drive severity higher also (for everyone). That could be very painful for CRMT's results and stock price. good luck.
Basel III capital requirements has induced only a few banks to sell MRS (Flagstar and Wells come to mind). The high cost to service is the more likely reason. However, WAC appears to still be a high cost servicer.
WAC's leverage would make Lehman and Bear blush. They have issued $350 million of equity over since they de-REITed and have grown from a $1-$2B balance sheet to a $17B balance sheet. and it appears most of the gains in book value have been driven off paper mark-ups of their highly delinquent MSR portfolio. it's just my humble opinion, but WAC appears to be, by a wide margin, the riskiest of the three non-bank servicers (due to cf profile, leverage, and high cost to service, plus a highly questionable definition of operating earnings).
Did some work also. Their "adjustments" to their earnings look highly suspect (just a word of caution when looking at the Adjusted EBITDA or earnings). Also, their cash flow statement is worth digging into, bc there are some red flags. CFO through 9M is negative $2B (mortgage biz which is capital intensive). The previous 12m they issued >$5B debt (although a lot mb and repo) and only $276mm of equity issuance. This is worth paying attention to as capital requirements for servicers has been mentioned a lot recently (equity ex MSR and MSR mark-ups), and WAC's is very low if not negative. good luck
Y, that valuation relative to AEL in November 2012 was asbsurd. The clear mistake was not buying AEL. It is up 125% since.
UncleLongHair, that statement in incorrect. Gain on sale margins of agency mortgages are on function of the mortgage rate, the par yield of agency MBS (aka the primary / secondary spread), guarantee fees and expected duration. the primary secondary spread widened to all time highs in the 2H'12 as QE artificially depressed MBS yields. That has begun to reverse
UncleLongHair, thanks from the background but not sure what your opinion is. Originating and selling conforming mortgages has indeed been a very profitable business for ANCX, but that business has been "over earning" because of historically wide spreads and very high volumes. That favorable backdrop changed dramatically in June w risking mortgage rates. Volumes are likely decline and margins have normalized, which will likely create pressure on ANCX's earnings. It seems like that "secret sauce" could cause some pain as conditions normalize.
I appreciate your thoughts and quick response. If commissions are 95bp then non-commission salary expense at the mortgage bank is still about the same size as the salary expense at the bank. Since commissions are usually the highest expense for a mortgage operation, this does strike me as a bit strange. I don't believe the 10q is out, but I believe non-comp / ex-provision expense is running ~$1.6-$1.7 million a quarter at the commercial bank segment. For a growing commercial bank w/ >$800 million of segment assets and a wealth mgt division, this sure seems absurdly low. Again, this is just another red flag that something might be up with the allocation of expenses between mortgage and banking (and thus the pain of lower mortgage results could be more severe than expected).
Thanks for the article, but you did not address the elephant in the room. Gain on sale of mortgages was still $7.1 million in 2Q after Denver with total pretax of $5.5 million, so >than 100%. We are just coming out of a mortgage banking volume and gain on sale margin bubble. I have trouble understanding how stock works if mortgage drives earnings lower. Also, I also have trouble reconciling the company's segment disclosures. They appear to allocate very little expense and salary to the commercial bank relative to the mortgage banking segment (potentially overstating the high multiple biz relative to the low to mid single digit multiple biz). It appears somewhat questionable. Would love your thoughts. Thanks
On 5/9/13 conference call they said they had a $800 million pipeline, April was their biggest origination month in years, and guided to greater than $4 billion of originations in 2013. That guidance implied $1.1 billion per quarter. I just read the transcript of the webcast, and looks like 2Q volumes came in below $800 million and they are cutting expenses and laying off people because volumes were so low the past month. Again, not sure where there is value here. Looks like a big value trap. Good luck David
And to throw my two cents in, I see little value in the common shares. They don't have much of the business with my estimate of zero residual value in their securitization (the Long-term Mortgage Portfolio segment), the Real Estate services segment is a melting ice cube (nearly all driven from the shrinking LT mortgage portfolio, which one could argue is someone questionable), and the origination gain on sale business could not make much money despite a historic bubble in gain on sale margins. that bubble has now popped. This reminds me of SNFCA, which I described as a value trap at $8 here on seeking alpha a few months ago (it is now down 25-30%)
Per the last 10k, you are correct that company has negative equity: "Book value per common share was $(2.59) as of December 31, 2012, as compared to $(2.65) as of December 31, 2011 (inclusive of the remaining $51.8 million of liquidation preference on our preferred stock)." The 10k also discusses the class action lawsuit from the preferred stock holders. I'm not a lawyer either, but common sense suggests management screwed over preferred holders and could be held culpable.
Management's sum-of-parts excludes / backs out SPB's debt. While I find management's sum-of-parts presentation suspect and hard to reconcile, the SPB piece is the most straight forward part. The $7.34 per share valuation is based on a $54.52 per share price in the most recent presentation. At same point in time, HRG had $1.28 billion or $6.21 per share of non-SPG debt and non-VIE debt. The stock is not as cheap as you present above. On another note, as long as the share price remains above the convert price, I find it hard to understand why you wouldn't use the diluted share count (and adjust the valuation for the face value of the converts). Again, good luck.
in response to you comment "I thought your sum of the parts argument unfairly punished them for carrying their share of SPB's debt on their balance sheet without giving them credit for the premium to book value that those same assets get at SPB's actual market price," I did adjust the sum-of-the-parts for SPB's debt and the mkt value fo the shares. I think you are somewhat confused.
#1 You note that the secondary offering in Dec was "perplexing" and "puzzling." However, my article that you linked to above (from nov '12) predicted the hedge fund's ownership was a big risk that was being ignored. This risk is likely more ellevated today than late November given the SEC settlement that requires Falcone to “take all actions reasonably necessary” to satisfy redemption requests from investors. HRG appears to be the only liquid investment at the hedge fund, so shares are likely to trade w/ a massive overhang until Falcone cleans up his redemptions (ie sells HRG shares). #2 I think your sum of the parts is off. Also, I suggest you look at enterprise value, not market cap. Good luck
Everyone is expanding their distribution networks. Mortgage origination has little barriers to entry and is a commodity business that experienced highly attractive returns for a brief period of time, and as a result, experienced a dramatic rise in capacity.
Flagstar's book value plus DTA = $22. Stock is at $13.
Management's selling appears pretty rational to me. For years the company struggled to make much money, and the stock lingered below $3 per share for most of the past 25 years. The Fed's aggressive purchases of agency MBS produced record, and temporary, spreads that enabled mortgage originators to overearn. If, but more likely when, spreads and volumes normalize, the company's earnings power will be dramatically lower. just my opinion, but this has the makings of a value trap. again, good luck.
Thanks for the article, although I think you may want to dig into the sustainability of mortgage gain on sale. The improvement in their results were driven all by this line item. Plenty of other gain on sale players have turned out to be value traps. FBC is one example. you can pick that one up for 3x EPS. good luck.