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  • Deep Value Investment in SPMD
    SPMD is facing significant selling pressure and increasing short interest over the last several quarters after the exiting of Chapter 11 bankruptcy in January 2010. The market in my opinion is not reflecting the predictability of earnings behind the contract model. Stock closed today at $3.99.

    Highly levered directory (yellowpages and local search) business. SuperMedia, Inc.

    General Overview:
    SuperMedia Inc. provides media advertising programs in the United States. It publishes SuperYellowPages, the print directories, which offer a range of paid advertising options, such as listing options, in-column advertising options, display advertising options, and specialty advertising, as well as white pages directories. The company also operates Superpages.com, an online local search site that provides advertisers fixed-fee and performance-based advertising options. In addition, it offers direct mailers under SuperpagesDirect name; and Superpages Mobile, an information source for wireless subscribers. Further, SuperMedia Inc. operates as an official publisher of print directories. The company was formerly known as Idearc Inc. and changed its name to SuperMedia Inc. in January 2010. SuperMedia Inc. is based in Dallas, Texas.

    I am going to leave it to the posters to look at the earnings history and 10-k on the company's website: http://bit.ly/jTURAp

    Comments on financials:

    Consider that the average contract is a 12 month term. If you amortize the every GAAP reported earnings over a 4 quarter period, the 2010 revenues were predicted give or take 5% variation. The following is the net additions to revenues attributable to the individual quarter using this simplistic assumption:

    2009 Q1: $123MM
    2009 Q2: $122MM
    2009 Q3: $103MM
    2009 Q4: $92MM
    2010 Q1: $154MM
    2010 Q2: $93MM
    2010 Q3: $102MM
    2010 Q4: $77MM
    2011 Q1: $166MM

    2009 vs 2010 Q-Q Comparison
    Q1: +25.20%
    Q2: -23.77%
    Q3: -0.97%
    Q4: -16.30%

    2010 vs 2011 Q-Q Comparison:
    Q1: +7.79%

    The largest drop offs were Q2 and Q4 in 2010. I anticipate that these will be the best quarters for improvement in 2011.

    The 1st Quarter 2011 revenues and earnings far exceeded my expectations going into the quarter. The long-term debt reduction missed my expectations but this was driven primarily by the reduction in accounts payable quarter over quarter, so overall debt was reduced by roughly the same expectation.

    The simplified indications above provide for a clearer vision of what the projected revenues should be in the upcoming quarters and I believe could be considered conservative. Dexo recently indicated on its most recent conference call an overview of how its revenues are spread (seekingalpha.com/article/267019-dex-one-...):
     

    Jason Alper - BTIG, LLC

    My question was regarding bookings. Obviously, it looks like from the slide that there is 200 basis points of impact from the CMR in the bookings. If I understand your bookings metric correctly, it's a very forward-looking metric and it looks like anywhere from 95% to 96% of your bookings convert into revenues. Is that an accurate way to look at it?

    Steven Blondy

    Well, it all converts to revenue eventually. I think the point here is that bookings represent the value of the contract signed in the period for our local customers, which is about 85% of revenue plus the published value of the national accounts, which is the other 15%. So during the quarter, the bookings number we reported is the actual customer contract signed during the quarter. And I think about 20%, 30% of that is -- refines its way into ad sales in the quarter when bookings is reported and then I think it's like 40% to 50% in the immediate subsequent quarter and then maybe another 30% in the following quarter and then there's a small bit that is in the fourth quarter following the reporting of bookings. So it kind of -- it peaks and then it kind of fades a little bit after the immediate quarter following reported bookings.

    Jason Alper - BTIG, LLC

    I see. So it's not solely a 12 months forward-looking type of net number, it filters in over time.

    Steven Blondy

    Yes. The vast majority of our contracts are still 12-month contracts. So it does represent predominantly 12 months kind of future orders. But remember, bookings is the value of the contracts signed in the quarter or in the period, whereas ad sales represents the published value of all the contracts signed in the directory which is actually published in that quarter.

    The key take aways from this dialogue is that the revenues are be spread roughly 20% in the quarter the advertisement was booked, 40%, 30%, and 10% for each quarter following the quarter reported. 

    DEXO is anticipating Revenue declines in the 14-15% range for Q2 2011. SPMD does not provide guidance but taking the upper end of the range at 15% provides for the following estimates:

    Operating Revenues: $435MM
    Operating Expenses (75%): $326MM
    Operating Income: $109MM

    Depreciation Estimate: $44MM
    EBITDA: $153MM

    Interest and Taxes Estimate: $75MM
    Net Income: $34MM

    At 15.5MM shares outstanding, this projects earnings of $2.19/share of Q2 with Q1 and Q2 earnings exceeding the existing share price trading on the NASDAQ.

    Overall, this projection for Q2 is higher than my estimates. I am conservatively looking for Revenues around $414MM, EBITDA of $149MM, and Debt reduction of $70MM. EPS of $1.86/share.

    My 2011 projections provide a range of EBITDA of $477MM - $678MM and EPS of $5.45 - $10.77. Debt Reduction of $150MM - $278MM.

    The company remains to experience headwinds, but at $3.99/share, there is ample residual value in the business and cash flow ability to service the debt obligations over the next several quarters to the point that refinancing the debt obligations in 2013-2015 is likely given the cash flows of the business.

    A back of the napkin value of the company at 5X - 6X Cash flow would have an enterprise value of between $2,385MM to $3,390MM.  Less Long Term Debt of $2,171MM provides for value of $214MM to $1,219MM or $13.80 to $78.58/share with 15,511,925 shares outstanding. Clearly even a move to the lower end of the range provides significant value to the investor.



    Disclosure: I am long SPMD, DEXO.
    May 12 12:33 AM | Link | Comment!
  • $BAC - GSE / Monoline / Private RMBS

    Today was certainly an interesting day in $BAC. Trading Range of $11.71 to $12.45

    Given the provided information in the news releases, presentation, conference call, and supplemental information, I am going to try and get a back of the envelope figure for the potential claims and potential liabilities. This will need to be augmented over the upcoming months to get a solid estimate, but this is a rough estimate given the information provided and the information an individual can gather from reading 10-K and 10-Q information from the large banks.

    Bank of America indicated on their call they have been using mathematical models to estimate the liabilities for primarily the GSE portfolio of loans. This particular comment I think this is significant when anticipating the risk in the private RMBS portfolio:

    “the fact that the contractual reps and warranties are less rigorous than those given to the GSEs make it difficult to extrapolate the experience with GSEs over this population”

    So let’s work through the numbers from today’s presentation:

     

    Based on the figures and the information provided, BAC has not increased reserves as quickly as the claims due to the uncertainty of the validity of the Monoline claims and experience on the Private Label RMBS.

    BAC GSE Data

    BAC Monoline Data:

    BAC’s insight in the Private Label/Other exposure:

    Given the average paid information, total GSE claim estimate to total, and a range of loss information pegged to the historical loss on GSE loans, the figures would indicate the following exposure to BAC:

    The unfortunate part of the provided figures is that there is limited data to properly and even semi-accurately predict the losses on the Monoline Claims and Private RMBS claims. As you can see from my analysis, some additional information would be useful in analyzing the data:

    ·         Standard and Comparative Detail between GSE/Monoline/Private RMBS

    ·         This would include the actual detail on new claims/rejected/accepted by Counter-party. The detail provided by BAC does not break-out these figures by quarter but lumps them together and notes the percentage of GSE

    ·         We know that $47 billion was noticed to Countrywide/BAC today via a letter (http://scr.bi/9V7rEv) on the Private RMBS which makes this data obsolete. This also accounts for just over 10% of the remaining exposure indicated by BAC. This does not appear to be a claim but a notice of default on the servicing agreement which will likely lead to a claim. I would love to know the data on the individual pools in this notice.

    Overall, I am still skeptical that this “put back apocalypse” is really going to create severe issues for BAC. I do think reserves are adequate based on the information they currently have but as they indicated on the call, reserves will be lumpy and with the trailing pre-provision earnings and capital, BAC will work out long-term. The Pre-Provision earnings have been $9 billion + over the past few quarters and tangible book value is ~$12.91/share. The stock is trading at $11.80 which reflects roughly another $11 billion loss to book value. The bank has $4.4 billion reserved for losses in the putback portfolio already.

    I may have been early on this trade, but I don’t think I am wrong at the current time. Long BAC.



    Disclosure: Long BAC
    Tags: BAC
    Oct 20 12:47 AM | Link | Comment!
  • Bank of America - Undervalued here
    As Mr. Market has taken a short-seller's research and made significant adjustments to Bank of America in the recent week, I see opportunity in the shares. Opportunity exists because Branch Hill Capital has significantly over-shot its research. Research slides here.

    Let's start with the basics:
    Stock Price (10/15 Close)  $    11.98
    Book Value/Share (6/30 10-Q)  $    23.24
    Tangible BV/Share (6/30 10-Q)  $    12.14
    Tangible BV/Share (6/30 with CCB Value)  $    12.86
    EPS Mean Analyst Est. 2010 (Yahoo Finance) $        0.91
    EPS (6/30 10-Q) Actual  $       0.55
    2009 EPS  $    (0.29)
    2008 EPS  $       0.54
    2007 EPS  $       3.29

    At the recent closing price, BAC is trading at a discount of 1.32% to tangible book value, 6.84% to tangible book value after the inclusion of the China Construction Bank interest, and 48.45% of book value. The stock trades at a PE of 13 for 2010 Mean Estimates and 8 times 2011 estimates.

    This is the basic analysis. Trading at a discount to book and a low multiple to future earnings means a great deal doesn't it? However, the major issue weighing down the stock is the unforeseen risk with mortgage put backs required by GSEs, monoline insurers, and private label MBS.

    Branch Hill Capital Projects the following losses based on its own research coupled with Compass Point Research:

      GSE Monolines Private Labels Total
    Loss Projection 21.8 billion 7.2 billion $45 billion 74 Billion
    Put Back Projection 36.6 billion  12 billion  Not provided  

    Branch Hill fortunately provides its assumptions and rough analysis to provide the figures. Let's start with the Monolines because this is the easiest to counter given the recent 10-Q from BAC. Branch Hill uses a arbitrary multiple of 3 to estimate the ultimate put back claim from the Monolines based on the recent 10-Q. Let's go to the 10-Q regarding the $4 billion mentioned:
    At June 30, 2010, the unpaid principal balance of loans related to unresolved repurchase requests previously received from monolines was approximately $4.0 billion, including $2.3 billion that have been reviewed where it is believed a valid defect has not been identified which would constitute an actionable breach of representations and warranties and $1.7 billion that is in the process of review. At June 30, 2010, the unpaid principal balance of loans for which the monolines had requested loan files for review but for which no repurchase request has been received was approximately $9.8 billion
    So $2.3 billion of $4 billion were reviewed and it is believed there is not a defect which would indicate a breach of contract. This is an astounding 57.5% of the claims! Now there are another $9.8 billion underreview but no purchase request has been filed. It is not exactly clear the remaining $1.7 billion are valid claims, but needless to say taking a completely arbitrary multiple of 3 against the higher figure then assigning another arbitrary loss of 60% against this figure misleads the reader to believe higher losses can be expected.

    Moving onto the Private Label figure the loss projection is again misleading. Here is a link to a Compass Research Note dated August 16, 2010 that is referenced in the slides by Branch Hill. The link is a pdf document. Compass Research uses the lawsuit of FHLB San Francisco v. Credit Suisse Securities (NYSE:USA) LLC, et al.) and makes the following indication:
    In the worst case scenario, we assume that the rescission requests identified in the FHLB suits are indicative of the total potential
    pool of loans that could be rescinded industry-wide. While we cannot opine on whether or not the suit’s rescission percentage will
    ultimately be proven accurate, we believe that the data set forth in each particular suit is substantial enough to establish a worst case
    scenario.
    This is likely a strench to extrapulate from the FHLB suits to the entire industry. It also does not provide any potential credit to the counter parties on their viewpoint on the documentation and exceptions. This underpinnes Branch Hill's calculation of losses.

    Unfortunately as much as I have dug online as an individual investor, I have not located any definitive data on what the success rate is on private label rescissions/put backs and/or the current recission rate across financial institutions. Compass provides the following table in its research:

    Worst Case 2005 2006 2007
    FHLB Recission Rate 43.2% 49.1% 54.5%
    Alt A Success Rate (1) 50.0% 60.0% 75.0%
    Alt A Severity Ratio (2) 50.0% 55.0% 60.0%
    Subprime RMBS Success Rate 80.0% 80.0% 80.0%
    Subprime RMBS Severity Ratio 50.0% 55.0% 65.0%
    (1) Higher % equals larger losses as firms are more successful on the ultimate recession of loans
    (2) Higher % equals larger losses as banks lose more from loans of the provided vintage

    So because they are subprime, it is assumed they will be worse than Alt-A, and therefore more likely to be successfully put back to the banks. The figures also reflect high recission rates to be applied across a large span of assets. So Compass/Branch Hill assumes that GSE's will put successfully put back 20% with a loss of 60% and in private label mortgages it will be nearly double in terms of success? I doubt this logic will hold true. Why would the underwriting be that much worse by the same lenders to reflect the material discrepancy? Furthermore, only $33 million has been submitted for recission on Private Label MBS. More will come, but $33 million is nothing when you compare it to Branch Hill's $45 billion loss figure.

    Moving to GSEs, reference Oppenheimer & Co.’s Chris Kotowski. As stated on Barrons.com:
     

    Moreover, Kotowski asserts, since there’s a delay of 12 to 20 months between the time a loan becomes delinquent and the time that Fannie or Freddie request a repurchase, it’s important that “problem flows,” meaning, new loans showing up as an issue, are actually declining. “The level of GSE put-back requests should have hit their peak/plateau somewhere between Q1 2010 and Q3.”

    Based on the total expected repurchases of Fannie and Freddie, $27 billion, and B of A’s share, B of A could be facing a total loss of $3.153 billion, Kotowski estimates.

     

    Read his research for further information.

    Regarding the loss assumptions, the S&P Case Shiller national average has lost 27.33% from the peak in Q2 2006 to Q2 2010. Even if you pad some numbers for costs of foreclosing, the properties did not lose 50% to 65% of their value plus any principal reduction received during the performing years of the loan. This is just silly. If they were land loans, I would understand the discount. I have looked and not located, but would love to see the hard data on what the actual loss has been.

    As it is getting late, the summary is this:
    • BAC is undervalued - I see $17 as an easy 12 month target
    • Branch Hill capital is pushing paper to benefit its disclosed short on the stock. The numbers do not add up and the assumptions within the report do not stand up to the facts.
    • BAC with current reserves of $3.9 billion is adequately protected in the near-term and has the earning capability to cover additional exposure in the long-term.
    Looking forward to the call and earnings on Tuesday. Long BAC.



     
     


    Disclosure: Long BAC
    Tags: BAC
    Oct 17 11:45 PM | Link | 1 Comment
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