Life Partner Holdings: Nothing More Than a Scam?

| About: Life Partners (LPHI)
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Life Partner Holdings (NASDAQ:LPHI) looks great on paper. With no debt, and a 6% yield, it is in a great financial position. The dividend is financed with cash, and it is growing. Revenue has grown every year since 2006, and has brought EPS and free cash flow with it.

The PEG ratio should be adjusted to account for dividends. To justify a P/E of 15, a 15% annual growth should have occurred in the past, and there should be a reason to believe that it will continue to give this fictional company a PEG ratio of 1.0, the benchmark. They should be, so this is the adjusted calculation: (P/E - Current Dividend Yield %) / Expected 5-year growth rate Then it must be assured that the expected 5-year growth ratio is similar or lower than the trailing 3-year revenue growth rate to make sure that the expectations are realistic. This way, dividends are accounted for when looking at enterprise value looking forward.

Now back to Life Partners. With a P/E of 8.1, and a yield of 6.1%, at least a 2.1% expected 5-year growth rate would be expected, backed up by history. The trailing revenue growth for LPHI is over 40%. The forecast is a measly, in comparison, 12%. This suggests that Life Partner holdings is trading at roughly half what it should in comparison to future growth and yield. Other measures of value support that Life Partners is undervalued by around 50%.

Life Partner Holdings operates in an industry all its own. Management recognizes themselves as one of the larger life settlement companies, and say that they have one competitor who has roughly twice their market share, while their other 30 competitors have around their market share: roughly 7%. Management doesn't name any of these competitors. From an investment standpoint, no competitors with comparable business models could be found. In the meantime, Life Partners is doing a great job of turning capital into cash. Return on Invested Capital, Return on Equity, and Return on Assets are all over 40%, and all of these are increasing, not eroding like many articles suggest that they will in the future.

Now we move on to the problem, because there is only one: Management profiting from immoral things like betting that other people will die sooner rather than later is generally to be regarded as morally degraded, but might be forgone for a seemingly great company like Life Partners. The first red flag on Life Partners came from a combination of the 2010 and 2009 annual reports. In 2009, the external auditor stated that control over internal accounting was not maintained. In 2010, there was a new auditor, but management wrote that the change was not due to any disagreement with the previous one. Sounds fishy.

Digging deeper, and further back, we find out a bit about Brian Pardo, Chairman of the Board and President, and CEO. All three roles. He also owns over 50% of the outstanding shares in a trust based in tax-haven Gibraltar. He's quite the entrepreneur, and this is his second company. The first one went down in a flame of SEC investigations into his falsifying records, and ended in bankruptcy.

This doesn't seem to scare off Vanguard, or Oppenheimer, who both own shares. None of the other major fund companies own shares, except for iShares which owns shares for its Russell 2000 index fund. One top of Brian Pardo's questionable history and actions, heap on lawsuits from 5 states. Not to mention decidedly bearish options sentiment. Another specter is simply the lack of share price appreciation. One would expect a company with growth of 40+%-per-year to have a rapidly appreciating share price, but Life Partners is still floating a pitiful 15% above the 2009 lows. Why is this? Because investors don't have confidence in the integrity behind Life Partner Holdings, and they shouldn't.

Disclosure: I am not short because my current portfolio set-up does not permit short selling. If I could, I would likely short LPHI when it reached around $22 per share.