Author Archive

  • Morning News: May 11, 2012
    , May 11th, 2012 at 6:42 am

    Germany to Euro Zone: Do as We Say, Not as We Do

    Credit Agricole Profit Hurt By Greek Exposure

    Bankia Said to Have End-May Deadline for Restructuring Plan

    France Entrepreneurs Flee From Hollande Wealth Rejection

    Credit Agricole First-Quarter Net Drops 75% on Greek Losses

    China Industrial Output Growth Slows Sharply In April

    India Industrial Output Surprisingly Falls

    J.P. Morgan’s $2 Billion Blunder

    A Shock From JPMorgan Is New Fodder for Reformers

    IAG Expects to Break Even at Best in 2012

    Mexico’s Slim Seeks Bigger Slice of U.S. Phone Market

    Nissan’s Quarterly Net Profit Surges

    Bank to Pay $202 Million To Settle Suit On Mortgages

    Credit Writedowns: Don’t Fight the Last War: Lessons from the Battlefields of Risk Management

    Jeff Miller: When Something Goes Wrong: The Case of JP Morgan Chase

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  • Glad That’s Cleared Up
    , May 11th, 2012 at 6:30 am

    Reuters:

    Facebook’s IPO already oversubscribed: source

    Bloomberg:

    Facebook IPO Said to Get Weaker-Than-Forecast Demand

    (H/T: Peter Kafka)

  • Reader’s Take on Nicholas Financial
    , May 10th, 2012 at 1:19 pm

    One of my readers wrote up his take on Nicholas Financial ($NICK) and I offered to run it here:

    What Would You Pay For This Company?

    by DTEJD1997

    What would you pay for a company with the following dozen characteristics?

    * Has a return on equity of 17.7%
    * Has a return on assets of close to 9%
    * was profitable through the 2008 financial meltdown
    * Has made profits every year that it has been publicly traded
    * Has increased profits in eight of the last ten years
    * Has increased EPS at a compound rate of 13.71% for the past 11 years
    * Has grown book value EVERY year for the past 10 years
    * Has grown book value at a 16.75% COMPOUND rate for the past 10 years
    * Has increased sales EVERY year for the past 10 years
    * Has increased sales at compound rate of 11.68% for the past 11 years
    * Has more shareholder equity than debt
    * Is very conservatively managed compared to its peers

    From the above financial metrics, we can see that this is a profitable, well-managed company.

    Would you be willing to pay 10X earnings?
    Would you be willing to pay 12X earnings?
    Would you be willing to pay MARKET earnings?
    Would you be willing to pay a small PREMIUM to market earnings?

    Great! Well what can we buy into this company for? How about a 6.8 P/E ratio and a price to book of about 1.1X?

    I almost forgot, it has a dividend yielding over 3%.

    Sound interesting?

    What is this mystery company? Why it is:

    Nicholas Financial ($NICK)

    I posit that this company is generally misunderstood and not given proper credit, resulting in an abnormally low valuation.

    NICK will be eventually be valued at a more normal valuation level once it is commonly understood what a good company this is.

    NICK’s Business Model

    NICK has field agents that go to “buy here, pay here” auto lots. They work out of branch offices. They will look at the book of loans that the lot has and make an offer on what they believe are good credit risks. Typically NICK will pay about 91 cents on the dollar for the loans. The loans have average interest rates of about 24% and have loan life of about 48 months. The average amount financed is $9,700. NICK is looking for people that have temporarily bad credit or life circumstances that are temporary in nature. NICK does most of their underwriting using metrics OTHER than a FICO score. As a result of this, NICK’s buyers are very finicky and will only purchase maybe 1 in 25 loans that they look at.

    Management also has a database on car values and the likelihood each one will enter in default. Certain models attract lower quality buyers. Certain models also hold their resale better if repossessed. Their proprietary database of vehicle defaults and liquidation values adds to their underwriting prowess.

    A further addition to the margin of safety is that NICK typically pays only 91 cents on the dollar for the loans.

    NICK is very aggressive about repossessing vehicles. They make it very clear that they will do so shortly after the loan is delinquent.

    Here is my line of reasoning:

    It is very probable that we will see a situation analogous to what transpired at America’s Car-Mart ($CRMT). (I owned and traded CRMT in the past but no longer own it.)

    To briefly describe the situation: CRMT is the largest publicly traded “Buy Here, Pay Here” auto dealer. They operate in a slightly different manner than NICK, but operate in the same industry, sub-prime auto financing. CRMT’s management is also fairly conservative, and has traditionally had similar returns on equity and ROA as NICK has. CRMT has gone in price from about 11 to 44 in the past five years. They have increased earnings per share from $1.39 in 2006 to $3.06 in 2012. CRMT’s P/E ratio has gone from mid to high single digit (8 or 9), to low to mid teens (13 or 14).

    What brought CRMT that higher valuation was sustained, steady growth in revenue and earnings. This resulted in increased investor awareness. CRMT became more recognized in the financial community with articles and mentions in VIC, Motley Fool, Investor’s Business Daily, Forbes, Seeking Alpha, and others. Increased revenue and earnings brought higher awareness, higher awareness has brought a higher valuation.

    CRMT now trades for about a 14 P/E ratio. I think that CRMT’s valuation is about right and fully valued. If NICK can make it to CRMT’s valuation levels, it would be a double immediately. NICK does not have to reach CRMT’s valuation level to make it a market beating investment, it just needs to come close.

    The end result was that CRMT increased its business and eventually found increased investor awareness and acceptance. It took many years for CRMT to accomplish this. NICK is ready to do the same thing.

    NICK is conservatively run and unique in their industry for a variety of reasons.

    * They review a large number of loans before purchasing, purchasing about 1 in 25 loans reviewed.
    * NICK measures risk through factors other than raw credit scores, such as impressions made during an interview, income level, stability, type of vehicle and others. This is why the company has a lower charge-off rate.
    * They hold the loans till they get paid off or default, there are no resales, and no loan securitization.
    * Employee pay is based off of quality of cash flow from purchased loans.
    * NICK is not heavily leveraged with debt. Debt is about $110 million versus shareholder equity of about $140 million.
    * NICK remained profitable throughout the financial crisis.

    If NICK were not well run, they would not have been able to post the numbers they have over the last 10 years.

    Value of NICK’s Business

    NICK’s management thinks that the sub-prime market is at least $250 billion in size in the US. Unfortunately, I think sub-prime auto lending is going to be a huge growth industry for the foreseeable future. In five years could the sub-prime auto loan market be $300 billion? I bet it could. Could NICK eventually get 1% of that? If they could, the company would grow approximately 10X. NICK has no operations on the west coast, plains states, or New England states. NICK’s field office now includes, sixty (60) offices located in Florida, Alabama, Georgia, Kentucky, Indiana, Maryland, Michigan, North Carolina, Ohio, South Carolina, Tennessee, Virginia, Illinois and Missouri. Thus, there is plenty of geographic expansion opportunities.

    NICK is going to be opening 3 new branch offices in the upcoming 1st quarter of fiscal year 2013. So that will be growth of maybe 4% from new locations, as new locations take a bit of time to get fully up to speed. I strongly suspect they will open new branches in every subsequent quarter, maybe 1 each quarter. The existing 60 branch offices will probably grow to 65 locations by the end of the year. The existing branches should also be able to grow loan growth in the low single digits. Add it up and you can easily get 9% growth in loan volume. That might even be a bit conservative.

    I am sure NICK could grow at a faster rate if they took on more underwriting risk.

    It is clear that NICK is growing its business at ABOVE market rates. NICK also has plenty of room for future expansion.

    NICK does not have large amount of debt relative to assets. They have more shareholder equity than they have in debt. As a result of this conservative level of leverage, NICK is not reliant on lenders to grow their business. NICK can grow out of retained earnings. NICK has about $136 million in shareholder equity, with an offsetting debt level of about $121 million. Compare this level of equity to your average bank! The average cost of NICK’s debt is about 4.25%.

    Even with this low amount of financial leverage they are able to earn 18% ROE and a 9% ROA. NICK’s management is organically growing the company at about 9% a year.

    NICK’s business has allowed them to produce SUPERIOR economic returns year after year, in up and DOWN markets. Clearly, NICK’s financial results are not a one time event. Nor are they are a result of management’s “luck”. NICK’s results are the result of talented management and workers, and a superior business model.

    Businesses growing at ABOVE market rates and ABOVE market returns are what most investors are looking for.

    A plausible argument can be made that NICK operates in a difficult market, and thus should have a discount. A plausible argument can be made that NICK is a small-cap company and should further trade for a discount. How much of a discount is warranted?

    The S&P 500 is trading for almost a 16 P/E ratio. I would grant that NICK should trade for a discount because of its industry and size. Take off 1 P/E point for each and you’ll come to a 14 P/E. A 14 P/E is what CRMT is trading for. I think CRMT is a comparable company to NICK. Take off another 2 points just to be conservative and you’ll come to a 12 P/E. At the date of 5.4.12, a 12 P/E would put NICK at a price of $22.20, which is almost 10 points higher than where it currently trading for!

    What could go wrong?

    NICK operates in a business that is somewhat objectionable. Senior management is getting up in years and will probably be looking to retire and cash out in a few years. I don’t think they will take too low a price as they have already rejected a few buyout offers. There is a risk that up & coming management will not be as good as current management who started the company (and own most of it).

    NICK is susceptible to downturns in the economy and most of their business is in the south-east (Florida) and the mid-west. NICK’s customers are very economically sensitive. A downturn in the general economy will hurt NICK’s customers.

    NICK could be subject to regulatory scrutiny. However, I don’t think that is too much of a problem. After all, Congress did away with most usury laws.

    NICK is vulnerable to other competitors in the industry acting irrationally. (Come on down to Jimbo’s used car lot! Just sign and drive! Every one gets financed! I’ve lost my mind! EVERYONE GETS CREDIT, JUST SIGN AND DRIVE!) This was a major problem in the past. Eventually, undisciplined, irrational companies run out of capital and go bust.

    Conclusion:

    The end result is that NICK should be trading at a much higher price-to-earnings ratio.

    As time passes, NICK will continue to grow its assets. NICK will continue to increase earnings. NICK will increase its dividend.

    Earnings of $0.50/share were reported for the last quarter. I think the company will easily top $2/share in earnings for the upcoming 12 months. It is only a matter of time before the market takes notice of this and bids the price of NICK up.

    An investor is thus going to make money when:

    A). There is an increase in the P/E ratio from under 7, to maybe a range of 12 or 14.
    B). NICK is growing about 9% a year organically.
    C). NICK is paying a dividend of about 3%, it is likely to raise it in the future.

    I think an investor could easily receive a 20% IRR over the next 4 to 6 years.

    *Please do your own due diligence. I and my family own shares in NICK and may trade them without advance notice.

  • World’s Simplest Stock Valuation Measure
    , May 10th, 2012 at 10:51 am

    Here’s the world simplest stock valuation measure:

    Growth Rate/2 + 8 = PE Ratio

    Let me emphasize that this is simply a quick-and-dirty valuation tool and it shouldn’t be used as a precise measure of a stock’s value. But when I’m first looking at a stock and want to see roughly how it’s priced, this is what I’ll use.

    For example, let’s look at Pfizer ($PFE). Wall Street expects the company to earn $2.34 per share next year. They also see the company’s 5-year growth rate at 2.79%. If we take half the growth rate and add 8, that gives us a fair value P/E Ratio of 9.40. Multiplying that by the $2.34 estimate gives us a fair price for Pfizer of $21.98. The current price for Pfizer is $22.98, so it’s about fairly priced.

    Let’s look at IBM ($IBM) which has a higher growth rate. Wall Street sees IBM earning $16.61 next year. They peg the five-year growth rate at 10.58%. Our formula gives us a fair value multiple of 13.29, and that multiplied by $16.61 works out to a value of $220.75. IBM is currently at $201.71.

    I like to find stocks that are going for more than 30% below our fair value. As I said, that’s just one tool I use to find bargain stocks.

  • Is Google a Value Stock?
    , May 10th, 2012 at 10:24 am

    Despite all the attention it gets, Google’s stock hasn’t been such a great performer over the past few years. Since its high point in 2007, the shares have mostly tracked the market.

    What’s surprising to me is that the stock seems fairly inexpensive compared to the rest of the market. Consider this: Google is now trading at 12.06 times next year’s earnings estimate. By contrast, the S&P 500 is going for 11.34 times its earnings.

    Given its strong growth, I would think Google would be going for a lot more than the rest of the market.

  • The NYT Features Joe Weisenthal
    , May 10th, 2012 at 10:17 am

    In today’s New York Times, Binyamin Appelbaum features my good pal Joe Weisenthal. Here’s a sample:

    In Weisenthal, Blodget has found a market-obsessive who embodies his vision. Weisenthal, 31 and still a bit baby-faced, is funny, omnivorous and well versed in the mechanics of the economy. In the intensely competitive world of financial blogging, dominated by young men who work long hours and comment on every new development, Weisenthal stands apart by starting earlier, writing more, publishing faster.

    During the course of an average 16-hour day, Weisenthal writes 15 posts, ranging from charts with a few lines of explanatory text to several hundred words of closely reasoned analysis. He manages nearly a dozen reporters, demanding and redirecting story ideas. He fiddles incessantly with the look and contents of the site. And all the while he holds a running conversation with the roughly 19,000 people who follow his Twitter alter ego, the Stalwart. He spars, jokes, asks and answers questions, advertises his work and, in the spirit of our time, reports on his meals, his whereabouts and whatever else is on his mind.

    He is like the host of a daylong radio show, except no one speaks out loud. He rarely makes phone calls. His phone almost never rings.

    Some of what he writes is air and sugar. Some of it is wrong or incomplete or misleading. But he delivers jolts of sharp, original insight often enough to hold the attention of a high-powered audience that includes economists like The Times columnist Paul Krugman and Wall Street heavies like the hedge-fund manager Douglas Kass and the bond investor Jeff Gundlach.

    Last summer, amid rising concern that the economy would tip back into recession, Weisenthal repeatedly highlighted contrarian chunks of evidence suggesting that we were actually on the verge of stronger growth. It was a lonely view for a long time. It was also correct.

  • Morning News: May 10, 2012
    , May 10th, 2012 at 5:38 am

    Greeks May Hold $510 Billion Trump Card in Renegotiation

    Spain Underplaying Bank Losses Faces Ireland Fate

    Merkel Says “Growth on Credit” Would Deepen Crisis

    China Posts Wider Trade Surplus In April On Weak Imports

    Chinese Banks Get Nod In U.S.

    Czech Power Giant CEZ’s First-Quarter Profit Declines 16% on Higher Albanian Tariffs

    Home Prices Rise in Half of U.S. Cities as Markets Stabilize

    Fannie Mae Won’t Seek Aid After Posting $2.7 Billion Profit

    Cisco Shares Fall as Forecasts Miss Analysts’ Estimates

    Sony Profit Forecast Misses Estimates as TV Sales Decline

    Green Mountain Founder Feeling Burned By Stock Flap

    Behind Bed Bath & Beyond’s Cost Plus Deal

    A Circle of Tech: Collect Payout, Do a Start-Up

    Memo to Would-Be Members of the 1%: Move to the Northeast or Mid-Atlantic

    Phil Pearlman: The False Truths of Social Finance

    Roger Nusbaum: What Does Long Term Actually Mean?

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  • Bed Bath & Beyond Buys Cost Plus
    , May 9th, 2012 at 9:13 am

    Bed Bath & Beyond ($BBBY) has opened up their wallet. The company is buying Cost Plus ($CPWM) for $22 per share which works out to $495 million. Based on yesterday’s closing price, that’s a 22% premium. The best part for BBBY shareholders is that the deal is all cash.

    Who exactly is Cost Plus? According to the press release:

    Cost Plus, Inc., which will continue to be headquartered in Oakland, California following the transaction, is a leading specialty retailer of casual home furnishings and entertainment products in the United States. The company currently operates 259 stores under the names World Market, Cost Plus World Market, Cost Plus Imports, and World Market Stores in 30 states.

    I like this deal and it’s a small dent in Bed Bath & Beyond’s checkbook. According to the most recent balance sheet, BBBY is sitting on $1.76 billion in cash, which is $7.61 per share. In terms of BBBY’s stock, that deal is worth about $2.14 per share.

    The deal is expected to close during BBBY’s second quarter (June, July and August). BBBY expects the deal to be “slightly accretive.” Let me explain what that means: BBBY is “buying” CPWM’s earnings at a price less than the going rate for BBBY’s earnings. As a result, the deal will show a net increase to BBBY’s bottom line for this year.

    The press release notes: “Bed Bath & Beyond Inc. continues to model a high single digit to a low double digit percentage increase in net earnings per diluted share in fiscal 2012.”

    Bed Bath & Beyond was down at the open but it’s now up for the day.

  • Morning News: May 9, 2012
    , May 9th, 2012 at 5:47 am

    Moody’s Bank Downgrades Risk Choking European Recovery

    German Exports, Imports Hit Highs

    CAAM: Beijing Should Refrain From Policies Affecting Auto Industry Development

    U.S. Millionaires Told Go Away as Tax Evasion Rule Looms

    Oil Prices Fall Ahead Of US Data, Rising OPEC Output

    Morgan Stanley’s Michael Grimes Is Where Money and Tech Meet

    For Morgan Stanley, Third Cut Is the Deepest

    Toyota to Treble Profit This Year, Trim Costs

    Disney Races to Exploit ‘Avengers’ After 21% Profit Rise

    Margin Calls Cost Green Mountain Chairman, Director

    Glaxo to Begin Hostile Offer for Human Genome Sciences

    Prudential Confident On Outlook As New Business Profits Rise

    ING Profit Excluding Charges Beats Estimates, Boosting Shares

    Allianz Confirms Target

    Softbank: In Strategic Alliance To Create PayPal Japan

    Howard Lindzon: Momentum Tuesday…Cracks!

    Epicurean Dealmaker: Occupy Galt’s Gulch

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  • DirecTV Earns $1.07 Per Share
    , May 8th, 2012 at 10:20 am

    DirecTV ($DTV) reported first-quarter earnings of $1.07 per share. That beat Wall Street’s consensus by either one or two cents, depending on the source. A year ago, DTV earned just 85 cents per share.

    DirecTV’s sales rose 12% to $7.05 billion which was $10 million more than consensus. The company has done well in North America, but they see their future lying in Latin America.

    Put it this way: DTV added 81,000 subscribers in the U.S. last quarter. In Latin America, they aded 593,000. Yet there are more than twice as many current subscribers in the U.S. as there are in Latin America.

    The problem is that it costs more to get a subscriber in Latin America, so that hurts DTV’s margins. This was a good quarter for DTV. The stock is off some because it wasn’t the kind of blowout quarter that we’ve seen.

    The company said that it plans to make $4 per share this year and $5 next year. I think they can surpass those marks with ease.