Archive for October, 2008

  • The Decline and Fall of Old Media
    , October 23rd, 2008 at 11:10 am

    The New York Times Company (NYT) closed yesterday at a 13-year low. The company reported a loss for the third quarter and it considering cuttings its dividend. The current dividend indicates a yield of 8.4%.
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  • Does this Make Any Sense?
    , October 23rd, 2008 at 11:02 am

    In July, Apple said to expect $1 a share in the next earnings report. Since Wall Street had been expecting EPS of $1.23, the stock dropped $4 to $162.
    Now here we are three months later and Apple reported earnings of $1.26. So the shares rallied $5…to $96!

  • Dennis Kneale Shocked then Composed
    , October 23rd, 2008 at 10:52 am

  • Nicholas Financial’s Financials
    , October 23rd, 2008 at 10:46 am

    A reader weighs in:

    I am not averse to buying microcaps and have in fact made some good money doing so. I bought stocks that had a good business model and became big companies. This is why I think I can help with regards to NICK.
    First, the finance receivables is very large compared to any other part of the left side of the balance sheet. Basically, you are buying the receivables, as a shareholder. You are buying them leveraged a bit (as you mentioned 2:1). You’re not really buying the operations of the company because again, earnings and cash flows are tiny compared to the asset side of the balance sheet; there will also be no earnings if receivables shrink and the company can no longer collect interest.
    With that being said, I’d like to point out that last quarter there was a charge off of close to $20M, applied to the receivables. This was 9% of the receivables, or roughly 20% of the equity. Meaning your shares, as they represent equity, should have declined by at least that amount — assuming there was no reason book value would increase in the near-term, which would be a long shot as “charge-offs” tend to be just that… off… for good. These are not to be confused with unrealized losses which occur due to mark-to-market fluctuations.
    Delinquencies on payments also increased across all time periods, indicating that further charge offs are in the wings. If the economy recovers soon there’s not much to worry about. If consumers pull pack (in Florida in particular) then even just a 20% charge off will have a massive impact. Because the company is leveraged about 2:1, that’s a 40% decline in equity. That’s also a cumulative ~30% decline in the receivables portfolio, meaning that next year revenues will decline by about 30% as well, because they make money from interest payments. The costs of running the company and collecting those payments are relatively fixed, so you will get an earnings decline of more than 30%, under this scenario. The cost of debt isn’t likely to get cheaper either, increasing another cost in the short run.
    Finally, in the last year there was a share offering which diluted your ownership stake by another 10-20% depending on the time periods you compare.
    If you know the risks then that’s fine. I respect the bet, which will either have a huge upside or go to zero. But this really is a bet on the consumer and finance receivables. There is no sustainable operating company if borrowing rates increase and the consumer weakens further. I didn’t feel that your post stressed this point enough.
    I hope my input is of value. I started looking through the financial thinking you’d spotted a gem. Under most economic scenarios there’s no operating company going forward. If we recover, then you are absolutely right, the stock will jump. But don’t expect this company to be around in six months if the economy gets much worse.

  • Your Daily TED Update
    , October 22nd, 2008 at 9:28 am

    We’re down to 251. This is looking much better.

  • It Was Only a Matter of Time
    , October 22nd, 2008 at 8:40 am

    Brokers With Hands on Their Faces

  • Some Thoughts on Nicholas Financial
    , October 21st, 2008 at 1:53 pm

    Yesterday, Felix Salmon had some questions for value investors and he concluded by saying: “I might have some faith in the ability of value investors to find cheap stocks, but I have no faith at all in the ability of value investors to time the market.” As usual, I agree with him.
    Personally, I don’t try to time the market, and the times that I have tried, I’ve been awful. Perhaps I’m a contrary indicator. Of course, even when I try to go against my instincts, I’m still lousy. I guess it’s just me.
    That’s why I stick to stock-picking. As followers of my Buy List know, I’m a buy-and-hold type of guy. The Buy List has 20 stocks that I choose at the beginning of the year. Each year, I’ve only replaced five stocks, so that implies a four-year holding period.
    One stock that’s been on my mind lately is Nicholas Financial (NICK). This is what I would call a deep value stock. It’s a very low-priced micro-cap and in all honesty, it probably won’t do much of anything for a bit of time. Still, I like it and I own it.
    The reason I find NICK so interesting is that it’s almost a perfect lab experiment for looking at some theories of investing. First, it’s a value stock. Second, it’s a micro-cap stock. Historically, both groups have outperformed the market as a whole. This of course doesn’t mean NICK will outperform, but it’s got those two characteristics on its side.
    I should add that NICK isn’t just a micro-cap. It’s really micro. The company has a market value of just $33 million. Some Yankees make more than that. I was buying it last week, and trying my best not to throw the price out of whack, but it’s hard to avoid. Some days, no shares trade.
    Also, NICK isn’t just a value stock, it’s a deep value stock. The shares are going for less than four times trailing earnings. The company’s book value runs $7.91 a share. Yesterday’s close was $3.21. That, my friends, is a value stock.
    Why is it so cheap? Well, NICK is in the worst possible industry right now. The company makes loans for used cars. Cars sales are plunging and the credit market is frozen. NICK isn’t officially called a subprime lender, but it sort of is. The stock has dropped from $14 to $3. But there’s a lot to like about NICK, and I’m comfortable owning it. Let me explain why.
    One thing that makes NICK interesting is that they actually hold their loans to term. Shocking, I know. They don’t sell their loans immediately. Most of the loans they buy from dealers at a discount. NICK also originates some loans, which tend be of decent quality, but that’s a small part of their portfolio.
    Here’s very generalized description of their financials from last year. (Please check the SEC docs for the exact numbers. I’m just using this to explain what NICK does.)
    NICK has a loan portfolio of about $180 million. That carries an interest rate of 26%. Their debt is about $100 million and they paid about 6.5% on that (it’s tied to LIBOR). So we’re talking about a company leveraged 2-to-1 with $50 million coming in the door and $6 million going out. That sounds good to me. That’s a yield of around 23%. Costs for running the business take out another 10%. The real killer is provisions for credit losses. That ran about 4% last year. This year I think it will be around 7%. NICK’s accounting tends to be fairly conservative. In fact, they could be over-providing, but I’m not complaining.
    Earnings last quarter were 15 cents a share down from 27 cents a share a year ago. Earnings will be lousy for the next earnings report (due sometime in early November), but they will be positive. I think they’ll probably be about five cents a share, give or take. So they are making money, which is impressive in this environment.
    The big driver for NICK is the provision for loan losses. The rest of their business is fairly stable. The major driver of loan defaults in unemployment. There’s a strong relationship between the jobless rate and NICK’s defaults. I think unemployment will top out around 8% sometime in 2009, maybe early 2010. The company isn’t in any danger of going under, although there will be losses for a bit. Once things start to improve, NICK ought to prosper.
    If you’re tempted to buy NICK, I will warn you. You probably won’t make anything for over a year. Once the market wakes up and isn’t afraid of less liquid stocks, NICK should rally.

  • Lincare and WR Berkley
    , October 21st, 2008 at 12:26 pm

    Two notes from the Buy List to pass on. First, Lincare (LNCR) reported third-quarter earnings of 76 cents a share, which beat estimates by four cents a share. The company earned 66 cents a share for last year’s third quarter, so that’s pretty decent growth. Earnings were squeezed by a 6% cut in Medicare prices.
    There’s also some trouble on the horizon.

    Revenue and earnings also were impacted by a change in ordering patterns for certain inhalation drugs by customers worried they were going to lose Medicare coverage for these drugs. Some patients placed large orders in June in an effort to get their drugs ahead of the Medicare change, which has since been delayed until Nov. 1.

    Wall Street currently sees Lincare’s 2009 earnings falling by 27%.
    The other news is that WR Berkley (WRB) said it expects to post a loss for the third quarter between 15 and 20 cents a share. Operating earnings, which is more important for insurance companies, will be between 70 and 75 cents a share. The company is taking an after-tax loss due to the hurricanes. The company also got screwed from owning preferred stock in Fannie and Freddie. WR Berkley is already up about 40% from its panic low on October 10.

  • Fed Chairs for Obama
    , October 21st, 2008 at 9:52 am

    The Bearded One has stepped into the minefield and, apparently, endorsed Obama. Or at least, the Democrats’ stimulus idea. Perhaps Ben just wants four more years as Fed Chair. Is Princeton that bad?

    While the Fed chief said any stimulus should be “well targeted,” even a general endorsement amounts to a political green light. Mr. Bernanke certainly knows that Mr. Obama and Democrats on Capitol Hill are talking about some $300 billion in new “stimulus” spending, while President Bush and Republicans are resisting. And by saying any help should “limit longer-term effects” on the federal deficit, he had to know he was reinforcing Democratic opposition to permanent tax cuts.

    That probably wasn’t a smart move, and I seem to recall Bernanke saying he would try to avoid such actions. One of my complaints about Alan Greenspan was the way he injected himself into policy debates. Still, I don’t see any reason why the Fed Chair can’t give his opinion on fiscal matters.
    On an interesting side note, Monica Langley points out in today’s WSJ that Obama is now BFF with 81-year-old Paul Volcker.

    On Tuesday, Mr. Volcker is scheduled to appear on the campaign trail with Sen. Obama for the first time. At a round-table discussion with voters in Lake Worth, Fla., he’ll “give his view on the state of the economy and the credit markets, and what needs to be done to fix them,” says one campaign adviser. Longtime Fed watchers are amused that Mr. Volcker, known for his muttered statements during Fed meetings in the 1980s, will be in a political role on the stump.
    For Mr. Volcker, a connection with Sen. Obama could help burnish his record as Fed chairman. The cigar-chomping central banker from 1979 to 1987, he received blame for driving up interest rates and tipping the U.S. into the deepest recession since the Great Depression. But Mr. Volcker is just as well known for taming the runaway inflation of that era. His stock has risen in recent months as his gruff warnings about the risks of deregulating the financial sector have come to look prescient. His successor’s reputation, meanwhile, has come under a cloud. Alan Greenspan is under criticism that the low interest rates and deregulatory ideology of his tenure contributed to today’s crisis.

  • Financial Crisis Hits Journalism
    , October 20th, 2008 at 9:25 am

    Credit crisis hits America’s farmers
    Financial Crisis Hits Moscow’s Wealthy and Fancy
    Crisis hits Aussies’ holiday plans
    Wall Street Crisis Hits Maine Housing Agency
    Credit crisis hits Sands’ Macau resort plan
    Crisis hits art world in auction flop
    Economic Crisis Hits Northwestern, “We Ok, Though,” Bienen Reassures
    Financial Crisis Hits Hungary Hard
    Crisis hits Asia’s love affair with luxury
    Financial crisis hits common man hard
    Financial Crisis Hits Billionaires
    Global credit crisis hits the poor, hard
    Economic crisis hits home in Brookline
    Stallion Fees Sink as Financial Crisis Hits Thoroughbred Market
    Financial crisis hits pheasant and partridge shooting
    Financial crisis hits your morning joe
    Economic Crisis Hits NY’s Northern Suburbs Hard
    Crisis hits Maine lobster industry
    Credit crisis hits Harrisburg incinerator
    Global financial crisis hits undertakers
    Mortgage Crisis Hits Queens Especially Hard (FYI: They mean the borough)
    Credit Crisis Hits Canada
    Financial crisis hits many where it hurts the most
    Elite Nightclubs Empty as Crisis Hits Oligarchs
    Credit crisis hits feeder, stocker cattle