Tuesday, August 12, 2008

NCC catalysts

6/30 Adjucted capital is as follows:
Equity 18.0
LLR 3.4
Visa 1.0
AAM .4
Remaining losses [3.8]
Remaining capital 19.0B
If 2X co. est. [3.8]
Twice the loss Cap 15.2B

At 6/30/08 NCC increased their estimated remaing loss in the worst portfolios to 3.8B. The losses are 2.5 in Nat HE, .3 in SubP 1st Mtg, .5 in SubP 2nd mtg, and .5 in Const. They charged off 1.3B YTD so they have taken or identified 5.1B of losses. But they raised 7B in a terribly dilutive offering so we should expect more hits in these portfolios or significantly larger than normal losses in the core business. But, the 2X estimate of 7.6 still to come would still leave them well capitalized and with a clean balance sheet.

So what could move the stock before it becomes evident that they have enough capital? The following events could be catalysts, in no particulat order:
Sale of the Liquidating Portfolio
Reduction of NPA and LLP in upcoming quarters
Sale of Allegiant Asset Management
Large new positions by leading value money managers 6/30 or 9/30
Strong BUY recommendations by Bove or Whitney
Elimination of FDIC Memo or SEC informal investigation

Those catalysts could accelerate the stock price movement. The underlying earnings will do it by itself eventually. NCC has pre provision and pre tax earnings of $600 per quarter. A $150 M ongoing provision gets pretax earnings of $450 0r 1.8B per year. With 2.1B shares outstanding, thats .85 eps. Using a 10P/E, 12X tax effected, gets an $8.50 share price on todays earnings stream and emphasis on collections, not growth. Normal times will grow the net significantly and the share price as well.

Friday, August 8, 2008

That’s me eating the bagel smothered with Smart Balance

I am once again the crusty credit analyst, no longer crummy. The refiners are returning some of my money and National City continues to look promising. The upcoming sale of their money management arm, $30B under management, should fetch around $300B and theycan’t have it on the books for too much. A sale will add to thecapital cushion. Right now that is important and we/they will deal with any missing earnings later. For now NCC looks good. Today’s SEC investigation announcement isn’t alarming YET as most SEC probes end up with afew million dollars in shakedown fines-so likely no big deal.

I’ve been watching Smart Balance [SMBL] for quite some time and never found the right entry point. i did today as the market sold SMBL off with a 25% vengence.

SMBL is a play on management and healthy living. Steve Hughes is the driver behind the company. He created and grew ConAgra’s Healthy Choice brand to a huge business over, then moved to turning around Tropicana for Pepsi, grew Celestial Seasonings tea business, and Dean Foods branded milk business. he accomplished huge sales growth and market share in each one AND he did each quickly. Each took less than 4 years. Best is the knowledge than he didn’t leave a mess at each place as he isn’t a hotrod, growth at all cost type. He builds brands succesfully.

Smart Balance is a healthy brand. They started with buttery spreads and have extended the brand into oils, popcorn, peanut butter, creme cheese, cheese, etc. All healthy, all at premium prices.

Hughes purchased the brand, GFS Brands, in 5/07 for $491MM. In addition to the IPO money, SMBL tapped private equity to fund the GFA acquisition. The new money came in at $7.46 for the common and a preferred that has converted at $9.00. As an aside, officers and directors, and major shareholders have purchased open market shares during the past 3 months at prices higher than the present market price.

Revenues are over $200MM and gaining share. Just as at past companies, Hughes has expanded the brand, shelf space, and entered the institutional business as well. Profits are slim, but will follow with scale.

SMBL is a asset light company. They only have 52 employees, go to the web site and read the impressive bios f the management group, and do no manufacturing or distribution themselves. They control and source the materials and have multiple product manufacturers. As such, book value is $6.60 which is greater than the share price. Tangible book is much lower as they have lots of goodwill, but theybought a good brand.

Today they reported earnings that were less than expected and sales were also a little light per analysts expectations. Like many companies over the past 3 months, commodity prices have risen faster than they could raise prices. They did effect two increases and another is set to go into effect for this August. With input prices now receding, my guess is they will sandbag decreases like Tesoro and Valero will in refining. On the conference call management was confident that the second half of ’08 will see accelerated growth and earnings.

My time horizon on SMBL is 3 years. Just as NCC has to rebuild its balance sheet and investor confidence before it hits $20, SMBL needs to build its brand and market share. Hughes seems to be historically on a 4 year exit plan and that’s my bet here. If he does what he has in the past he’ll sell to a big food company for a large price. This has multi-bagger written all over it. Both SMBL and NCC will not happen overnight, but they will happen and the annualized returns will be significant. Remember I am no longer the crummy credit anlyst, but again the crusty credit analyst.

I have bet on Steve Hughes today and gotten in at a very good price. If the market gives me lower prices I will be compelled to add to my position as I’d like Steve to make me a bunch of money over the next couple of years.
Add to Technorati Favorites