Tuesday, October 21, 2008

NCC’s second quarter was improved

A bank run was the wild card that could have derailed NCC’s turnaround. The latest FDIC increase to $250,000 has all but eliminated that possibility. NCC has only 5% of their funding in uninsured deposits. Therefore I’m not going to worry about that risk any longer.

Neither should other bank stock investors. That leaves credit quality and capital dilution as remaining worries. Now that the deposit run fears have ebbed, investors should be able to make estimates on the remaining two risk areas and come to the same conclusions that I have. If so, the stock price will rise.

NCC is cheap as a survivor and cheap as an acquisition. At quarter end NCC had a bok value of about $9ish and tangible book of $6.50ish. At a $3 share price it is selling at 1/3 of book and 1/2 of TBV, much lower than most regional banks. That would be warranted if their oan portfolio was going to deteriorate significantly requiring a capital raise with related dilution. but NCC already raise their $7B of capital in April which allows Tier 1 capital to be 11%, the highest of big regional banks. they also have a $4B loan loss reserve. If loans deteriorated sharply and they lost $8B that would eat through the LLR and require another $4B of provision to write-off the loans and an additional $2B to replenish the reserve. That $6B would be equal to $3 per share, leaving $6 still in book value-twice the current share price. I don’t think they will lose $8B and eventually investors and acquirors will come to the same conclusion.

The new Federal capital injection program will augment NCC’s capital and that of other regional banks. Deals will be easier to do and capital will be available. I remain hopeful that the share price will move up over the net 3 months. Ideally there is not an acquisition and the price moves up over the next 12 months as the credit picture gets clearer and I enter capital gains territory.

NCC is a special situation and similiar opportunities will present themselves over the next 5 years. These mispriced investments are where money can be made. The broad market is going to be mediocre at best. There remains too much debt to liquidate and the resultant slowing of consumption will result in a slower growth economy. We are not going back to endless credit, 7 year car loans, large credit card lines, home equity cashouts, and exotic mortgages. Only the credit worthy will have access to cheap credit and everyone will save more. We are entering into an era of anti-consumerism. it won’t be the time to invest in index funds as the overall market will not do well over thenext 5 years.

Additionally we still haven’t learned our lessons. We still pay attention to and invest in activities that have no economic basis. We constantly worry about the VIX and base decisions off this invention. I’ve gone to the Chicago Board of Options Exchange, read the VIX description, and I have no idea what it is. We’ve got another storm brewing in synthetic CDOs. Real CDOs consist of lousy bonds, but at least bonds. The synthetic variety consist of income derived from credit default swaps and are leveraged. Great! Until we work through all of these crazy investments created by brilliant ivy league types and get back to plain vanilla, logical investment structure we will continue to have problems in both the credit and stock markets.

I’m staying cautious because of the forgoing belief and looking for only special opportunities. Remain cautious.

Saturday, October 11, 2008

Mass and personal hysteria are rampant

All of my remaining stock positions have been killed over the past several weeks. They’ve fallen faster and more severely than I would have imageined. Gold, inverse 10 year treasuries, and inverse nasdaq were not able to compensate for the swoon in equities. National City is the position that concerns me the most because it contains the most risk and has developed into a large position. So I’m going to talk to myself and see if I can continue to convince myself that I’ve made a smart investment.

I remain convinced that NCC has adequate capital and liquidity at the holding company. The major risk is a bank run and so far, so good. The bank has lots of crappy loans, but the capital, reserves, and earnings to work through those---if there isn’t a large deposit run.

The financial press was active Thursday and Friday talking about NCC selling themselves to PNC, BNS, or someone else. Nothing could be confirmed. If there is a deal, will it be a market oriented transaction or a FDIC forced marriage? Obviously I’m praying for the former.

NCC now seels for $2. It has a $9.50 book value per share and another .50 per share in Visa; so let’s figure on a BV of $10 per share. they have another $2 per share in their loan loss reserve. That’s $12 per share to handle bad debts. They have a $20B liquidating portfolio [ NCC’s definition for lines of business they are no longer active in ]. The entire portfolio is not poor credit although that is where the bulk of their credit risk resides. On a per share basis, they have $10 per share segregated here. They are not going to lose the entire amount of each loan. If they were to lose 1/2, and that would be 4 times what the bank thinks they will lose, that is $5 per share. That still leaves $7 per share of value, or $14 billion of capital to face the recession and any weakening of the remainder of their loans. Unless a sale is a FDIC forced shotgun wedding, the price is going to be closer to $7 than $2.

Beyond the back of the envelope math above, there are several other influences at work that encourage a deal. they are:
1.The new TARP bailout bill now allows acquiring banks to use write-downs of an acquired bank’s portfolio to eliminate taxes on the combined operation rather than just adjusting the balance sheet under “purchase accounting.” Just like Wells Fargo was able to make Wachovia work without FDIC assistance, someone can see the logic in acquiring NCC as long as the acquirer maintains a good, profitable business.
2. The Treasury is exploring its new authority to make direct investments in banks. These investments, most likely prefered stock, will give banks the strength to survive, rebuild earnings, and eventually redeem the government’s preferred securities. This option is a new one that could be attractive to NCC should it determine that it needs more help. Acquirers know that the possibility exists for Treasury money so they need to hurry and bid correctly if they want to expand their footprint.
3 Believe it or not, there are still some banks that sell at prices greater than book value. PNC and BNS are two of those. there are others. These guys could do aall stock deal, at an attractive price to NCC, and since they were paying with paper do well for their shareholders, especially with the new tax rules. If an all stock deal happened, i wouldn’t hold the stock for long. Today I’m not sure I would hold on until I hit the capital gains 12 month threshold.

I still nervously prefer for NCC to ride it out, but would thankfully accept a decently priced buyout. The past several weeks have been scary and taking a gain would be soothing in these stressful times.But I sure don’t want them to give the bank away and I don’t think they will. The Corsair group didn’t put $7 billion, at $5 per share, in for grins. They too were looking to make multiples of their investment, not a paltry return. But in these times even Corsair could be convinced that a $7+ deal makes their $5 April investment look acceptable. Plus, as part of a larger, stronger bank their stock position can still grow dramatically as the economy improves.

I’m guessing a deal happens and am hopeful that my analysis is correct on pricing. I can make a case for quite a bit more in the deal price, but I am also aware of the risks involve and the times we live in. I’d take $7 and run like I stole something.

Happy Columbus Day.

Saturday, October 4, 2008

This squirrel would buy TRN on Monday

I am anxiously awaiting the 3rd quarter reports. The market has been viscious lately and taken all companies down indiscriminately. At least I think it has been indiscriminate.

Two of my biggest losers have been ADM and TSO. Both have been killed by hedge fund deleveraging. Additionally, ADM has been punished by the commodities rout even though it is a processor, not a raw material provider. Its earnings should look good and hopefully will see some recovery in share price. Tesoro has been pushed down by fears of demand destruction. People may be driving less, but oil is costing TSO a lot less and they have dragged their feet on decreasing the price of gasoline. Earnings should be decent and hopefully I can recoup some of my money. NCC also will provide more clues to their collection efforts and future pofitability. So, I’m looking forward to the 3rd week of this month for answers.

I have opined about waiting to buy shares and then index funds when the time is right. I still believe that is the prudent course of action. But I’ve become intrigued by a company that is causing me to look in the mirror and see if my pair even meagerly compares to my squirrel friend. If the market hasn’t caused severe shrinkage, I plan to buy some shares. But, this time, I will build my position over a three month period in case the market continues to hammer even leading companies.

Trinity Industries is the vixen that has caught my eye. TRN is an American manufacturer with large operations in Mexico. Its been around since 1933. It is the largest manufacturer of railcars, barges, and highway guardrails and crash cushions.It is a leading maker of wind power towers and LPG tanks. It also has a large railcar leasing business and is in aggregates and concrete in Texas, Arkansas, and Louisiana.

Why buy a manufacturer? Because this one is very good and very cheap. It is, and will continue to, benefitting from the following trends:
1.Green power. their wind tower business is up from $11M in 2004 to $425M this year. their tower backlog is $1.5B!!
2.Barges and trains are efficient users of fuel and both fleets are old. Both are in the midst of a large replacement cycle which has many years to run. TRN has a backlog of over $3B, 4.6B total, which gives excellent visibility into 2009. Almost all railroads and barge shippers are doing well financially so they can buy and pay.
3.The movement of renewable fuels is by train and barge and is growing. Agricultural products and coal also move the same way. All of those areas remain strong and subject to government subsidy.
4. The current economic stimulus bill enhances accelerated depreciation which encourages purchases of manufactured goods.
5.Any upcoming stimulus likely will focus on highway spending which will benefit the company’s guardrail and crash cushion business as well as their concrete and aggregates business in the important state of Texas.

The current share price is attractive. At $21 you are buying the company for only 4.5 EV/EBITDA, .88 of BV, 6X forward earnings, and a PEG ratio of 60. This is a company with a ROE of 19%, only 48% of capital in debt, and paying a dividend [yield about 1.7% ] on the 10th. There $425M revolving credit agreement runs until 2012, has no usage outstanding, negating the need to access credit at this perilous time. Their 2nd quarter earnigs were excellent and they raised annual guidance at that time.

Over the past month the share price has decline from $34 to $21. Some of this was due to their largest shareholder, Jeffery Gendell [hedge fund], reducing its stake in the company. If what I’ve laid out above is accurate, then he sold to raise cash for redemptions, not dissatisfaction with TRN’s performance. He’s sold abot 3M of his 10M shares. He may continue to sell and depress the price further. Several days ago TRN bought back 2M shares, at $21.15, privately, likely from Gendell, which brings their purchases for the 3rd quarter to 2.7M shares. They spent $61M or $22.50. Book Value is $22.50! That type of repurchase is unheard of and an excellent use of corporate cash as opposed to the way most corporate managements use repurchase programs to prop stock or disguise the impact of stock option issuance. These purchases will actually help earnings per share and benefit common shareholders.

Good balance sheet, good income statement, good backlog, good customers, good industries, good government incentives, good guidance, good corporate governance, good entry price equals good investment. But I’m only going to buy a little at a time as my hands are still bleeding from some of my other well thought out blunders. It’s time for me to look in the mirror.

Wednesday, October 1, 2008

Be sure you are “comfortable” with your positions

I’ve been fixated of late with NCC, but I’ve given a lot of thought to my positioning of investable assets. WWY closes October 6th and I’ll possess more cash, but that’s a good event. The problem side of that is you can’t earn much in short term treasuries, but you can’t lose either! I continue to watch BUD, as a cash alternative, but am not convinced that it’s a cinch deal yet.

I want to buy stock. I’ve been ready with buckets of liquidity and am prepared to buy S&P 500 index funds when I feel the time is right. Usually I prefer to identify individual stocks as opposed to the use of diversified mutual funds or index funds. But since the market indescriminately rises 20% quickly after a market bottom, index fundswill make sense. But, I just don’t think the time is right, even after the bailout legislation.

Why aren’t we ready to celebrate and have stocks move upward? Here are a few, likely, probabilities:
1. A significant number of hedge funds will fail and the list of pension fund customers will affect property taxes
2. Federal Home Loan Banks will be identified as all too similiar as fannie and freddie and full of problematic real estate loans
3. Credit card delinquencies will accelerate anf losses will follow
4. Foreign banks will increasingly need additional capital
5. The safe banks, Northern Trust, State Street, and BONY Mellon will lose huge amounts on securities lending activites to hedge funds
6. All comparisons for homwe and car lending will continue poor as many of the former borrowers were not credit worthy and will not qualify going forward. This means we aren’t going back to past levels of new car sales, new home sales, furniture sales, etc.
7. Disclosure by many companes the “cash” of their balance sheet isn’t cash, but illiquid securities of dubious value which changes the conservative nature of their operation.
8.Emerging markets and commodity safe havens will continue to collapse.

Fun huh! I’ve made myself sick.

Keep your powder dry and invest very selectively. I’ve got several speculative positions and will stay with them and a few core positions that also will stay put. I’ve felt lots of pain and fear with the spec positions, but remain stubbornly convinced that i am correct in spite of 1 through 8 above.

Time to turnoff this computer, refill my cocktail, and watch some mindless TV program.
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