Time Arbitrage with Primerica
Jun/110
There is an opportunity to time arbitrage the stock market by owning shares of Primerica. The market is not assigning any premium to the expected low-risk growth at Primerica over the next 5 years. The growth is expected because Citi shrunk the size of Primerica prior to the IPO. Over the next few years, Primerica will replace the term life policies that were removed with new policies. This will translate into attractive earnings growth, but Primerica trades for 1.1x book value and under 9 times this year’s estimated earnings per share. Buyers of the stock can earn an attractive return assuming no multiple growth by relying on the expectations for earnings growth in the coming years.
Last July, I wrote a bullish article about Primerica. I saw an opportunity because the company’s balance sheet was restructured prior to its April 2010 IPO. Through March, the investment thesis played out as Primerica reported 4 quarters of better than expected earnings. The stock rose from $20 last July to $26.
In April, Citigroup announced that it was selling a second tranche of Primerica, which has beaten up Primerica’s stock as the market has struggled to digest the additional supply of shares. This recent decline is an opportunity to buy shares in a company with solid earnings growth prospects at a low valuation. At these levels, I believe there is assymetrical risk / reward in the shares of Primerica.
Read the rest of this post which has my investment thesis on Primerica at Seeking Alpha.
Updated Newcastle Liquidation Analysis 2011Q1
Jun/111
The last few quarters I’ve written about my estimation for Newcastle Investment’s (NYSE: NCT) liquidation value. I believe this estimate is conservative because it assumes assets are sold at market value but the liabilities are paid at face value. The actual market value of the liabilities is at a discount to the face value, so if Newcastle’s management were to liquidate the company they would try to buyback the liabilities at a discount before paying them off at face value.
Here the table showing the liquidation value updated for the current quarter:
| 2011 Q1 | 2010 Q4 | 2010 Q3 | 2010 Q2 | 2010 Q1 | 2009 Q4 | |
| Recourse assets | $269.7 | $74.4 | $101.9 | $79.3 | $54.5 | $155.8 |
| Recourse liabilities | 144.5 | 59.5 | 56.3 | 55.8 | 77.9 | 183.6 |
| Net recourse assets | 125.2 | 14.9 | 45.6 | 23.5 | -23.4 | -27.8 |
| 2011 Q1 | ||||||
| CDO note holdings | 367.7 | 348.5 | 80.0 | 25.7 | 1.5 | 1.0 |
| Borrowings from other NCT CDOs | 95.8 | 108.8 | 0.0 | 0.0 | 0.0 | 0.0 |
| MH deal equity | 70.0 | 71.2 | 65.8 | 64.6 | 63.6 | 26.0 |
| Preferred stock | 61.6 | 61.6 | 61.6 | 61.6 | 61.6 | 152.5 |
| Liquidation value | 405.5 | 264.2 | 129.9 | 52.2 | -19.9 | -153.3 |
| Shares outstanding | 79.3 | 62.0 | 62.0 | 62.0 | 53.6 | 52.8 |
| Liquidation value per share | $5.11 | $4.26 | $2.09 | $0.84 | -$0.37 | -$2.90 |
My estimate of liquidation value increased about $0.85 in the quarter. The main drivers were increased valuation of the assets inside the CDOs, which gave greater potential value to Newcastle ownership of the CDO notes. The other drivers were the net interest income earned during the quarter and the slight accretion from the follow-on offering. I note this is the smallest increase in estimated liquidation value since 2010Q1.
I was disappointed that management executed the follow-on offering. I thought the $6 execution price gave away too much value for the company. I think of the company as trading at 3.5x EPS and would not sell equity at this price. Management claims that they have potential high return investments. We’ll see what they have done in Q2.
At Tuesday’s (May 31, 2011) closing price of $5.48, I don’t see much downside given my calculation of a $5.11 liquidation value. Hopefully, management will continue to add value by buying back the CDO notes at a discount to face value.
There is no guarantee that the stock price will remain above my estimated liquidation value. The value of the company’s assets could reverse course and start declining in value. Management could execute another follow-on offering. There is also a large conflict of interest between management and common equity holders of Newcastle because Newcastle managed by a third-party who makes more money if Newcastle is a larger company rather than a more profitable company. There are other reasons the stock may not perform. Please do your own analysis. Maybe this analysis could be a starting point for your own analysis.
Texas Capital Bancshares: Credit Trend is Not Good
Aug/100
Texas Capital Bancshares (TCBI) is an interesting organic growth banking story, but the bank’s declining credit metrics make it a better short from here. The bank is 12 years old and has grown by lifting out relationship bankers from the big banks. These relationship bankers bring their best customers over to TCBI. This is an efficient and capital friendly growth strategy. This strategy also allows the bank to grow even in periods of weak loan demand.
However, the credit metrics of the bank have deteriorated significantly over the past 4 quarters. The only potential catalyst that matters is a sign stability in the bank’s credit metrics. The next data point won’t be for another 7 weeks when the bank releases Q3 numbers.
Here’s a look at the credit numbers for TCBI
| 2009 Q2 | 2009 Q3 | 2009 Q4 | 2010 Q1 | 2010 Q2 | |
| Loans Outstanding | $4,211 | $4,290 | $4,457 | $4,443 | $4,463 |
| Loan Loss Provision | 11.0 | 13.6 | 10.1 | 13.1 | 15.7 |
| Net Charge-Offs | 6.8 | 2.8 | 8.0 | 9.3 | 12.6 |
| Loan Loss Reserve | 54.3 | 65.8 | 67.9 | 71.7 | 74.9 |
| Non-Accrual Loans | 49.6 | 85.3 | 95.6 | 115.9 | 138.2 |
| Other Real Estate Owned | 31.4 | 34.7 | 27.3 | 28.9 | 42.1 |
| Non-Performing Assets | 81.0 | 119.9 | 122.9 | 144.8 | 180.3 |
| Non-Accruals/Loans | 1.18% | 1.99% | 2.15% | 2.61% | 3.10% |
| Reserves/Loans | 1.32% | 1.54% | 1.55% | 1.63% | 1.68% |
| Reserves/Non-Accruals | 109% | 77% | 71% | 62% | 54% |
| Tangible Common Equity | 456 | 466 | 473 | 491 | 504 |
| Texas Ratio | 16% | 23% | 23% | 26% | 31% |
TCBI’s numbers are showing a disturbing trend. Non-accrual loans have accelerated the past two quarters. Plus, it looks like management has not been adding to the loan loss reserve aggressively as non-accruals have climbed.
One could argue that TCBI has been under reserving for loan losses during the past 4 quarters. The loan loss reserve to non-accrual loan ratio has declined from 109% to 54% over the past 12 months. If management had kept this ratio constant, TCBI would have report a losses instead of profits over the past 4 quarters.
TCBI shares trade 1.15x tangible book. I think the profitability of the bank is questionable given the declining reserve ratios. If you add in the worsening credit metrics, I think TCBI will have a lid on its stock price until it reports a quarter with stable credit metrics. Since TCBI is well-capitalized, the viability of the bank is not in question. But, the decline in the credit quality suggests that the credit issues are open-ended. I think investors should demand a discount to book value to own a bank stock with credit quality continuing to worsen at rate like this. At 70% of tangible book, the stock would trade at $9.50 or a decline of 35% from the current price.
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