The shotgun marriage between banks and government appears to be having some unintended consequences. While some firms, Goldman in particular, have talked about returning bailout cash, Washington has stalled such attempts saying it's not ready to get its money back. Weird.
Experiences financiers are now seeing today as a great time to jump ship. Punitive tax rates on already-distributed bonuses, further regulatory scrutiny, and a more risk averse balance sheet must have an effect on the most experienced bankers willingness to go to work in the morning.
Goldman offers a great example. Recently, Jon Winkleried, one of the top-3 at GS, decided to retire. Byron Trott, the rare banker (if not the only) to receive praise from Warren Buffett, is leaving to start his own merchant banking firm. And the co-heads of Global Alpha, Goldman's flagship hedge fund, are retiring to pursue other interests.
They'll be glad to be away from TARP.
Tuesday, March 31, 2009
Tuesday, March 24, 2009
AmEx: Reasonably Priced Plastic
The below is posted with a one day lag. (it was part of the application process for a freelance/contract writer position).
American Express
To participants of the capitalistic system American Express (“AmEx”) needs little introduction. The firm is a global payments, credit card, and travel company whose products are catered to well-heeled clients. AmEx runs one of the most prominent credit card networks in the world; unlike its largest rivals Visa and Mastercard, however, it profits from the entire economic cycle of issuing the card, swiping the plastic (via the merchant fees), other fees, and the spread on loans it provides. It is an economic powerhouse but is subject to greater volatility because of its risks of operating such a full cycle network.
As a somewhat mature company it “has sought to return at least 65% of the capital it generates to shareholders as a dividend or through the repurchase of common stock,” a goal it has since tempered as a result of the strings attached with money it has taken from Uncle Sam. A more muted target, though impressive nonetheless, of 20% return on equity, is now the company’s goal on account of higher charge-off rates and higher capital requirements.
In 2008 the company grew revenue 3% year-over-year to the impressive sum of $28 billion. This is possible through its boastful network of 92.4 million cards, an industry leading high-FICO-score client base, and ultra-low costs of funds of 3.63% for long-term debt and 2.11% for short-term borrowings.
My unofficial mentor, Warren Buffett—through Berkshire Hathaway—has maintained his position as the largest shareholder. That’s not to say the stock is without risk. A few of AmEx’s risks and uncertainties include: legislation on interest rates would adversely affect the company’s spread (interest charged vs. cost of funds); a really-bad-case-scenario in the macro environment would result in an even bigger spike in the charge-off rate (currently at 8.7%); a longer-than-expected turnaround in the securitization market would force liquidity issues.
Furthermore, at 407 pages, the 2008 10K is long enough to discourage even the most determined annual report aficionados. But the audit report looks clean and the numbers don’t look funny.
Valuation
So what is AmEx worth? Cash flow from operations has historically been 2-3x net income, largely due to the non-cash charge for the provision for losses. I use the more conservative net income as a base. The economy is in “shambles” as Buffett has stated, and a greater portion of the world’s citizens may continue their indifference towards paying their bills. Earnings multiples should be applied with caution since these are truly extraordinary times. Even with a 50% haircut off of last year’s net income, the stock trades at close to 12x earnings, or an 8% adjusted earnings yield (the inverse of P/E ratio)—it currently has a 5.9% dividend yield while paying out only 1/3 of earnings. This is a conservatively adjusted value and reflects the erosion of securitization income ($1bn in 2008) and a marked increase in the charge-off rate.
The Bottom Line
American Express has inched its way up to the 11th spot in CoreBrand’s brand ranking survey of 2008 and is 15th in BusinessWeek’s 2007 ranking. Translation to the card user: If you get charged $1000.00 for a breakfast at a café in Peru, you can trust that AmEx will fight to reverse the charges. It is the antithesis of the IRS. That business moat is hard to replicate. The company is positioned to profit from the long-term demographic trend towards a cashless society. That said, the brand value, and the attractive adjusted earnings multiple, provide an adequate margin of safety. I rate American Express a “buy.”
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P.S. 500 words (about the length of this piece) is a very short space to try to describe and dissect a business.
Disclosure:
The author has an AmEx card but pays off the balance every month. He also owns shares of AXP.
American Express
To participants of the capitalistic system American Express (“AmEx”) needs little introduction. The firm is a global payments, credit card, and travel company whose products are catered to well-heeled clients. AmEx runs one of the most prominent credit card networks in the world; unlike its largest rivals Visa and Mastercard, however, it profits from the entire economic cycle of issuing the card, swiping the plastic (via the merchant fees), other fees, and the spread on loans it provides. It is an economic powerhouse but is subject to greater volatility because of its risks of operating such a full cycle network.
As a somewhat mature company it “has sought to return at least 65% of the capital it generates to shareholders as a dividend or through the repurchase of common stock,” a goal it has since tempered as a result of the strings attached with money it has taken from Uncle Sam. A more muted target, though impressive nonetheless, of 20% return on equity, is now the company’s goal on account of higher charge-off rates and higher capital requirements.
In 2008 the company grew revenue 3% year-over-year to the impressive sum of $28 billion. This is possible through its boastful network of 92.4 million cards, an industry leading high-FICO-score client base, and ultra-low costs of funds of 3.63% for long-term debt and 2.11% for short-term borrowings.
My unofficial mentor, Warren Buffett—through Berkshire Hathaway—has maintained his position as the largest shareholder. That’s not to say the stock is without risk. A few of AmEx’s risks and uncertainties include: legislation on interest rates would adversely affect the company’s spread (interest charged vs. cost of funds); a really-bad-case-scenario in the macro environment would result in an even bigger spike in the charge-off rate (currently at 8.7%); a longer-than-expected turnaround in the securitization market would force liquidity issues.
Furthermore, at 407 pages, the 2008 10K is long enough to discourage even the most determined annual report aficionados. But the audit report looks clean and the numbers don’t look funny.
Valuation
So what is AmEx worth? Cash flow from operations has historically been 2-3x net income, largely due to the non-cash charge for the provision for losses. I use the more conservative net income as a base. The economy is in “shambles” as Buffett has stated, and a greater portion of the world’s citizens may continue their indifference towards paying their bills. Earnings multiples should be applied with caution since these are truly extraordinary times. Even with a 50% haircut off of last year’s net income, the stock trades at close to 12x earnings, or an 8% adjusted earnings yield (the inverse of P/E ratio)—it currently has a 5.9% dividend yield while paying out only 1/3 of earnings. This is a conservatively adjusted value and reflects the erosion of securitization income ($1bn in 2008) and a marked increase in the charge-off rate.
The Bottom Line
American Express has inched its way up to the 11th spot in CoreBrand’s brand ranking survey of 2008 and is 15th in BusinessWeek’s 2007 ranking. Translation to the card user: If you get charged $1000.00 for a breakfast at a café in Peru, you can trust that AmEx will fight to reverse the charges. It is the antithesis of the IRS. That business moat is hard to replicate. The company is positioned to profit from the long-term demographic trend towards a cashless society. That said, the brand value, and the attractive adjusted earnings multiple, provide an adequate margin of safety. I rate American Express a “buy.”
-----------------------
P.S. 500 words (about the length of this piece) is a very short space to try to describe and dissect a business.
Disclosure:
The author has an AmEx card but pays off the balance every month. He also owns shares of AXP.
Sunday, March 15, 2009
Performance Update
All stock-related sites should report an unbiased scorecard. The Faro portfolio puts itself up against the same test. The fund inception date correlates with the launch of this humble blog--estimates are in that there are 4-5 regular readers. The inception date is Oct 2007. If I had tried to "time" the start of such an auspicious task, well, I'm really bad at timing: stocks have lost half their value since then.
I still believe the case for stock investing stands. The transaction costs are almost nil (tell that to your real estate broker); they allow you to become part owners in pieces of potentially great businesses; owning strong companies over time is a great buffer to the loss of purchasing power (if the business can raise it's prices with inflation, it's returns should rise with general prices); historically, the returns for any one with a long-term horizon better any other asset class.
Since inception, the portfolio is down -17.8% vs. -49.40% for the S&P. It's worse than under you mattress but much better than most mutual funds.
--------------------------------
Full Disclosure: none
I still believe the case for stock investing stands. The transaction costs are almost nil (tell that to your real estate broker); they allow you to become part owners in pieces of potentially great businesses; owning strong companies over time is a great buffer to the loss of purchasing power (if the business can raise it's prices with inflation, it's returns should rise with general prices); historically, the returns for any one with a long-term horizon better any other asset class.
Since inception, the portfolio is down -17.8% vs. -49.40% for the S&P. It's worse than under you mattress but much better than most mutual funds.
--------------------------------
Full Disclosure: none
Sunday, March 8, 2009
Company of the week
30 years ago, out of the wreckage of an imploding company, Leucadia National Corp (Ticker: LUK) was born. Ian Cumming and Joseph Steinberg have since transformed the firm from its early days of a shareholders' equity deficit of -7.7mn to +2.7bn. Albert Einstein's reverence of the miracle of compound interest has been at work: a $1,000 dollar investment in 1978 would be worth 1.98mn as of 12/31/08; that's a 28% annualized return. Book value has grown at a slightly more impressive rate.
The recent past has been less than stellar. From its zenith in May 2008 to Friday's market close price, the per share value has dropped 80% while the S&P 500 has declined 52%.
The source of the underperformance has to do with the nature of Leucadia. From the 10k we read: "In identifying possible acquisitions, the Company tends to seek assets and companies that are out of favor or troubled and, as a result, are selling substantially below the values the Company believes to be present.(1)" Unloved companies tend to underperform in spurts. By definition they have problems that others would rather avoid.
The company is a hodge podge of subsidiaries involved in timber, plastics, telecommunications, real estate, medical product development, wineries and others. The firm also owns a sizeable portfolio of publicly traded stocks ranging from mining, auto finance, Argentine agriculture, to Jeffries: an investment bank. In addition, Leucadia owns limited partnership interests in several asset management firms.
I'm still trying to grasp the estimated worth of the the company many call a "mini Berkshire." With such diverse companies, capital needs, and volatility of certain assets, estimated intrinsic value cannot be conveyed in a short blog post. But at a discount to book value, and with such an impressive track record and philosophy I mostly agree with, I decided a dip in the pool was worth it, even when I wasn't certain of crocs or the exact water temperature.
--------------------------------
Full Disclosure:
The author recently purchased a few shares of Leucadia. He also has a job interview with the company this Thursday.
Notes:
(1) 2008 form 10k
The recent past has been less than stellar. From its zenith in May 2008 to Friday's market close price, the per share value has dropped 80% while the S&P 500 has declined 52%.
The source of the underperformance has to do with the nature of Leucadia. From the 10k we read: "In identifying possible acquisitions, the Company tends to seek assets and companies that are out of favor or troubled and, as a result, are selling substantially below the values the Company believes to be present.(1)" Unloved companies tend to underperform in spurts. By definition they have problems that others would rather avoid.
The company is a hodge podge of subsidiaries involved in timber, plastics, telecommunications, real estate, medical product development, wineries and others. The firm also owns a sizeable portfolio of publicly traded stocks ranging from mining, auto finance, Argentine agriculture, to Jeffries: an investment bank. In addition, Leucadia owns limited partnership interests in several asset management firms.
I'm still trying to grasp the estimated worth of the the company many call a "mini Berkshire." With such diverse companies, capital needs, and volatility of certain assets, estimated intrinsic value cannot be conveyed in a short blog post. But at a discount to book value, and with such an impressive track record and philosophy I mostly agree with, I decided a dip in the pool was worth it, even when I wasn't certain of crocs or the exact water temperature.
--------------------------------
Full Disclosure:
The author recently purchased a few shares of Leucadia. He also has a job interview with the company this Thursday.
Notes:
(1) 2008 form 10k
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