Monthly Archive for December, 2009

Ameris Bancorp (ABCB)

Posted on December 25, 2009, 5:31 pm. 0 Comments

Ameris Bancorp (ABCB) is based in Moultrie, Georgia. It has taken over the assets of several failed banks in Georgia this year, which suggests that it is a strong bank to do so and will likely prosper once again when the economy gets going. I assume it will be more profitable now that has an expanded geographic footprint and asset base.

Here I am taking a look at all the relevant historical data for Ameris to see whether it has been profitable and prudent in the past, and what that might mean for the future.

The following chart is for the yearly returns on assets and equity since 1992. (click for larger size)

Ameris has been very profitable in the past, with a very high ROE ranging from the mid-teens to mid-twenties up until 2006, where all banks’ returns started to slide down a steep hill (or off a cliff in some cases). ROE and ROA are just barely below zero at the moment, but I don’t think this is something to worry about. It might take a few years to get back to the historical average, but I think Ameris will get there again.

The following chart shows the historical cost of funding assets and net interest margins since 1992. (click for larger size)

A bank makes its money by borrowing money and attracting deposits and then loaning this money out at a higher rate. The cost of funding assets is basically the yield at which the bank is borrowing its money – an investor wants to see as low a number as possible here. The net interest margin is the spread between the rate at which the bank borrows and the yield it earns by making loans – you want to see as large a number as possible here. Though I think Ameris has not had a very low cost of assets (I’ve seen plenty of banks with 1.5% and below), Ameris most definitely has had a very high net interest margin, higher than most banks I have seen. Even now, Ameris has a very high net interest margin for the current state of the economy and compared to other banks. Net interest margin will eventually get back to normal.

The following chart shows several metrics that describe the condition of the bank: noncurrent loans ratio, loss allowance ratio, and tier 1 ratio. (click for larger size)

Noncurrent loans since 1992 have not gone higher than 2% of total loans until 2007-2008, which suggests that Ameris is a fairly prudent lender. Hopefully, this ratio will not increase any further, but if they do, I would be careful to ask whether it is due to bad loans they have made or the bad loans they have acquired from failed banks.

The loss allowance ratio (the amount of money the bank has set aside for bad loans) has increased slightly, but I’m not sure if it has increased as much as it needs to given the amount of noncurrent loans. Also, the tier 1 ratio has remained fairly static throughout the years, meaning that the banks has been well-capitalized through good times and bad.

Conclusion

Ameris seems to have a pretty long history of profitability up until recently. Ameris has also acquired several failed banks which suggests to me that it is a strong, well-capitalized bank. And really, would regulators allow a crappy bank to acquire the assets of a failed bank? I don’t think so. I think chances are good Ameris will pull through this downturn and emerge stronger and will regain most of its former profitability.

I’m not exactly sure if Ameris is a bargain at the moment (that requires a look at tangible book value and earnings power) but I am certainly more confident in what the future might hold for Ameris.

More Google Search Hilarity

Posted on December 24, 2009, 2:41 pm. 1 Comment

I’m finding Google Search to be quite hilarious. “How do I escape…” (click image for larger size)

I never knew people were having such problems with phone booths, coffee houses, and bathrooms.

C. R. Bard Inc. (BCR)

Posted on December 24, 2009, 12:43 pm. 0 Comments

The stock for C. R. Bard has recently taken a pretty big hit, which is always a good reason to initiate research into a company. The following is a short summary of my research.

Company Description

C. R. Bard, Inc. and its subsidiaries engage in the design, manufacture, packaging, distribution, and sale of medical, surgical, diagnostic, and patient care devices worldwide. C. R. Bard sells its products directly and through distributors to hospitals, individual health care professionals, extended care facilities, and alternate site facilities. The company was founded in 1907 and is based in Murray Hill, New Jersey.

In 2008, approximately 80% of their record $2.45 billion in sales was derived from products that are number one or two in their respective markets. BCR has four product divisions: vascular (15.9% annualized growth for past 5 years), urology (9.4%), oncology (18%), and surgical specialties (6.2%). Each of these divisions makes roughly equal contributions to total sales for the company.

Additionally, in October 2008, the Centers for Medicare and Medicaid Services (CMS) eliminated reimbursement to healthcare facilities for costs related to certain hospital-acquired infections (HAIs), recognizing that preventing urinary tract infections (UTIs) is better than treating them. Treatment of hospital-acquired infections (HAIs) costs U.S. hospitals more than $500 million annually and signi?cantly increases a patient’s length of stay. With the recently announced elimination of Medicare reimbursement to hospitals for the treatment of HAIs, BCR has several infection control products that are well-positioned as a means to control costs and improve patient outcomes.

A Great Company?

BCR looks like a great company based solely on its margins, returns, and balance sheet.

Current Returns

  • ROA: 18.6%
  • ROE: 24.33%
  • ROI: 20.68%

Margins

BCR has greatly improved its margins over the past ten years. In 1998, its operating margin was 13.6% and is currently about 27%. On the other hand, net margins have been more erratic for the company, fluctuating between 10% and 21% in the past decade.

Growth

Earnings per share have grown at an annualized rate of 16.7% over the past 11 years. Book value per share has grown at an annualized rate of 17% over the same time.

Balance Sheet

BCR has long term debt totaling $150 million, which gives it a debt to equity ratio of 6.9% BCR could immediately pay off its debt immediately with the $632 million in cash sitting on its balance sheet. Alternatively, BCR could pay off its debt in less than 4 months using only its free cash flows.

Is It A Bargain?

The EPS estimate for next year is 5.55. After subtracting long term debt from cash and equivalents, BCR has $4.82 per share in cash. Subtracting this from the current price of $79.15 we get $74.33, which gives us a P/E of 13.4 (an earnings yield of about 7.5%). BCR also has a small dividend yield of 0.86%.

Using a DCF analysis, I believe BCR currently has a significant margin of safety at a price of $79.15, ranging from a 30% discount in what I believe is a worst case scenario (owner earnings growing at a 5% rate) to a 50% discount in a scenario I consider pretty reasonable (owner earnings growing at a 10% rate, slightly less than its historical rate).

Who Else Owns It?

NameShares held% total shares held% total assetsDate
Polen Capital Management Inc349,4140.365.969/30/2009
TOBAM107,1000.115.796/30/2009
Harvey Investment Co Llc133,9200.144.759/30/2009
AMI ASSET MANAGEMENT CORP154,9500.164.699/30/2009
Valueact Holdings, L.p.1,411,7001.454.339/30/2009
MIV Asset Management98,0000.14.1311/30/2009
Generation Investment Management LLP926,9170.954.029/30/2009
Stewart Capital Advisors, LLC8,8880.013.799/30/2009
Eagle Ridge Investment Management91,9750.093.579/30/2009
Speece Thorson Capital Group, Inc.118,5300.123.59/30/2009
Guyasuta Investment Advisors Inc145,1650.153.299/30/2009
Walter Scott & Partners Ltd3,219,1033.33.259/30/2009
DSM Capital Partners LLC857,4190.883.179/30/2009
Mountain Pacific Invsmt Advisers Inc162,4000.173.059/30/2009
Intrepid Capital Management Inc32,7500.033.019/30/2009
Roaring Brook Capital LP37,0000.043.019/30/2009
Noesis Capital Mangement Corp32,7800.032.979/30/2009
Threadneedle Fund Managers87,7000.092.7711/30/2009
Brinton Eaton Associates Inc50,6210.052.769/30/2009
Cramer Rosenthal McGlynn LLC3,558,5453.652.729/30/2009

Google Search is Fascinating

Posted on December 20, 2009, 1:35 pm. 0 Comments

The ability to view the search queries others are performing is fascinating. See the snapshot I took for the search term “why is.” (click image for larger size)

Questions regarding colors seem to populate the top of the list…

Patterns, Patterns on the Chart

Posted on December 17, 2009, 11:05 pm. 0 Comments

I have always been fascinated by charts, patterns, and the technical analysts who faithfully believe the chart tells all. For several weeks I have seen various people who believe a drop in the Dow Jones Utility Average is coming. I decided to take a close look myself and here is the picture I painted where there is a small chance a pattern may repeat itself. I wonder if this will come to pass? (Click image for larger size)

2009-12-17-util

Hills Bancorp (HBIA)

Posted on December 17, 2009, 10:26 pm. 0 Comments

Hills Bancorp (HBIA) is the holding company for Hills Bank and Trust Company of Hills, Iowa. The shares are only thinly traded over the counter.

Here are some of the more important metrics for the bank:

  • Cost of funding is 2.25% and net interest margin is 3.34% – not great, but not terrible, but I think its certainly better than a lot of banks out there
  • ROA is 0.86% and ROE is 9.49% – pretty good considering the environment; in years past ROA has been above 1% and ROE in the 12%-14% range
  • Efficiency ratio is pretty good at 57.78%
  • Loss allowance to loans is a pretty generous/conservative 2.03% because I think Hills Bank has a good loan portfolio with a noncurrent loans to loans ratio of 0.74%
  • Hills Bank is definitely well-capitalized
  • Assets: cash is 3.12%, securities 11.14%; and loans 81.3%
  • Tangible Book Value per Share – by my calculations, TBV/share has gone up throughout this financial crisis
    • Sept ‘09 – $38.15
    • Sept ‘08 – $35.46
    • Sept ‘07 – $33.09
  • Price/TBV
    • Sept ‘09 – about 1.28 (current price is $49)
    • Sept ‘08 – about 1.41 to 1.49
    • Sept ‘07 – about 1.86
  • Loans
    • a pretty good mix of loans with the basic home loans making up the bulk; nothing to worry about here

If you are interested in thinly-traded stocks of healthy banks, I think Hills Bank is worth your attention. If one thinks Hills Bancorp’s intrinsic value is equivalent to a P/TBV of 1.8, the shares would be worth $68.67, meaning the shares are currently trading roughly at a 29% discount tointrinsic value.

As one might be able to tell, I have continued to study the FDIC data and SEC filings of many small banks. I feel that I have found a significant number of opportunities and have definitely increased my understanding of what good banks, bad banks, and mediocre banks look like. One thing I would love to be able to do is to put together an investment partnership devoted to investing in the stocks of the small and micro-cap community banks of this country.

Some Good CEFs Trading at a Discount

Posted on December 16, 2009, 12:33 am. 1 Comment

Only in the world of CEFs will you find the average fund trading at a discount to NAV of 7% or more. A blog I have just discovered, with the great name of “Beating Buffett,” has a fairly recent post on the three closed-end funds managed by Royce.

It’s my opinion that Royce has a great reputation as value investors, and when their CEFs are trading at discounts as steep as 16 or 17%, I would seriously consider putting some money to work in them. For example, the Royce Value Trust (RVT) is trading at a 16.83% discount to NAV. Click the image below for a history of the premium/discount to NAV since inception.

RVT-nav-20091214I think its very likely that the discount will once again turn into a premium if you are a patient investor. The possibility of earning 16% on top of the total return of the underlying assets sounds like a great idea to me.

A Guide on How to be An Activist Investor in Closed-End Funds

Posted on December 15, 2009, 4:48 pm. 0 Comments

Earlier this year I wrote an academic paper titled “Closed-End Funds and Activist Investors: What’s the Attraction?” I have finally been prodded into making this available to those who would be interested in reading it. If you’re at all interested in why certain activist investors are attracted to closed-end funds, I feel this paper gives a basic and good overview of the subject.

Download the paper here.

If you choose to use the paper in any way beyond personal reading, please be sure to use the proper citations and to give credit where it is due. I would also thank you if you let me know what you choose to do with the paper or how the paper may have helped you. My email address is available inside the paper.

Quantifying the Effect of the Possible Inclusion of Berkshire in the S&P 500 Index

Posted on December 8, 2009, 10:22 pm. 0 Comments

I estimate there is a total $290.59 billion of assets invested in mutual funds and the two of largest ETFs that track the S&P 500 index. If Berkshire were to be included, it would take up about 1.65% of the index. This means roughly $4.8 billion of index fund assets would be chasing the soon-to-be-split B shares. Now, how do you quantify the effect of this upon the price of the B shares?

In an average trading day for B shares, roughly35,00 to 40,000 shares are exchanged. With a share price of $3,300, the total value of shares exchanged in a day ranges from $120 to $130 million.

Now try to imagine 40 times that average daily value chasing down Berkshire shares. Also consider the fact that there is an extremely low turnover rate among Berkshire owners. Undoubtedly, inclusion in the S&P 500 will have a serious and most likely immediate effect upon B shares.

Lets assume that for each $100 million of index fund money that is required to purchase B shares, the B shares will go up by .25%. Multiply 40 by .25 and and we get 10 percentage points as a possibility of the amount the B shares will go up due to index fund purchasing. I think 10% is an easy base case scenario.

I have convinced myself that Berkshire will get a sizable pop due to index fund buying. By how much, I really have no idea. If anyone has a better way to estimate how much Berkshire B shares will increase due to index fund buying, please let me know!

Charles River Laboratories (CRL): A Stock With a Possible Large Margin of Safety

Posted on December 6, 2009, 11:54 am. 0 Comments

Charles River Laboratories (CRL) “provides essential products and services to help pharmaceutical and biotechnology companies, government agencies and leading academic institutions around the globe accelerate their research and drug development efforts.” CRL recently lowered guidance for 2009 so the stock price has taken a hit, which can mean this might be a great entry point for a value investor as the margin of safety has undoubtedly improved.

Here is some historical data for CRL (click for larger image):

CRL-history

CRL has a current market cap of about $2.2 billion. From 2002 to 2008, CRL has grown its owner earnings at about 9% compounded. Performing a DCF analysis, using a 9% discount rate, a multiple of 18, and assuming CRL can grow owner earnings at 7% per year, I estimate that CRL’s intrinsic value is about $66 per share. With a current share price of $33, my estimate of an intrinsic value of $66 per share gives us a large margin of safety of 50%.

Another thing I like to look for with a company is what other funds or money managers are holding it in their portfolios and whether or not that holding is a large percentage of the entire portfolio. With CRL, there are several funds out there holding a concentrated position in CRL:

  • Blue Harbor Group, LP – 9.76%
  • Olstein Capital Management, LP – 4.33%
  • Westport Advisers LLC – 3.47%
  • Hahn Capital Management LLC – 3.32%

In summary, I think CRL could be a good bet. With a large margin of safety, even if you’re off by 20%, you’ll still most likely get a decent return on your investment.