What?!?! You loaned money to people that could not afford it and now you want someone to bail you out? Big shocker. ME, ME, ME is all I hear – similar to a 4-year old in a candy store when it comes to the well-publicized events of the sub prime mortgage ‘meltdown’ and the debate of whether the Fed should cut interest rates.
I will be the first to say that I am not a heavily trained economist and I have no advanced degrees in the subject. Furthermore, I must admit that I do not have access to a fraction of the information that these people do – and in the event that I did, I would be hard pressed to make any sense of it.
However, that does not stop me from running my mouth on the issue – everyone else seems to be doing so, so why not join the party?
First, there is no doubt that things have been tough out there. We have seen a couple of Wall Street’s more adored lenders, banks, and mortgage REITs take monster hits on people. From declining stock price, to wiping out lots of net worth, to companies going under and leaving thousands of people with out jobs – it is rough. The situation is further exacerbated by the real estate market slow down – leaving many related professionals (realtors, mortgage brokers, developers, home builders, etc.) without income or a much smaller source of such. Living in South Florida, which was arguably the hottest real estate market in the country during the boom has provided me some very basic, observational insight on the situation.
It seemed that everyone here in the area became a realtor – everyone was looking to flip homes – everyone was writing big-ticket mortgages. For a while, things were good, but then the inevitable happened – things slowed down. Why did things slow down? Simplistically, let’s be honest – people ran out of money, especially in the area I come from. If people had more money, people would still be buying the flipped homes, realtors would be earning commissions, builders would still be building to sell to the masses, and mortgage lenders would still be madly filling out applications. But, it stopped? Again, people ran out of money. I do not want to hear that all of a sudden the mass population of Americans suddenly started subscribing to value investing and changed their financial tone. There was literally no more money left.
I would always wonder when the lack of top-quality paying jobs in the area would finally catch up with the real estate marketplace here. I could not compute the math on how people were affording high-priced homes on mediocre salaries. I was always wondering at what point does this behavior trickle into the overall local economy? Well, it has – and it is showing up here in the area. Restaurants are slower and waitresses I speak with are telling me this past winter season was the slowest in a while, the summer was slower than usual, and this upcoming year is also supposed to be slow. Membership applications to golf clubs have slowed – and in some cases, many want out but cannot sell because there are no buyers. Small businesses – especially one-man shows that do business with other one-man shows – are complaining about clients taking longer to pay them – rather than getting paid within 15-20 days, checks are showing up 40-50 days after the invoice and a phone call. It all adds up.
Next, do not kid yourself that this issue is restricted to a small, non-metropolitan area in South Florida. The signs are all there and are showing up nationwide. Some examples:
All of the major cable companies are reporting slowdown in subscriber growth for their high speed Internet and digital cable TV services. Charter, for instance, had great additions of their digital phone product, but flat growth in their cable TV subscribers. DISH Network flat out blamed the slower home market for slower sales;
Home Depot, Nordstrom, and even Wal-Mart said they are seeing weaker consumer spending. The first two also cited that payments on their company-financed credit cards to customers are coming in slower and we are seeing more late payments.
Foreclosures are up – everyone knows this.
Apple iPhone sales appear to have slowed since they first exploded onto the spot. I do not have the numbers to back this up, but think about yourself or your friends that got one. They all got them the first week they hit the market – not a lot of new iPhone buyers since then. Personally, I am not sure where people are coming up with the $600 for this device. Actually, I take that back – I know one person that actually padded his mileage on his expense report to be able to foot the bill. Harmless to a big company, right, but it comes out of someone’s pocket.
The biggest news item I have seen that overall, the average American savings rate is in the negative numbers. That is, on average, people are spending more than they are making. Eventually, the well runs dry.
Previously, Greenspan saw what was going on and warned that a recession by the end of 2007 or early 2008 was a distinct possibility. I hate to also sound like a psychic, but many of my past writing from early 2007 cited many of the above reasons and that at some point, it would have to filter into the overall economy and hit the marketplace. Of course, I had no idea on the timing of such, the absolute freezing of the mortgage paper marketplace, and the extent that albeit it for a short time, the stock market actually endured a correction (10%+) on an intra-day basis.
So, what is the source of the above issues? Since nobody is flat out saying it, I will say it. Why is everyone so surprised about this? For years, banks and credit cards have been loaning money to people that frankly could not afford it. I am not merely singling out those that are classified as sub prime. People with 750+ credit scores were being loaned boat loads of money, often unsecured, to do whatever with. Buy a bigger house, invest in a half-baked business idea, buy new cars, go out to eat all the time. Nobody is saving this money and investing it – if they were, the savings rate would not be negative, right? So, now that banks have loaned money to people that could not afford to pay it back, they want someone to bail them out.
Reward bad business decision making? That is what it sounds like, but it may be too aggressive. Consider this perspective. I have read, cover-to-cover, a big book called Responsibilities of Corporate Officers & Directors Under Federal Securities Law. It was the most boring thing ever, but the biggest thing I took with me was the discussion on what you can get busted on, for lack of a better phrase, when it comes to the collapse of a business. Obviously, anyone can sue anyone for anything these days, but realistically, what qualifies as an event that can genuinely be prosecuted? Specifically and simplistically, if you have a business plan and it appears you put thought into it with the intent to turn a profit and reward shareholders, you are in the clear. Translation, you cannot be punished for a bad business idea. Not all businesses work – that is a reality. If your intent is to defraud or steal, well, then you have problems. But, you cannot go down in flames if the business idea, with some analysis showing it might work, simply did not pan out. Even a chance of a business panning out is enough, considering that most small businesses fail. I have heard a slew of statistics from 75% in the first year to 90% within 5-years – who knows – but the reality is, most business ideas do not make it to profitability.
As for how this impacts the banks and lenders. Well, again, very simplistically their take was to loan as much money as possible to pretty much whoever. For a while, this was making the banks a lot of money – there is no question. The business plan showed that it could work in theory and for a while it did. So, all is well. Honestly, the system could have continued to work and drive things the way it did, but people stopped paying their bills. That is where we are today. Businesses, lenders, banks, and many more engaged in the practice of turning a profit and the business idea simply just did not work out.
So, with the writing on the wall, why is everyone now calling for an interest rate cut and whining to do so? I think it comes down to wanting someone to bail them out. The now famous Jim Cramer meltdown video basically saw him whining and crying about ‘how tough it is out there’ and that the Fed should come to the rescue. Remember – the Fed is not the enemy here – the practices of America as a whole is what caused this blip.
Overall, at least to me, things look good. Sure, growth has slowed in some cases, but revenues are up, profitability is up (even if at slower rates), people are employed. Business has not ceased to exist and continues to function very well. Some in the credit markets might claim exception to this, but how is this different from technology consulting companies facing the Internet Bubble collapse or travel companies facing the events of 9/11? It’s not – it is just part of doing business and there is absolutely no reason to be bailed out.
How many of you still reading this article (sorry for the length) have run into tough financial times? How many of you have had businesses you owned fall apart or have slow year? Who was there to bail you out? Nobody. Sure, clients help and the government has programs to facilitate the development of business, but nobody was just going to write you a check to cover your losses. And in the event they did, what are the odds of you tightening the belt and just walking away? Slim to none – as more often than not, people that are bailed out of their credit card debt by a family member or bankruptcy often return to the same fate. Forget statistics – I would venture to say we all have a handful of friends that are in over their head, were able to get out of it, and then fall right back into the precipice of debt.
The stock markets are pushing for a rate cut – and it very well may happen. The stock markets, though, want it now it seems and do not feel like waiting until the September 18 meeting. Many economists are now saying one will happen, and it very well may. Should such a cut happen, it will be interesting to see how that actually affects the stock markets. It makes one wonder if some of the upside is already getting priced in by the markets expecting such activity. Note today’s (August 22) climb in the major indices.
So, what happens if the Fed does not cut rates and leaves them the same, as they have been saying for a while. The panic returns and the markets continue a downward decline. Honestly, that does not seem like a horrible idea. Nobody likes their stocks going down, but it has been up-up-and-away since Fall, 2006. It may be time for a breather. Additionally, we have seen the U.S. Dollar strengthen against the British Pound and the Euro in the past few weeks suggesting that this may be a good path to go down. Overall, this is good news for the Dollar and for our economy as a whole. Sure, $1 is $1 here, but the more liquidity added, the more it is going to hurt our country’s economy in the long run.
Also, all things are possible. Explain how the interest rates in Europe are lower than ours here in the USA and yet, their respective currencies have strengthened, and their countries have avoided much of the debacle of the mortgage fall out. Honestly, I think the Fed would be amenable to lowering the rate if they were convinced that banks and Americans would change their ways somewhat and practice fiscal responsibility. However, as mentioned above, adding more liquidity would likely just contribute to the same poor spending practices by consumers and loose lending guidelines by banks.
I really believe that we need to let this situation filter out naturally. It is not some Force Majeure event – there is a very direct, logical explanation for such. Additionally, consider that the markets have yet to endure an actual correction on a closing price basis. The markets are down about 7% since their highs (less than the 10% required to officially call it a correction) and are still up about 6% YTD, despite the steep recent decline. Further consider that September and August, historically, are the stock markets two weakest months of the entire year – and the closing months of the year tends to be strong.
I am not suggesting maliciously punishing anyone, but we cannot just let the effected companies off of the hook at the expense of our entire economy – only to create a situation that will most likely spawn an even more severe situation in the future. This is a storm that must be weathered – and frankly, it is not that bad of a storm. The interest rate cut needs to be restrained until it is really needed – when inflation does start to spiral out of control or business becomes universally stagnant. Like antibiotics, you do not want to take them to much because each time you do, it makes them that much less effective when you might actually really need them.
Also, do not take me for a bear – I want things to go up, up, and away all the time myself. In fact, I have a couple of positions that I would like to see go through the roof as soon as possible. Why? Well, and I embarrassingly say this, but to ‘bail me out’ of some issues. As much as I would like that happen, I am well capable of bailing myself out and having someone bail me out now frankly would not help me for the long-haul.
So, this horrible malady that we are effected with is really not all that bad and there are intelligible, logical steps that can be done without waving the magic interest rate wand. Sleep it off.
Wednesday, August 22, 2007
Wednesday, August 8, 2007
Earnings Perspective: Seaboard Corporation (Q2 2007) – Reward Owners Despite Tough Times Ahead
After the bell today, Seaboard Corporation (AMEX: SEB) announced its earnings and financial results for the fiscal quarter ended June 30, 2007. SEB did not hit or miss expectations because estimates or guidance are not given.
First, SEB traded down 2.95% today to close at $1,990 – it touched as low as $1,901.10 during today’s session. SEB is now down nearly 30% from its 52-week high set on April 19, 2007. Despite continuing to be profitable and being one of the more established and reputable marine shipping and cargo companies in the world, SEB has failed to keep pace with the market’s rally. Furthermore, it has failed to keep pace with the other pure-play bulk shippers. The lack of participation in the overall market and bulk-shipper rally can perhaps be explained by (1) SEB tending to march to its own beat and keep to themselves; (2) SEB’s 81% run-up since September, 2006; (3) Even more impressive 563% run-up over the past five years. Short-term, perhaps SEB has run out of gas and reading the quarterly report indicates that may be the case.
First, let us reflect on the FY 2006 shareholder letter delivered to SEB holders in which the CEO publicly comments on the performance of the company’s stock price, a technique SEB rarely practices. Mr. Bresky was upbeat on the tremendous performance of the stock price but warned the stock price is likely experiencing a spike within a steady upward trend. It certainly appears Mr. Bresky was spot on, again, at least over the short term. So, for those of you looking to trade SEB or have it go straight up every day, not only does the stock market not work that way, but it was very clearly delineated in the publicly available letter to the stockholders.
More importantly, reading the 10-Q, also filed after the bell in tandem with the earnings announcement, provides clues into SEB’s falling earnings. As for the numbers, SEB posted total revenue of $742M in Q2 2007 versus $688M generated in Q2 2006. Year to date in 2007, revenue is $1.47B, an 11% increase when compared to the $1.34B generated in the first six months of 2006. However, net income fell substantially. SEB posted earnings of $33.82 per share for Q2 2007, indicating a decline of 38% from the $54.85 Q2 2006 EPS number. YTD earnings are $72.95, a decrease of nearly 24% when compared to the same period in 2006.
The culprits: (1) higher corn costs for feeding the pigs, mostly due to ethanol demand; and (2) aggressive capital expenditures, particularly in the marine shipping business unit.
Further discussion in the 10-Q indicated that as far as the short-term goes, high corn prices will remain, high prices of hogs and pork cannot be sustained over long periods of time, and capital expenditures for the rest of 2007 will be aggressive. For those of you looking for a quick in-and-out trade, SEB is likely not the best bet. I anticipate seeing pressure on SEB EPS and profit margin numbers for the rest of 2007 and perhaps near-term downward pressure on the stock price as a result.
I know the above sounds bearish considering my previous discussions and posts on SEB, but before you assume I have done a 180, consider that maybe I was just being upfront and getting the bad news out before the good.
Despite declining earnings and reduced cash position, SEB increased book value by 3% and after today’s $1,990 close, SEB is trading at 1.9 times book value. For long-term ownership investments, I am an avid fan of companies being able to continually increase book value per share, despite business and industry challenges. Short and simple, with the increase in shareholder equity per the 10-Q and depressed stock price, you can get far more bang for your ownership dollar at this stage with SEB.
Business wise, despite the challenges, SEB continues to show strong growth in the marine shipping segment and revenue growth in their core businesses. Although profitability of their core businesses, especially hog/pork processing, will be subject to some volatility and pressure due to price of hogs/pork and corn prices, the divisions will remain profitable. Additionally, there does not seem to be any concern that any of their significantly producing business avenues will materially decline. Simple translation, SEB will continue to churn out cash and drive up book value per share for the foreseeable future.
Valuation wise, SEB still appears to be attractive. I estimate that SEB is trading at 13.8 times approximated 2007 earnings based on the performance of the first two quarters. Granted, SEB is diverse and it is not as black and white as I am suggesting, but food service peers are trading at 18-22 times 2007 earnings and shippers are trading at 18-25 times 2007 earnings. Certainly, the Bresky’s controlling interest in the company and being able to govern all decisions, lack of general Wall Street coverage, and business diversity can keep that P/E ratio down a little bit, but overall, good value. The book value number discussed above is also attractive as is the under 7 EV/EBITDA ratio.
Most importantly, amidst the challenges and pressure SEB is facing, the owners continue to be rewarded. A little before the 10-Q was filed with the Securities and Exchange Commission, SEB filed an 8-K announcing a buyback program to repurchase up to $50M of stock over the next 2 years. At today’s market price, that is approximately 2% of the total shares outstanding and by chance is very close to the number of shares sort per the latest filings. The latter may be coincidental, but interesting to note. Of course, SEB may never repurchase a single share of stock, but I anticipate they will use up the entire $50M over the next two years. Granted, 2% of the shares outstanding is not a monumental number, but considering SEB’s stringent stock issuance policy, no stock option/stock grants, and other non-dilutive practices, removing any number of shares from the public marketplace is critical. I anticipate that this buyback, once completed, if ever, will result in at an absolute minimum, a $40 per share benefit to owners. A special cash dividend could have been declared ($50M divided by 1.26M shares outstanding), but I envision that SEB feels the price of common stock may fall a little further from today’s $1,900 levels. Unfortunately, short-term, I tend to agree with that sentiment, but by buying back stock at potentially lower prices, owners will receive even more than $40 per share in value and in a tax-free/tax-deferred form. I would be surprised to see if SEB publicly discusses the results of the repurchase program – one will likely have to look at the statement of cash flows to see the results quarter by quarter. Furthermore, I am unsure which shares they will buy back, but they will not be mine.
On a more observational note, especially to those that are looking at SEB as an investment choice, I believe it is significant to note the language in which SEB presents its 10-K and 10-Q SEC filings. It is clear that SEB prefers simplicity when authoring these filings and frankly, it makes it easy for nearly anyone to understand. Sometimes, you read company filings and the language is so tortuous and complex, you wonder if they are trying to hide something. For instance, I was reading an SEC filings the other day that is performing phenomenally well in the capital markets, is debt free, and is making money hand over fist. However, despite my extensive experience and direct knowledge of the industry they are serving, it was a struggle to surmise how they generated revenue and made money. Granted, the intricacies of SEB’s operating units is very complex and dependent on an array of very elaborate (perhaps convoluted?) variables, but from reading the filings, one can generally conclude how revenue is produced. I have always said it is important to understand a business before investing, but sometimes, companies make it difficult to understand even the most basic items impacting the business. Seaboard does an exceptional job of telling it like it is. Certainly, further research to better understand the intricacies of each operating unit can help uncover hidden value or recognize traps better, but you have to start somewhere. It is a simple observation, but not one to be taken lightly or merely brushed off. It says a lot about how SEB treats their owners.
I maintain my previous price target, but honestly, hope it happens later than sooner. Such though may seem counter-intuitive from an investment standpoint, but seeing SEB is showing no weakness in terms of generating wealth for its owners over a long-period of time, I would not mind the accumulation phase lasting over the next 10 years. I certainly think SEB will perform very well over the next 10 years and outperform the markets on an annualized basis, I just would like a little more time to pick up more cheap shares. For those of you on the SEB bandwagon, as exciting as SEB’s run to $2,699 was and has been, it would have been nice for September, 2006 to have lasted longer to provide a longer window to acquire more shares at lower prices. I believe SEB is in that phase now and it makes sense to take advantage of it.
And of course, a company that increases book value quarter-over-quarter, keeps it simple, pays a consistent quarterly dividend (albeit a 0.1% yield), and buys back shares while not issuing new shares is a good one to own.
First, SEB traded down 2.95% today to close at $1,990 – it touched as low as $1,901.10 during today’s session. SEB is now down nearly 30% from its 52-week high set on April 19, 2007. Despite continuing to be profitable and being one of the more established and reputable marine shipping and cargo companies in the world, SEB has failed to keep pace with the market’s rally. Furthermore, it has failed to keep pace with the other pure-play bulk shippers. The lack of participation in the overall market and bulk-shipper rally can perhaps be explained by (1) SEB tending to march to its own beat and keep to themselves; (2) SEB’s 81% run-up since September, 2006; (3) Even more impressive 563% run-up over the past five years. Short-term, perhaps SEB has run out of gas and reading the quarterly report indicates that may be the case.
First, let us reflect on the FY 2006 shareholder letter delivered to SEB holders in which the CEO publicly comments on the performance of the company’s stock price, a technique SEB rarely practices. Mr. Bresky was upbeat on the tremendous performance of the stock price but warned the stock price is likely experiencing a spike within a steady upward trend. It certainly appears Mr. Bresky was spot on, again, at least over the short term. So, for those of you looking to trade SEB or have it go straight up every day, not only does the stock market not work that way, but it was very clearly delineated in the publicly available letter to the stockholders.
More importantly, reading the 10-Q, also filed after the bell in tandem with the earnings announcement, provides clues into SEB’s falling earnings. As for the numbers, SEB posted total revenue of $742M in Q2 2007 versus $688M generated in Q2 2006. Year to date in 2007, revenue is $1.47B, an 11% increase when compared to the $1.34B generated in the first six months of 2006. However, net income fell substantially. SEB posted earnings of $33.82 per share for Q2 2007, indicating a decline of 38% from the $54.85 Q2 2006 EPS number. YTD earnings are $72.95, a decrease of nearly 24% when compared to the same period in 2006.
The culprits: (1) higher corn costs for feeding the pigs, mostly due to ethanol demand; and (2) aggressive capital expenditures, particularly in the marine shipping business unit.
Further discussion in the 10-Q indicated that as far as the short-term goes, high corn prices will remain, high prices of hogs and pork cannot be sustained over long periods of time, and capital expenditures for the rest of 2007 will be aggressive. For those of you looking for a quick in-and-out trade, SEB is likely not the best bet. I anticipate seeing pressure on SEB EPS and profit margin numbers for the rest of 2007 and perhaps near-term downward pressure on the stock price as a result.
I know the above sounds bearish considering my previous discussions and posts on SEB, but before you assume I have done a 180, consider that maybe I was just being upfront and getting the bad news out before the good.
Despite declining earnings and reduced cash position, SEB increased book value by 3% and after today’s $1,990 close, SEB is trading at 1.9 times book value. For long-term ownership investments, I am an avid fan of companies being able to continually increase book value per share, despite business and industry challenges. Short and simple, with the increase in shareholder equity per the 10-Q and depressed stock price, you can get far more bang for your ownership dollar at this stage with SEB.
Business wise, despite the challenges, SEB continues to show strong growth in the marine shipping segment and revenue growth in their core businesses. Although profitability of their core businesses, especially hog/pork processing, will be subject to some volatility and pressure due to price of hogs/pork and corn prices, the divisions will remain profitable. Additionally, there does not seem to be any concern that any of their significantly producing business avenues will materially decline. Simple translation, SEB will continue to churn out cash and drive up book value per share for the foreseeable future.
Valuation wise, SEB still appears to be attractive. I estimate that SEB is trading at 13.8 times approximated 2007 earnings based on the performance of the first two quarters. Granted, SEB is diverse and it is not as black and white as I am suggesting, but food service peers are trading at 18-22 times 2007 earnings and shippers are trading at 18-25 times 2007 earnings. Certainly, the Bresky’s controlling interest in the company and being able to govern all decisions, lack of general Wall Street coverage, and business diversity can keep that P/E ratio down a little bit, but overall, good value. The book value number discussed above is also attractive as is the under 7 EV/EBITDA ratio.
Most importantly, amidst the challenges and pressure SEB is facing, the owners continue to be rewarded. A little before the 10-Q was filed with the Securities and Exchange Commission, SEB filed an 8-K announcing a buyback program to repurchase up to $50M of stock over the next 2 years. At today’s market price, that is approximately 2% of the total shares outstanding and by chance is very close to the number of shares sort per the latest filings. The latter may be coincidental, but interesting to note. Of course, SEB may never repurchase a single share of stock, but I anticipate they will use up the entire $50M over the next two years. Granted, 2% of the shares outstanding is not a monumental number, but considering SEB’s stringent stock issuance policy, no stock option/stock grants, and other non-dilutive practices, removing any number of shares from the public marketplace is critical. I anticipate that this buyback, once completed, if ever, will result in at an absolute minimum, a $40 per share benefit to owners. A special cash dividend could have been declared ($50M divided by 1.26M shares outstanding), but I envision that SEB feels the price of common stock may fall a little further from today’s $1,900 levels. Unfortunately, short-term, I tend to agree with that sentiment, but by buying back stock at potentially lower prices, owners will receive even more than $40 per share in value and in a tax-free/tax-deferred form. I would be surprised to see if SEB publicly discusses the results of the repurchase program – one will likely have to look at the statement of cash flows to see the results quarter by quarter. Furthermore, I am unsure which shares they will buy back, but they will not be mine.
On a more observational note, especially to those that are looking at SEB as an investment choice, I believe it is significant to note the language in which SEB presents its 10-K and 10-Q SEC filings. It is clear that SEB prefers simplicity when authoring these filings and frankly, it makes it easy for nearly anyone to understand. Sometimes, you read company filings and the language is so tortuous and complex, you wonder if they are trying to hide something. For instance, I was reading an SEC filings the other day that is performing phenomenally well in the capital markets, is debt free, and is making money hand over fist. However, despite my extensive experience and direct knowledge of the industry they are serving, it was a struggle to surmise how they generated revenue and made money. Granted, the intricacies of SEB’s operating units is very complex and dependent on an array of very elaborate (perhaps convoluted?) variables, but from reading the filings, one can generally conclude how revenue is produced. I have always said it is important to understand a business before investing, but sometimes, companies make it difficult to understand even the most basic items impacting the business. Seaboard does an exceptional job of telling it like it is. Certainly, further research to better understand the intricacies of each operating unit can help uncover hidden value or recognize traps better, but you have to start somewhere. It is a simple observation, but not one to be taken lightly or merely brushed off. It says a lot about how SEB treats their owners.
I maintain my previous price target, but honestly, hope it happens later than sooner. Such though may seem counter-intuitive from an investment standpoint, but seeing SEB is showing no weakness in terms of generating wealth for its owners over a long-period of time, I would not mind the accumulation phase lasting over the next 10 years. I certainly think SEB will perform very well over the next 10 years and outperform the markets on an annualized basis, I just would like a little more time to pick up more cheap shares. For those of you on the SEB bandwagon, as exciting as SEB’s run to $2,699 was and has been, it would have been nice for September, 2006 to have lasted longer to provide a longer window to acquire more shares at lower prices. I believe SEB is in that phase now and it makes sense to take advantage of it.
And of course, a company that increases book value quarter-over-quarter, keeps it simple, pays a consistent quarterly dividend (albeit a 0.1% yield), and buys back shares while not issuing new shares is a good one to own.
Monday, August 6, 2007
Seacoast Banking Corp – Time To Buy, After a Little Breather
Seacoast Banking Corp (NASDAQ: SBCF) is the holding company for Seacoast National Bank, a regional bank with over 40 branches in South Florida at the end of 2006. The bank primarily serves the Treasure Coast area (St. Lucie, Indian River, and Martin Counties) and has expanded its operations into the counties of Okeechobee, Orange, and Highlands.
Seacoast is trading at about a 50% discount to its 52-week high which was reached before the widespread mortgage panic hit the markets and on speculation of a buy-out, especially after National City (NYSE: NCC) bought out Ft. Pierce, Florida based Harbor Federal for a big premium.
SBCF and Harbor Federal were very similar banks – both with 70+ years of history and were serving essentially the same areas, though Harbor expanded more to the north than SBCF did. Many were expecting SBCF to be quickly scooped up by a larger bank following NCC’s acquisition of Harbor Federal, but it never happened and here are the compelling reasons why:
Now, the landscape has changed somewhat. SBCF is at $16.80 after closing up 7.5%, mostly on a big bullish day for the markets, especially financials, and fueled by discussion that private equity firms are lining up smaller regional banks in Florida and California for a roll-up.
Here is what I see unfolding, for what it might be worth. Mind you, I do not have a fantastic track record when it comes to choosing banking investments.
Although the areas SBCF serves have grown tremendously, they are in large still ‘small, hometown’ type communities. I know this because I have grown up in the area and spent most of my life on the Treasure Coast. In this area and especially in the areas to the west where SBCF has expanded, people know each other and like to do business with people they know. Large companies are certainly in the area and doing well, but that being said, for the most part, the reputable local contractors get the construction jobs and the local banks tend to get the nod from local customers. I have even seen a handful of events, which I am not privy to share in full, that indicate local banker dislike for the larger banks that have come into the area. Honestly, I too, have been impacted by the transition from a small, local bank to a large, national bank – and in many ways, I do not like it.
I believe this factor will come into play. Short and simple, the area needs a local bank with a local face – where you see the leaders of the bank at the same restaurants and food stores you may frequent. Now, the Treasure Coast is not that small and SBCF is positioned in Orlando, but it is still a local bank and that has value in this area.
A handful of privately held, local/regional banks that serve the same area as SBCF have been able to continue to reward shareholders, despite the challenging environment, by growing book value per share, issuing stock and cash dividends, and maintaining or even raising the bank sponsored buy back price of its shares. SBCF, which is susceptible to the punishment the capital markets can dish out, has well, been punished.
One of two things will happen.
Either way, it spells a win for shareholders at these levels and I am willing to go out on a limb and suggest that SBCF’s NPAs (non performing assets), loan charge offs, and bad loans are a lot smaller than the stock market is suggesting. But, do not take my word for it – on hitting fresh new 52-week lows in August, 2007, the officers and directors have come out of the wood work purchasing shares on the open market. It has not been a ton of shares, but is enough to suggest to me that that from a stock market price standpoint, the worst is behind us.
Also noteworthy is SBCF’s expansion into Broward/Dade Counties and noting that many of the privately held local/regional banks have seen their shareholders retain their value, not have it diminish in these well publicized tough times. SBCF was expensive at $32 – it’s a bargain at $16. Anything under $17 is a buy and I am looking for a return to $22 per share within the next 12 months on a buy-out or getting their on its own steam.
Seacoast is trading at about a 50% discount to its 52-week high which was reached before the widespread mortgage panic hit the markets and on speculation of a buy-out, especially after National City (NYSE: NCC) bought out Ft. Pierce, Florida based Harbor Federal for a big premium.
SBCF and Harbor Federal were very similar banks – both with 70+ years of history and were serving essentially the same areas, though Harbor expanded more to the north than SBCF did. Many were expecting SBCF to be quickly scooped up by a larger bank following NCC’s acquisition of Harbor Federal, but it never happened and here are the compelling reasons why:
- At the time. SBCF was trading at over 3x book value – indicating a buy out premium of 3.5x – 4.5x book value would have been required. Not good value.
- If you have ever spent time on the Treasure Coast, you will see that many of the major banks are already here in the area, including Bank of America, Wachovia, and others. Citigroup has even begun to make strides into the area.
Now, the landscape has changed somewhat. SBCF is at $16.80 after closing up 7.5%, mostly on a big bullish day for the markets, especially financials, and fueled by discussion that private equity firms are lining up smaller regional banks in Florida and California for a roll-up.
Here is what I see unfolding, for what it might be worth. Mind you, I do not have a fantastic track record when it comes to choosing banking investments.
Although the areas SBCF serves have grown tremendously, they are in large still ‘small, hometown’ type communities. I know this because I have grown up in the area and spent most of my life on the Treasure Coast. In this area and especially in the areas to the west where SBCF has expanded, people know each other and like to do business with people they know. Large companies are certainly in the area and doing well, but that being said, for the most part, the reputable local contractors get the construction jobs and the local banks tend to get the nod from local customers. I have even seen a handful of events, which I am not privy to share in full, that indicate local banker dislike for the larger banks that have come into the area. Honestly, I too, have been impacted by the transition from a small, local bank to a large, national bank – and in many ways, I do not like it.
I believe this factor will come into play. Short and simple, the area needs a local bank with a local face – where you see the leaders of the bank at the same restaurants and food stores you may frequent. Now, the Treasure Coast is not that small and SBCF is positioned in Orlando, but it is still a local bank and that has value in this area.
A handful of privately held, local/regional banks that serve the same area as SBCF have been able to continue to reward shareholders, despite the challenging environment, by growing book value per share, issuing stock and cash dividends, and maintaining or even raising the bank sponsored buy back price of its shares. SBCF, which is susceptible to the punishment the capital markets can dish out, has well, been punished.
One of two things will happen.
- SBCF will be acquired…Most likely by a private buyer that wishes to have a banking establishment in this part of the country and perhaps even keep the familiar Seacoast name intact. A private buyer can likely buy out SBCF (either a majority stake or an all out acquisition) for $19-$25 per share (let’s say $22) and get a great bargain.
- SBCF will remain independent…For the next several years and thrive as one of the few local banks servicing the area – it’s stock price may not do what long term holders want it to do, but ultimately, it will turn around. SBCF continues to build its cash position and stockholder equity numbers, despite an alleged challenging environment.
Either way, it spells a win for shareholders at these levels and I am willing to go out on a limb and suggest that SBCF’s NPAs (non performing assets), loan charge offs, and bad loans are a lot smaller than the stock market is suggesting. But, do not take my word for it – on hitting fresh new 52-week lows in August, 2007, the officers and directors have come out of the wood work purchasing shares on the open market. It has not been a ton of shares, but is enough to suggest to me that that from a stock market price standpoint, the worst is behind us.
Also noteworthy is SBCF’s expansion into Broward/Dade Counties and noting that many of the privately held local/regional banks have seen their shareholders retain their value, not have it diminish in these well publicized tough times. SBCF was expensive at $32 – it’s a bargain at $16. Anything under $17 is a buy and I am looking for a return to $22 per share within the next 12 months on a buy-out or getting their on its own steam.
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