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Investment Bank Regulation: Beware the Dawn of This New Era
LandAmerica Financial Group Will Recover on Top
Research from Bear Stearns indicates that the average conventional borrower is paying a coupon of 6.14%, and actual mortgage rates are 5.90%, making 37% of the mortgage universe within the minimum 40 basis point refinancing window, and if mortgage rates decline another 25 basis points to 5.65%, that exposure increases to 50% of the market or $2.47 trillion in conforming mortgages. A 50 basis point decline would take mortgage rates to a record low of 5.4%, increasing exposure to 72%, of $3.53 trillion in mortgages.
It is my belief that a major mortgage refinancing wave will be coming, and whenever someone refinances their mortgage they will need to buy title insurance. LFG will directly benefit from these refi's.
LandAmerica Financial Group Will Recover on Top
User 155569 said- “Assigning an EBIT margin of 10% is amusing.”
LFG’s EBIT margins 2002-2006:
2002 2003 2004 2005 2006
9.6% 9.8% 8.5% 7.7% 5.1%
LFG has earned EBIT margins near 10% in the past, and they should be able to earn higher EBIT margins when the mortgage market recovers due to their reduced expense base coupled with a more normal level of mortgage originations. A 10% EBIT margin expectation is a long-term expectation and is not unreasonable given what the company has earned in the past. Even if margins only return to 6%, you get a $60 stock, so I don’t see how you get hurt long-term. Moreover, FNF, a large competitor, says that they can earn 15% EBIT margins in a $2.4 trillion mortgage market, which I believe to be a normal market. LFG should be able to earn 10% EBIT margins in that environment, especially if management is able to implement some of its long-term initiatives to improve margins once the mortgage market recovers. Also realize that history has acquisitions that were not fully consolidated.
User 155569 said- “2006 was their best year ever.”
LFG’s EPS from 2002-2006:
2002 2003 2004 2005 2006
$8.06 $10.33 $8.02 $9.31 $5.68
Looking at LFG’s earnings per share from 2002 to 2006, it is evident that this company does have to potential to produce earnings at levels way above what they are currently producing. A simple average produces an earnings number of $8.28, and with the stock currently at $38.41, LFG is selling for 4.6x the average of what they earned from the 2002 to 2006 period.
User 155569 said- “Revenues will not improve from current levels for 4 or 5 years.”
If it does take four or five years, and earnings return to $10+, you could have a stock that is selling for $100+ that is giving you a 3.2% dividend yield on your cost basis. With LandAmerica’s large dividend yield, you are afforded the luxury of being paid to wait. Also, this was meant to be a long-term investment idea.
User 155569 said- “I would be very surprised if they don’t start writing off goodwill soon.”
On goodwill, yes there could be write downs but it is very unlikely that they will write it all off (will the banks write off all their goodwill through this cycle? I doubt it).
Near-term, the stock could be weak as incurred losses increase to build reserves, and the closing rate will probably be weak on this refi boom for a number of reasons. I just think this thing could be north of $100 in 4 years, which is a return that I would like to have. I would look to initiate positions in the low $30's and below.
Amazon Shares Showing Resilience as Analysts Defend Stock
Jarden Remains a Compelling Short
Thanks for sharing your thoughts about JAH. I find your articles to be very easy to read and well thought out. Thanks again for sharing your analysis.
Crocs Stopped Dead In Its Tracks; Can They Step It Up From Here?
Three Reasons Why I'm Going Short and Buying Puts
The Bear's Lair- Level 3 Decimation
"From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradeable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models."
Three Reasons Why I'm Going Short and Buying Puts
The Bear's Lair- Level 3 Decimation
"From November 15, we will have a new tool for figuring out how much toxic waste is in investment banks’ balance sheets. The new accounting rule SFAS157 requires banks to divide their tradeable assets into three “levels” according to how easy it is to get a market price for them. Level 1 assets have quoted prices in active markets. At the other extreme Level 3 assets have only unobservable inputs to measure value and are thus valued by reference to the banks’ own models."