Thursday, November 29, 2007

Paperstand (ETFC, WCI, SPF, IAR, CAH)

The WSJ reports that E*Trade (ETFC) is getting a $2.55bn cash infusion from Citadel Investment Group, in a bid to restore confidence and liquidity in the discount brokerage. In a plan overseen by the federal Office of Thrift Supervision, Citadel will make a two-part investment in E*Trade. The first component is the purchase of E*Trade's entire $3bn portfolio of asset-backed securities for a value of around $800m. The 2nd component is the purchase of $1.75bn worth of 10yr notes, paying an annual interest rate of about 12.5%.

“Heard on the Street” column dicusses home builders, saying that with home sales slowing to a crawl and buyers unable to qualify for mortgages, some home builders are struggling to keep their operations going. The make-or-break matter for most builders is the ability to generate cash to service debt and to pay for the construction of new homes. Such liquidity risks could trap investors. "Liquidity is the No. 1 concern for builders, and rightly so," says Nishu Sood, of Deutsche Bank. "It's a matter of survival," he says of the many builders that borrowed heavily for the land they stockpiled during the housing boom. WCI Communities (WCI) is currently testing the banks' patience. The co recently violated an "interest coverage" test, which requires a minimum ratio of EBITDA to the interest it owes on its debt, says Andrew Brausa, of BofA. Another builder that worries investors is Standard Pacific (SPF). The builder has about $140m in debt service next year and is likely to generate enough cash in its 4Q of this year to cover these payments, says Vicki Bryan, an analyst at Gimme Credit. But there are other drains on its liquidity. For one, the co has to pay $150m of maturing long-term debt next year and an additional $150m in ‘09, UBS analyst David Goldberg says. Other builders with problems mentoned include BZH, DHI and TOL.

Barron’s Online discusses Idearc (IAR), saying that after falling 28% since it spun off from Verizon a year ago, Idearc represents a bargain worth considering. At a 52w low, the co's enterprise value as a multiple of operating earnings is 8x, less than some directories businesses have fetched in LBOs in recent years. Not that Idearc is about to be LBO'd anytime soon: With $9bn in debt, it's already heavily levered. But investors willing to stomach the risk are paying a historically cheap price to get the same thing that has attracted private equity to yellow pages outfits: High cash flow from a no-growth business that offers quarterly dividends totaling $1.36, for a rich 7% yield. Idearc has the cash flow to support, and perhaps even increase, that dividend, but it could use that cash to make more acquisitions or enter new US mkts, offering the prospect of higher-than-expected sales growth. "We thought Idearc was undervalued when we first bought into the shares, and at the current price, it's still undervalued," says Mike Shinnick, of 1st Source Monogram Long-Short Fund.

“Inside Scoop” section reports that CEO of Cardinal Health (CAH) has bought $1.1m worth of the co's stock. Clark, who joined Cardinal in Apr’06, purchased 20K shares Mon. The buy was Clark's first open-mkt purchase and the shares acquired represent his only transferable shares. The purchase follows a less bullish signal 2wks ago, when director Matthew Walter sold $5.4m worth of stock through a limited liability co. Jonathan Moreland, of Ladenburg Thalmann Asset Mgmt, notes that Clark's purchase is a significant amount of money but says he is concerned by Walter's even larger sale, especially since it came at a similar price to the Clark buy. "Frankly, it's about time an exec was indicating some value for these shares," Moreland says. He adds that adding in Walter's sale "makes for a pretty conflicted signal."

1 comment:

newequity said...

Is ETFC a buy in your opinion.