On Corus, Fremont, and the Impairment Charge

I haven’t written about the sub-prime lending story on this blog, because it didn’t involve the kinds of stocks I would normally write about. Despite the recent market tumult, very few financial services companies have seen their stock prices decline to levels where they would be worth writing about. However, there are a few exceptions. Last Thursday, one of these exceptions, Corus Bankshares (CORS), made an announcement that connected it to the wider sub-prime lending story.

Impairment Charge

Corus announced that it had determined the decline in the market value of its stake in Fremont General (FMT) constituted an “other than temporary” impairment (as defined by GAAP). As a result, Corus plans to record a charge in the first quarter of 2007.

At the time of the press release (March 15, 2007) Corus held 2.5 million shares of Fremont General purchased at an average cost of $12.73 a share. The most recent trade I saw on Fremont was at $8.81 a share. So, at present, Corus’ common stock position in Fremont would be $31.83 million at cost and only $22.03 million at market. If the quarter ended today, Corus would record a $9.8 million pre-tax charge. The impairment charge would increase to the extent that Fremont General’s share price falls between now and March 31st; conversely, the impairment charge would decrease to the extent that Fremont General’s share price rises between now and March 31st.

Adding to the Position

At year end 2006, Corus held only 1.6 million shares of Fremont General. The recent increase is explained in the March 15th press release:

“During 2007, and since the recent disclosures and decline in Fremont’s stock price, Corus has opportunistically purchased an additional 967,000 shares, bringing its total position to 2.5 million shares with an average cost basis of $12.73 a share.”

Common Stock Portfolio

The 2.5 million shares of Fremont General are held at the holding company level. The holding company has a portfolio consisting entirely of the common stock of companies within the financial services industry.

To give you an idea of what the portfolio looks like, here is a summary of Corus’ common stock investments as of December 31st, 2006. Remember, this information is out of date – especially in regard to the Fremont General position:

Bank of America (BAC): 16.5%

Fremont General (FMT): 11.8%

JP Morgan (JPM): 11.1%

Wachovia (WB): 10.4%

Regions Financial (RF): 8.9%

Comerica (CMA): 7.1%

Citigroup (C): 5.8%

Merrill Lynch (MER): 5.7%

US Bancorp (USB): 4.5%

MAF Bancorp (MAFB): 4.2%

Morgan Stanley (MS): 3.1%

Compass Bancshares (CBSS): 3.0%

Associated Bancorp (ASBC): 1.9%

SunTrust Banks (STI): 1.8%

Bank of New York (BK): 1.8%

National City (NCC): 1.3%

Amcore Financial (AMFI): 1.0%

Both on December 31st, 2006 and March 15th, 2007 the holding company’s common stock portfolio had a total market value in excess of $200 million. Therefore, it is unlikely the Fremont stake accounts for much …

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20 Questions for Richard Beddard of The Interactive Investor Blog

Richard Beddard is the editor of Interactive Investor, one of the UK’s leading financial websites, and the main contributor to its blog. He’s a keen private investor in smaller UK stocks and larger American ones.

Visit The Interactive Investor Blog

1. Are you a value investor?

My starting point isn’t value. I look for stocks I can pigeon hole: growth, income or recovery usually value always has the last word though. Knowing why I’m buying the company helps me decide how to evaluate it. For example, if I’m looking at an income share I focus on the dividend yield and cashflows . If I’m looking at a growth share I look at earnings growth, return on capital, and margins initially. If I’m looking at a recovery share the price needs to have tanked and management must have a credible plan. But it all comes down to price in the end, and how it relates to the other factors.

2. What is value investing?

It’s buying good companies on the cheap. The price is one side of the equation, what you get for it is the other side. I like my companies to have little debt or, better still net cash in the bank. Partly that’s about safety – a cash rich company is unlikely to go bankrupt tomorrow, and partly it’s about potential, because cash can be reinvested or returned to shareholders. A growing company needs cash to fund expansion. A recovering company needs cash to see it through difficult times. I don’t mind if a company I own takes on debt, but I like to get in there before it does. Other signs I look for are less tangible: straightforward accounts, companies that put substance ahead of style, insiders buying, reputation…

3. What is your approach to investing?

I’m a long-term bottom up investor. I don’t pretend to read the markets, but I buy the stocks I do for specific reasons which means they are often un-correlated. That protected me from the savage downturn between 2000 and 2003. I suppose you could say I’m a contrarian, though I don’t set out to do the opposite of everyone else. I just set out to do my own thing.

4. How do you evaluate a stock?

It doesn’t take me long at all. Maybe an hour or two. But finding the stocks to evaluate takes a lot longer than that. I follow all the US shares covered by the Value Line Investment Survey, and all the shares listed on the London Stock Exchange. I reckon that’s 4,000 odd companies, so you can imagine – I don’t have much time to spend on each. I don’t use screens to whittle down the number as I think they are too literal. If a company has one year of low growth in five, it’s not a growth share. That’s mad. I think the ‘fuzzy logic’ of the human brain is a better filter. But Value Line and similar UK services (I use …

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On Rex Stores, Real Estate, and Ethanol

In my post “On Posco, Berkshire, and Buffett“, I mentioned that I had published a quarterly newsletter when I began this blog, but discontinued it during the second half of 2006, when I found bargains had become too scarce to reliably provide enough material to fill a newsletter each quarter.

In the first issue of the newsletter, back in April of 2006, I wrote about a company called Rex Stores (RSC). Theoretically, Rex Stores is a chain of electronics retail stores. In reality, a considerable amount of the corporate assets an investor acquires an interest in when he buys the company’s common stock has little or nothing to do with selling electronics.

Some of you may remember how Bill Rempel answered the last of his twenty questions on January 24th, 2006:

20. What’s the most interesting company we haven’t heard of?

Rex Stores (RSC). I looked at them in mid-2005 as a possible value play. This little electronics store in the heartland, sitting on a bunch of real estate, with an extremely low effective income tax rate. Huh? Turns out the company had a big hand in these synthetic fuel plants that were getting oodles of tax credits, and the IRS was investigating several of these things because they were throwing off tax credits but the fuel they were producing synthetically was costing more than normal fuel, something along those lines. I can’t remember if the synfuel plant they owned a part of was in the investigation or not, but I decided I didn’t like the notion of buying a small cap retailer that was into quite that diverse an investment. It pays to read the fine print.

Bill’s intriguing description of Rex Stores is essentially correct (note: the IRS audit was concluded favorably). This is how the company is described in its most recent 10-Q:

We are a specialty retailer in the consumer electronics/appliance industry. As of October 31, 2006 we operated 207 stores in 36 states, predominantly in small to medium-sized markets under the trade name “REX”. Over the past eight years, we have also been active in several synthetic fuel investments and as of October 31, 2006, we had funded two ethanol producing entities and had contingent agreements to fund three additional ethanol producing entities.

The synthetic fuel partnerships are separate from (and older than) the recent funding of ethanol producing entities. The production of synfuel generates tax credits; synfuel production is only economical because of these tax credits. The credits are phased out once the price of oil exceeds a certain level.

As you can imagine, the historically high oil prices of the recent past threatened to impair the value of Rex’s synfuel investments, because such high prices would effectively cause synfuel production to cease.

On October 31st, 2006 Rex made the following announcement:

REX recently received confirmation that all synthetic fuel plants for which it receives income are in operation. As such, the Company expects to record higher

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Book Review: The Little Book of Common Sense Investing

Gannon On Investing’s contributing writer, Steven Rosales, reviews Jack Bogle’s new book, The Little Book of Common Sense Investing.

Read Book Review…

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Value Investing News: Top Stories – Week of Monday, March 12th

Due to yesterday’s festival, I’m a bit late posting the weekly headlines from Value Investing News. Here are last week’s top stories:

1. Taking A “Leap Of Faith”
2. This Panther Is Ready To Pounce
3. Against the Topps Deal
4. Moodys – Flunking Out At Lampert U
5. Warren Buffett at Georgetown
6. Topps Removes Dissident Directors from “Go Shop” Process
7. Sequoia Fund Annual Report
8. The “Money Flow” Myth and the “Liquidity” Trap
9. If the Number of Net/Nets is a Contrary Indicator, We’re in Trouble!
10. Handleman (HDL) is Still a Bargain

Visit Value Investing News…

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Festival of Stocks #28

Welcome to the twenty-eighth Festival of Stocks. The Festival of Stocks is a weekly blog carnival dedicated to highlighting the best recent posts on stock market related topics.

I am proud to present this week’s best entries to the Festival of Stocks. The articles are listed by category. The stock tickers are linked to Yahoo Finance. I have included my post “Against the Topps Deal” among the links below.

This week I decided to do things a little differently. Several of the best blog posts of the last week happened to be on the same topics. Rather than attempting to fight the tide and admit inferior posts in their place, I decided to embrace the idea of multiple posts on the same topics. As a result, you will find an occasional panorama of punditry among this week’s selection. Of the festival’s seventeen posts, three are on Jack Bogle’s new book, two are on the Topps deal, and two are on stock buybacks. Of course, there is also the usual handful of posts on specific stocks you’ve come to expect from each week’s festival.

On the right side of your screen, you’ll see a survey asking what total annual return you expect from the S&P; 500 over the next ten years (if you don’t see it, please go here). The survey isn’t an ad. It’s part of a project I’m working on for the blog. Please take the time to vote, as I’ll incorporate the results of this survey into some of my future posts.

If you have an investing blog of your own, you can copy the poll and present it on your own site. The more diverse the places the poll is presented, the better the results will be.

Thanks for humoring me.

Enjoy the festival.

 

Market Commentary

Falling Out the First Storey Window By Value Discipline
In his first post back after a month long absence from the blogosphere, Rick discusses the February 27th fall in Shanghai and the U.S. market tumult that followed – a one day drop he likens to a fall out of a first storey window.

Bogle’s Book

Book Review: John Bogle’s Little Book of Common Sense Investing By Value Blog Review
Steven sets the record straight regarding exactly what Bogle does and doesn’t say in his new book. Everything on Value Blog Review is written with new investors in mind – and this review is no different. Steven explains why Bogle’s latest title is the first book a new investor should read.

The Little Book of Common Sense Investing – Book Review By The Confused Capitalist
Jay finds himself in the unusual position of describing how a book can be like Chinese water torture – but in a good way. His point is simple: Bogle’s constant, logical beating of the indexing drum, accompanied by simple arithmetic and quotes from famous value investors and B school professors, makes it “all but impossible to dismiss” the case for index funds.…

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Survey: Annual Total Return From S&P; 500 Over Next Ten Years

What annual total return do you expect from the S&P; 500 over the next ten years? That’s the question being asked in the poll on the right of your screen. It’s not an ad. In fact, it’s part of the wider discussion on market valuations and future returns I began in my normalized P/E series.

For now, I’m conducting a survey of investing blog readers. You’re reading an investing blog (this one) so you qualify. Please take the time to answer the poll.

If you have an investing blog of your own, you can copy the poll and present it on your own site. The more diverse the places the poll is presented, the better the results will be.

I’m not looking for accurate predictions here. I’m just looking for honest expectations. There are no wrong answers; so, there’s no reason to be influenced by how others have voted.

I’ll incorporate the results of this survey (and another related survey) into some of my future posts.…

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Festival of Stocks Reminder

Don’t forget I’m hosting the Festival of Stocks, a blog carnival dedicated to highlighting bloggers’ best articles on stock market related topics. So, please start sending in your submissions now. The best of them will appear here on Monday.

You can submit an entry by using a standard form. Or, you can just send me an email.

Send in a Submission…

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Against the Topps Deal

In my earlier post entitled “Topps to be Acquired by Eisner and Others“, I said that I would look over the company’s financials. I did and what I found is quite interesting.

Actual Offer

First, you need to forget the $9.75 a share number you’ve seen reported as the offer from Tornante and Madison Dearborn. Topps (TOPP) has $84.87 million in cash and no debt. So, the $9.75 a share offer from Eisner et al. includes the acquisition of $2.19 per share in cash.

The offer for Topps’ operating business is $7.56 a share not $9.75 a share. When investors calculate standard valuation ratios such as price-to-earnings, price-to-sales, and price-to-book, they need to use the $7.56 a share number rather than the $9.75 a share number, because the utility of these ratios is in comparing an operating business to the price paid for that business.

For instance, although it first appears that Eisner et al. are making an offer that values Topps at over 100% of sales, this is an illusion. The offer values Topps at almost exactly one times sales – in fact, slightly less than one times sales.

Furthermore, Topps is expected to increase sales in the years ahead, because of certain favorable developments (brought on in part by management’s recent actions) that seem to have improved the outlook for the industry. I’ll address the issue of a “turnaround” later.

For now, it’s important to note that Topps’ current sales levels are not especially high – in fact, sales are roughly where they were in 2001.

Use of Cash

In that year, Topps spent close to $30 million to repurchase 2.81 million shares at $10.39 a share. Six years later, the entire company is set to be sold for $9.75 a share.

To be fair, Topps had more cash in 2001 than it has today. The difference in cash and investments is theoretically large enough to account for the $0.64 a share gap between the price at which Topps was enthusiastically buying in 2001 and the price at which Topps is now planning to sell itself. Regardless, this repurchase record betrays the fact that Topps’ board accepted an offer even they don’t believe to be substantially greater than what long-term shareholders will (eventually) be able to sell their shares for in the open market.

If that last statement is untrue, then either the 2001 repurchases were a negligent misuse of almost $30 million of company cash or unforeseeable events that occurred during the intervening years have permanently impaired the value of the business.

Which is more likely? Is management wrong now? Was it wrong then? Or, have circumstances conspired against the company?

If the 2001 repurchases were the error, perhaps they were an excusable error.

However, Topps’ long history of squandering cash is inexcusable. Almost exactly six years ago, Topps had $158.74 million in cash. Today, the entire company is being sold for $385.4 million dollars.

Over the last several years, Topps has spent far more …

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Value Investing News: Top Stories

An excellent resource I’ve mentioned before is Value Investing News. If you’re ever short on reading material – or just looking for financial news with a decidedly value bent, stop by Value Investing News.

Here are the top stories from last week:

1. Another Buffett Wannabe
2. Note to John Bogle: Give Value Investors More Credit
3. The New Domtar: The Upgrade is Not Just On Paper
4. Finding Value In Microsoft
5. Friendly’s Higher; They Hired a Banker
6. Large Take-Two Investors Group To Nominate 6 to Board
7. Friendly Dissidents Use billboards to Press Views
8. Biglari Sends New Letter to Friendly Ice Cream Shareholders
9. The Inside Story of a Wall Street Battle Royal
10. Everybody Wants To Go To Heaven, But Nobody Wants To Die

Visit Value Investing News…

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