Wednesday, May 30, 2007

Valuation of RGFC.PK

The valuation of R&G Financial (RGFC.PK) which just sold its Florida Bank to Fifth-Third bancorp. I estimate it is selling at half its value and will probably double if/when it return to the NYSE from the pinksheets.

21,559,584 Class A
29,561,190 Class B
51,120,774 Common shares

Liquidation value of Preferred stock

Series A 50,000,000
Series B 25,000,000
Series C 69,000,000
Series D 69,000,000
total 213,000,000

Equity (based on Bank Holding Company data, after restatement)
544,945,000 As stated on BHC form
- 213,000,000 Preferred
331,945,000 Equity for Common shares
- 118,569,000 Non-tangible servicing asset (though not worthless)
213,376,000 Tangible Book Value

6.49335 Book value per share
4.17396 Tangible book value per share
3.02 Cohen (former analyst) estimate of Tangible book value per share

211,685,000 Other assets, probably mostly derivatives included in book value
Interest rate derivatives, probably OK

723,721,000 Listed on BHC as intangible and other assets
255,816,000 Listed on BHC as other liabilities
467,905,000 Diff between these two

------------------Changes with sale of Crown bank--------
Price payed
288,000,000 For crown bank
50,000,000 Paying off preferred shares
16,000,000 Real estate
354,000,000 total payed

226,000,000 tangible assets of Crown bank
128,000,000 Gain in tangible assets for RGF common stock holders

213,376,000 Old Tangible Book Value
+128,000,000 Gain in tangible BV
341,376,000 New tangible BV

6.67783 New Tangible BV per share

If Cohen's number is right
285,451,984 New tangible BV
5.58387 New tangible BV per share

3.90 Price per share on May 30
69.84% Fraction of tangible BV

Even a poor bank is worth about 1.5x tangible book value per share
Using TBV=5.58387
This is
Value = 8.3758
which is over twice the current price

Other scenarios:
The deal falls through. It needs to sell out like Doral to obtain cash. Value = 1.5 /share. Probability 10%
The deal goes through but tangible equity declines by $50M. Value = 6.0/share Probability 10%
The deal falls through and they fail. Value =0 Probability 5%
Value = 0.75*8.4 + 0.1*1.5+ 0.1*6 = $7.05/share

I will take as my value 7.0/share which makes it a buy at 3.90 however with the risk involved I can only put a small amout of my money into it.

############## UPDATE #####################
RGF announces that the think the restatement will be about $240 million after taxes. They had figured $185-$200M previously. On their BHC form they listed -$264,637,000 as accounting restatement which is probably pretax.

So I think we subtract about $50M which gives us about 230-280 of tangible book or $4.5-$5.5/share. It is selling at
$3.95/share today. Still pretty cheap but worth the risk? Investors did seem to like Doral once it got an infusion. Maybe RGFC.PK is worth a few bucks. I think the chance of doubling is still very good and chance of failure small.

Also the $16M is not for RGF sharholders

8-K about FHA license being taken away. Hopefully temporary.

Price on July 23, $2.60/share WOW!!!

##################### Update ###########################

12/2007 Holding company report out

Common book value down to $125MM. There is $523MM in either 30 days late or non-accrual. They have recently said that they are probably not going to pay any more preferred dividends. They are now deteriorating quickly. It could be the end for RGF. They will likely need to sell the bank in order to avoid being seized by regulators. Yikes.

Friday, May 18, 2007

Home builder earnings

I made this plot of earnings and book value for two of the oldest buiders Pulte Homes (PHM) and Centex (CTX). Black is PHM and red is CTX. The solid lines are book value per share (BV) and the dashed line is earnings (E), multiplied by 10.

They have grown BV by a factor of about 1000 since 1968. Pretty impressive. That is a 19.9% annualized growth rate for PHM and 17.8% for CTX.

You can also see how volatile the earnings are. Earnings are the change in BV from year to year: the derivative of the BV curve. The ratio of the two E/BV is the return on equity (ROE). You can see that the average ROE is roughly 10%. For the past 10 years, the ROE has been much higher. The dotted lines are about twice the solid so ROE is about 20% similar to the late 1970s.

You can also see the major recessions in 1973-1974 (the OPEC oil crisis) , 1980-1981 (Volcker's recession), and the 1991 Bush recession. The 1973-1974 recession appears to have been the worst for these builders. PHM nearly lost all of its earnings but still managed to avoid a loss. For both companies, BV has never declined in nearly 40 years. They have never had a loss.

Despite these terrible recessions, builders have managed to recover after a couple of bad one or two years. I think they will do likewise after this recession. Will the profitability of builders return to ROE=10 like they did in the 80s? Perhaps. However, the future may not resemble the past. What really matters in terms of growth for the builders is population growth. It appears that the government is passing immigration "reform" which should allow not only higher than average population growth but also plenty of cheap labor which will add to builder profitability. I think it is true that the long term picture is still rosey for home building in the US. However in the shorter term, we are likely to see a recession and the housing slump is likely to get worse before it gets better. There are still lots of uncertainty over how this will all play out. I think we are likely to see massive intervention on the part of the government aided by the Fed to prevent a full blown deflationary collapse. As an investor, my job is to decide whether builders will survive, whether they will grow thereafter and to decide when all this bad news is sufficiently priced in to create a good entry point in the stocks. I like Meritage Homes (MTH) best at this point although they are probably not the most conservative pick. Still, they seem to have the most long term potential and seem to be most feared by market participants presumeably because they only build in the southwest. They are trading at 0.88 BV and may go a bit lower. I have some shares, purchased at around this valuation and may acquire more if they drift lower towards half book and I see a rise on the Fear Meter which is now registering only Medium-High.

Of course one should be prepared for some volatility in prices. In the 1973-1974 recession, CTX tumbled in price from 2.78 to 0.3 (split corrected) which is a factor of 9.3,Yikes! Of course, they started off that priced 4.8 times book (way overvalued)and bottomed at half book (way undervalued). It seems half book is about the maximum fear point. MTH may not be there yet.