Thursday, June 10, 1999
A Value Investor's Look at [email protected], Part 1
This space has never been one to shy away from controversial positions or topics, so I hope you don't mind if I step right out onto another battlefield today. The battlefield is somewhat of my own making, but it involves a larger shift in the commercial landscape of the U.S. and the world at large, I suppose, here in 1999.
Over the last few days, I've been discussing [email protected] (Nasdaq: NTBK) in the Boring Portfolio. Having solicited comments on the company's ability to service its customers, a number of bad experiences were relayed to me on the Boring Portfolio message board. I included those in yesterday's report and that's where the fun began. Apparently, I ruffled some feathers among stockholders, so I'm taking this opportunity with the wider audience of the Evening News to do a couple of things:
1. Introduce you to this very interesting company.
2. Talk about how I go about analyzing it.
3. Talk about portfolio management and securities analysis in general and my ideas on "value investing."
The first two will be the most emphasized here. And I'm sure this will run more than the length of the column, so I will wrap up those two and get into the third topic tomorrow, if only briefly.
[email protected] is a savings and loan holding company set up to do business on the Internet. I'm leaving off the "exclusively on the Internet" phrase because I really don't care about the purity of a distribution and service platform. If a company wants to acquire bricks and mortar down the road but started as an Internet bank, then I would look at that on its own merits and not try to pin the company to its original business plan, unlike a Saturday "weakly" with a perpetually bearish editor I could think of.
The first feature of the company that people might notice is its tremendous shareholder return performance since coming public in 1997. The company's stock has gained more than 200% per year, compounded, since coming public in July of '97. Just in case someone rushes to the conclusion that this company just came on the scene in 1997 to cash in on Internet mania, the company was incorporated in February of 1996. Since the management of the company didn't just wake up that day and decide to incorporate and cash in on a mania, this means they were thinking of the strategic opportunities and getting their act together to incorporate in 1995 and quite possibly before that. So that was long before Yahoo! and Amazon.com came public. Click here for a three year chart of those stocks' performances. The relatively flat line at the bottom is the S&P 500's performance.
Also, the company's not being run by some yahoos that just came onto the banking scene. A quick reading of the proxy statement will show that the executives involved with the company have extensive backgrounds in the banking and financial services industry and in data services and outsourcing companies serving the financial services industry. Particularly interesting is the involvement of Mack Whittle, who is the CEO of Carolina First Corporation (Nasdaq: CAFC), a South Carolina bank holding company. Whittle left NCNB, the forerunner of NationsBank, in 1996, to form Carolina First. Put two and two together there to see that Whittle is a service-oriented guy.
So let's talk about the business plan at [email protected] And let's leave out all references to the Internet, because that's not the way you explain a company like this. The basic proposition, as I see it here, is to 1.) Deliver more value to customers than incumbent retail banks; 2.) Make banking more convenient for the customer; and 3.) Offer an integrated package of financial services that the large banks cannot because of their incumbency problems. That the Internet is there to facilitate these things isn't the mission statement. Internet delivery would fall into the tactical realm of executing the overall strategy. That the mass Internet is in its relative infancy is certainly a big part of the plan to attack, take share from the incumbent banks, and grow very rapidly.
Over the last year (Q198 to Q199), deposits at [email protected] have grown 158%, assets (before recent securities offerings) are up 222%, shareholders' equity has risen 321%, and first quarter revenues grew 216%. Customer service expenses and marketing expenses (two of the more important noninterest expense line items here) grew by 210% and 61%, respectively. At 24,634 accounts as of the end of Q1, accounts grew 193% year-over-year and a whopping 41.5% sequentially. That sort of growth isn't without its problems, however. It's not a snap to put in place the systems to make all those account holders happy and to a certain extent, some of the CD holders are purely price shopping (though the jumbo CD balance is low, which I like to see).
This is where I really ticked off some of the company's shareholders in yesterday's Boring Portfolio entry. The posts on the Boring message board were uniformly negative and I relayed that (if you're thinking this two-part piece on the company is a bash job, sit tight).
As you can see above, the crux of the business model is servicing the living daylights out of the customer. That means bill payments have to always work, the company has to be able to handle inbound service calls and be able to function effectively on an outbound service call basis, deposits have to be credited promptly, the website has to display mission-critical uptime performance, mistakes have to be handled promptly, and on and on.
Do you expect this out of your current bank? No, because if you're a customer of a big commercial bank, you're probably very much like a beaten dog. You're expecting to be hit and all you can do is wince. Beaten dogs bite back at times, though, and that's what's happening in the retail banking world today. Customers are going to demand that an Internet bank go five times as far as the incumbent banks in servicing them. On the one hand, customers will be glad to be away from their cruel masters, but at the same time, they won't have any loyalty to their new masters unless they're treated very well.
Tomorrow, I'll discuss what [email protected] is doing right, why it must do these things, what the financial model might look like in the future and how that will affect shareholder returns, and the other factors that are going into the process of making a decision on investment in this company.
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