Boring Portfolio

Boring Portfolio Report
Thursday, February 1, 1996

The two stocks currently residing in the Borefolio will be getting some company tomorrow, as I toss 200 shares of Green Tree Financial (GNT) into the sack. The objectives of this move are threefold: to put cash to work as quickly as possible, to diversify my holdings, and to select stocks with solid prospects for price appreciation over the coming 6 to 10 months. My conclusion is that Green Tree nicely satisfies all three goals.

As for the two existing holdings, Kulicke & Soffa and Texas Industries, they had a fine day today.

KLIC clocked in with a gain of 7/8ths (to 22 3/4), recovering some of the ground lost in the frenzy that occurred yesterday as CEO Scott Kulicke entertained the telephonically-assembled crew of analysts. By the way, the Wall Street Journal informed its readers today that perhaps the semiconductor and electronics industries might not be such awful places to invest after all. Hey, thanks for the tip!

As for Texas Industries, the harmonic convergence of Super Bowl fever and the Gardner brothers' visit to Dallas has propelled this (formerly?) boring stock to yet another new high: up 2 3/8ths points today to 58 5/8, on above-average volume. I checked, folks: there is no other news to account for it. And no, this is not exactly what I had in mind when I bought the stock on Monday. But I'll take it all the same.

THE GREEN TREE FINANCIAL BUY REPORT

Green Tree Financial (NYSE:GNT)
1100 Landmark Towers, St. Paul, MN 19090
Phone: 612-293-3400

Approx. Current Price: 29
Trade: Buying 200 shares, February 2, 1996

THE COMPANY

Green Tree Financial is diversified financial services corporation that has grown rapidly by focusing on niche (read: "boring") markets often overlooked by much larger competitors. A major part of its operations involves financing of new and previously-owned manufactured homes, as well as providing "floor-plan" financing to the manufactured home industry. The company's insurance agencies also market physical damage and mortgage life insurance relating to the contracts it services.

In addition to its manufactured homes niche, Green Tree finances FHA-insured home improvements, major consumer purchases (Harley-Davidson motorcycles, ATVs and RVs, boats, snowmobiles, horsetrailers, pianos), and commercial equipment purchases (Piper Cub airplanes, tractor trailers). As of December 31, 1995, Green Tree valued its total loan portfolio at approximately $14 billion.

Approximately ten years ago, Green Tree instituted a computerized credit-scoring system that can give borrowers conditional approval for a loan in as little as 30 minutes. This "instant financing" policy would appear to be risky--particularly in the manufactured home-buying market, which has above-average default rates. Green Tree's system works very well in practice, however, and its 10% default rate for manufactured home loans is among the lowest in the business.

Green Tree also was an industry leader in cultivating Wall Street as a source of liquid capital. Since 1986, the company has assembled loan accounts into pools of investment-grade securities, similar to what Fannie Mae and Freddie Mac do with home mortgages. The company's FHA-insured and VA-guaranteed manufactured home contracts are converted into "Ginnie Mae" certificates for sale on the secondary market.

Just last week, for example, Green Tree offered a bundle of securities collateralized by a motley pool of sales contracts on "new and used motorcycles (representing 51% of the pool), marine products (12%), trucks (5%), sports vehicles (19%), horsetrailers (6%), small aircraft (1%), RVs (3%) and pianos (3%)." S&P awarded the vast majority of the offerings a AAA rating.

Geographic dispersal of its operations insulates Green Tree from regional economic downturns. The firm will not underwrite more than 10% of its loans in any one state, and no more than 1% in any single zip code. The company works closely with over 12,000 independent dealers throughout the United States, providing various incentives (such as its "Retail Rewards" program) to encourage then to utilize the company's services. Green Tree also operates its own regional service centers.

Green Tree's total loan originations have grown dramatically: up 40% in 1995 over the preceding year (to $5.26 billion). The company now does as much business in a single quarter as it did in an entire year as recently as 1992.

On January 30, Green Tree reported that EPS for 4Q:95 rose 47% to $.50, as compared with $.34 for 4Q:94. The results topped the Street's consensus expectations by a nickel. Fourth quarter income was $255.5 million, compared with $154.3 million for the year-ago quarter. For the full year, EPS increased 38% to $1.81, versus $1.31 in 1994.

Loan production was strong in all segments. For the year, manufactured home loan originations increased 30% (to $4.16 billion), home improvement originations increased 35% (to $627 million), and consumer finance originations increased 276% (to $361 million). The Company's dealer floorplan lending program increased outstandings to $570 million, as compared with $167 million the year before.

Chairman and CEO Lawrence M. Coss founded the company in 1975. He personally owns approximately 2.24 million shares of the company--3.3% of all outstanding shares. Other insiders own another 3.1%. Institutional investors control another 80% of the shares.

THE STOCK

GNT shares have appreciated 83% in value over the past 12 months, outpacing the impressive 62% average for its peer group and the 38% for the market overall.

The stock is currently trading at approximately 14X estimated earnings for the four quarters halfway completed (which is what I tend to focus on). This is more or less in line with the multiple that most stocks in its peer group enjoy. I expect earnings to grow 35-38% over the same period--something that competing companies can only dream about.

Analysts' current consensus EPS estimate for 1996 is $2.10, a 16% increase over 1995's $1.81/share. My own view is that this estimate will almost certainly be revised upwards in the near future. The substantial discount in the stock's valuation reflects the relatively high risk inherent in the financials industry. (Please note the high beta listed below: this Boring stock can move fast.)

Key Numbers

Stock Price :            29.00   ROE :                25.2

52 Week High : 32.38 Price/Earnings : 16.5

52 Week Low : 15.75 Price/Sales : 5.1

Beta : 2.00 Price/Book : 4.2

Yield : 0.8 Debt/Equity : 42.5

Shares (mil.): 137.2

Market Cap ($Mil) : 3978.8

Net Profit Margin (%) 28.7

1994 1993

Cash Flow Per Share 1.92 1.27

Capital Expenditures 18.91 11.70

According to First Call, 11 analysts collectively rate GNT at 1.5 (between "strong buy" and "buy"). S&P awards GNT a five-star rating, its highest. Value Line has ranked the stock for some months now as "1" for Timeliness and "3" for Safety. Recent Investors Business Daily rankings for GNT are 97 for EPS and 78 for relative strength.

CONCLUSION

Along with other stocks in the financial services group, Green Tree's share price came under pressure in late 1995 over concerns about growing consumer indebtedness. Although those concerns should not be dismissed, their impact upon Green Tree's business are mitigated by the sound management practices of the company and the deservedly high ratings its securitized offerings tend to enjoy in the secondary market.

The likelihood of a favorable interest rate environment bodes well for Green Tree in 1996. The prospects for share-price appreciation of 25 to 30% over the year are very good, and the risk associated with those prospects is less than that associated with other stocks in the financial services group.

--Greg Markus (MF Boring)