Boring Portfolio Report
Wednesday, April 23, 1997
by Greg Markus (TMF
Boring)
ANN ARBOR, Mich. (April 23, 1997) -- Nasdaq stocks picked up some ground against their blue chip counterparts today. The Nasdaq Composite Index rose 14 points (1.19%), while the Dow lost 21 (-0.31%) and the S&P gave back a fraction of a point (-0.13%).
The Boring Portfolio gained better than three-quarters of a percent in net asset value, with only one holding numbered among the day's losers. Alas, the loss was a sizable one: GREEN TREE FINANCIAL had $1 7/8 lopped off its top, on massive trading volume approaching 2 million shares.
I could focus on how CISCO SYSTEMS (Nasdaq: CSCO) scored a solid $1 1/8 advance in the face of a downgrade by an analyst at Oppenheimer. Or I could talk about ORACLE's (Nasdaq: ORCL) $2 1/2 leap, as earnings news from PEOPLESOFT (Nasdaq: PSFT) and BMC SOFTWARE (Nasdaq: BMCS) suggested that the market for business-related software is anything but soft.
Or I could discuss how the oil-patch is heating up, contributing to TIDEWATER's (NYSE:TDW) $2 1/8 surge -- or how ATLAS AIR (Nasdaq: ATLS) ascended a quarter-point on the bid in advance of the company's quarterly earnings release tomorrow morning.
But in typical Boring fashion, I'll pass on all that good news today and comment instead on the single wallflower at today's party: What's the deal with Green Tree?
Green Tree Financial has been wilting notably over the past couple of quarters as traders have fretted about rising interest rates and declining consumer creditworthiness. Through all of that, Green Tree has grown its top and bottom lines impressively, rolling out new product lines -- such as home equity loans, a private-label credit card biz, and a new office-equipment leasing arm. None of that has seemed to register with the Street, however.
It was much the same today. Green Tree fell not because of any failing on its part but merely because it happened to be in the vicinity of THE MONEY STORE (Nasdaq: MONE) and UNITED COMPANIES FINANCIAL (NYSE: UC) when traders took a chain saw to those two stocks following the release of their quarterly earnings reports.
Both companies reported solid earnings growth, easily beating analysts' expectations, but the fine print apparently revived concerns about rising loan delinquencies and also about the impact on earnings of a revision in an obscure accounting rule, FAS 125.
The analysts are still working through the math of the FAS 125 stuff, but their initial reaction was that the accounting change help plump up the earnings of The Money Store and United artificially. As for loan delinquencies, Money Store reported that the percentage of its home equity (HE) loans that were 30 or more days delinquent stood at 6.59% at the end of the March quarter. That was above what some analysts were expecting.
And you know what happens when analysts aren't favorably impressed with a surprise. Out come the McCullochs, the Stihls, and the Husqvarnas. Brum-m-m! Brrrumm-m!! BWAHHH-H-H-H!!
So, uh, what does this all have to do with Green Tree?
Beats me.
I'm no accountant, so I won't pretend to understand much about FAS 125. What I can tell you, though, is that Green Tree discussed the rule change during the company's last quarterly conference call, and no analysts have raised any question about it with regard to Green Tree, either at the time of the conference call or since, to my knowledge.
During the call, Green Tree execs said they had alerted analysts at the end of last year that FAS 125 would impact the company's earnings by around $0.15 cents per share during 1997 -- negatively. They said that this continued to be their guidance. As for the first quarter of 1997, the company said that the rule's effect was to reduce EPS by about three pennies.
Reduce. The impact of FAS 125 on Green Tree is different from its effect on, for example, The Money Store or United -- and I'll offer a follow-up on this tomorrow ... if you promise to stay awake through it all.
The bottom line, however, is the bottom line. And the bottom line is that Green Tree remains comfortable with analysts' current EPS forecasts for the year.
As for concerns about creditworthiness, Green Tree's delinquency rate for its home equity (HE) loan business is less than half of what Money Store reported today. And for its total portfolio, Green Tree's 30+ days delinquency rate was reported to be 2.03% at the end of the March quarter -- which was actually down a bit from the 2.33% reported at the end of 1996.
To be fair, Green Tree's and Money Store's HE delinquency rates are not directly comparable. Green Tree has only fairly recently ramped up its HE business, whereas Money Store's been in that line for many years. Green Tree's delinquency rate would almost have to be smaller, since most of the HE loans it's made are still fairly fresh. Variations in geographical concentration of loans and other factors should also be factored in.
From an investor's point of view, the key issue is not whether industry-wide or even company-specific delinquency rates are going up, down or sideways. The key issues are whether a financial services company is experienced in managing risk through all kinds of credit environments, whether it has adequate reserves to offset defaults, whether it has a sound business model for the long haul, and whether it has demonstrated an ability for executing that business model.
If I thought Green Tree failed to meet even one of those criteria, I'd sell the stock tomorrow. But I don't, so I won't.
According to First Call, 15 analysts who track Green Tree currently offer estimates of $2.90 to $3.10 for 1997 EPS, with a consensus estimate of $3.01. Using that consensus figure, GNT is trading at 10-times projected earnings.
The industry-average p/e, based on calendar 1997 projected earnings, is around 13.5. Since Green Tree is at the front of the industry in both quality and earnings growth, GNT typically trades at a premium to the industry multiple, which would suggest a multiple in the mid-teens.
In recent years, GNT has traded at a slight discount to the market multiple (source: Value Line). This would again suggest a multiple in the mid-teens.
Considering that Green Tree grew EPS at a 33% annual rate over the past five years and is projected to continue along at a 27% annual clip through this year, a multiple of 14 would seem to be more than sufficiently conservative. That would suggest $3.01 x 14 = $42 as a near-term target price.
Perhaps the stock market will be reassured as Green Tree demonstrates this quarter that it continues to be highly successful in marketing its securitized assets. In that regard, just yesterday the company filed with the SEC to offer up to $1 billion in asset-backed securities.
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Stock Change Bid ATLS + 1/4 25.00 BGP + 1/4 21.25 CSL --- 27.88 CSCO +1 1/8 48.50 GNT -1 7/8 29.75 ORCL +2 1/2 37.75 OXHP + 1/2 61.75 PMSI + 1/16 8.94 TDW +2 1/8 48.50
Day Month Year History
BORING +0.76% -0.36% -5.00% 9.32%
S&P: -0.13% 2.18% 4.44% 24.46%
NASDAQ: +1.19% 0.44% -4.95% 17.89%
Rec'd # Security In At Now Change
2/28/96 400 Borders Gr 11.26 21.25 88.78%
5/24/96 100 Oxford Hea 48.02 61.75 28.58%
3/5/97 150 Atlas Air 23.06 25.00 8.42%
8/13/96 200 Carlisle C 26.32 27.88 5.89%
2/2/96 200 Green Tree 30.39 29.75 -2.10%
6/26/96 100 Cisco Syst 53.90 48.50 -10.02%
3/8/96 400 Prime Medi 10.07 8.94 -11.24%
11/21/96 100 Oracle Cor 48.65 37.75 -22.40%
12/23/96 100 Tidewater 46.52 48.50 4.25%
Rec'd # Security In At Value Change
2/28/96 400 Borders Gr 4502.49 8500.00 $3997.51
5/24/96 100 Oxford Hea 4802.49 6175.00 $1372.51
8/13/96 200 Carlisle C 5264.99 5575.00 $310.01
3/5/97 150 Atlas Air 3458.74 3750.00 $291.26
2/2/96 200 Green Tree 6077.49 5950.00 -$127.49
3/8/96 400 Prime Medi 4027.49 3575.00 -$452.49
6/26/96 100 Cisco Syst 5389.99 4850.00 -$539.99
11/21/96 100 Oracle Cor 4864.99 3775.00 -$1089.99
12/23/96 100 Tidewater 4652.49 4850.00 $197.51
CASH $7660.41
TOTAL $54660.41
