Boring Portfolio

Boring Portfolio Report
Tuesday, January 27, 1998
by Greg Markus (TMFBoring@aol.com)


ANN ARBOR, Mich. (Jan. 27, 1998) -- Green Tree Financial (NYSE: GNT) reported its fourth quarter results before the bell this morning and held a conference call soon thereafter.

Tonight's recap will focus entirely on Green Tree. That means passing over the good news that Borders Group (NYSE: BGP) rose $1 13/16 to hit a new all-time high of $33 5/16. It also means skating past the sharp gain enjoyed by Cisco Systems (Nasdaq: CSCO), which moved that stock to just under its own record high.

My comments on Green Tree will be relatively brief. I listened to this morning's lengthy conference call and have been studying the company's long and complicated press release. To echo the words of certain White House operatives, I'd rather get the story right instead of "right now," and it's a rather complex story.

In a nutshell, Green Tree reported a net loss of $0.12 per share for the fourth quarter, including a "supplemental reserve" of $190 million (pre-tax) taken to offset faster than anticipated prepayments of certain manufactured home loans made in earlier years. Excluding the charge, earnings were $0.72 per share.

The $190 million charge is larger than the anticipated $125-$150 million bite announced in November; it's offset by a $44 million (pre-tax) "credit to stockholders' equity" in accordance with FASB 125 (which I do not pretend to understand at this moment).

As for the $0.72 EPS, that figure is about $0.12 below Green Tree's earlier guidance. The company attributed the shortfall to higher than anticipated spreads on its securitizations in the fourth quarter, owing to volatility in global credit markets that affected virtually all issuers of fixed income securities. Well, okay.

Beyond that, Green Tree and its auditor (KPMG Peat Marwick) determined that the company should restate its 1996 earnings, lowering them by $200 million (pre-tax). That puts 1996 earnings at approximately $1.31 per share rather than their previously stated $2.20. The restatement reflects a failure by Green Tree to adjust adequately for all the impacts of partial loan prepayments by customers (e.g., sending in a extra payment or paying more than the monthly amount due in order to pay off the loan more rapidly).

The final figure for 1996 awaits recalculations of CEO Larry Coss's big-league bonus for that year, which was based on Green Tree's profits.

Looking forward, Green Tree has cut its EPS guidance for 1998 from around $3.50 to around $2.50.

Not surprisingly, the stock took yet another major hit today, and on huge volume, exceeding 10 million shares.

Surprisingly, my initial reaction to today's news is not entirely negative. As I say, I want some time to digest all the information and to ask certain follow-up questions to Green Tree, as they may occur to me. (I'm reporting my thought processes out loud here not because I think they're particularly notable, but simply because they might offer something instructive -- either by what I do right or by what I do wrong.)

The reason I'm not entirely displeased with today's news from the Tree is because of this: about $0.75 of the one dollar trimming of guidance reflects more prudent assumptions the company is making with regard to prepayment speeds of loans made in 1998. Without going into details here (they're in Green Tree's press release), the new assumptions are in line with recommendations offered by CIBC Oppenheimer analyst Steven Eisman approximately two months ago. Eisman has been among the leading critics of companies that employ gain-on-sale accounting, including Green Tree.

The remaining $0.25 reduction in expected earnings relates to anticipated increased costs of funding. That is, ratings agencies will assuredly react to today's news (one already has), and any additional downgrade of Green Tree's credit costs will affect its profit margins in the asset-backed securities market.

Suffice it to say, I'm not happy about that prospect, but at least Green Tree has attempted to factor it into its guidance.

Green Tree also recognizes now that it needs to beef up its board of directors. The company expects to name perhaps two new members very soon.

Slashing EPS projections by a full dollar is never a happy occasion -- especially when it comes on the heels of restating previous earnings. Anyone who chooses to leap out of the Tree now will get no criticism from me. Heck, after some reflection, I may decide to follow you.

For now, though, I want to think about it. The projected $2.50 in earnings are presumably much better quality earnings, given the more realistic prepayment assumptions. A multiple of 10 or even 11 is not out of the question, should Green Tree be able to demonstrate that no additional bugs are hiding in its leaves.

At some point, the company -- with its extensive retail loan operation, solid relationships with the manufactured home industry, and growing office equipment leasing and finance biz -- becomes an attractive asset on a pure take-out basis. Green Tree's dividend is now looking reasonably attractive in relation to the stock price, as well.

So all in all, I see no need to leap without first looking.

FoolWatch -- It's what's going on at the Fool today.

Buy a Book and Get It Signed! -- Book Tour '98


TODAY'S NUMBERS
Stock  Change    Bid 
 ANDW  +  1/8   27.81 
 CGO   -  7/16  21.75 
 BGP   +1 13/16 33.31 
 CSL   +  3/8   44.00 
 CSCO  +2 11/16 59.25 
 FCH   -  11/16 36.63 
 GNT   -2 13/16 19.25 
 TDW   -9 1/16  40.44 
 
                   Day   Month    Year  History 
         BORING   +0.65%  -4.22%  -4.22%  20.53% 
         S&P:     +1.26%  -0.15%  -0.15%  55.89% 
         NASDAQ:  +1.11%   0.54%   0.54%  51.67% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     33.31   195.95% 
   8/13/96  200 Carlisle C    26.32     44.00    67.14% 
   6/26/96  150 Cisco Syst    35.93     59.25    64.89% 
   1/21/98  200Andrew Corp    26.09     27.81     6.60% 
   11/6/97  200 FelCor Sui    37.59     36.63    -2.57% 
    3/5/97  150 Atlas Air     23.06     21.75    -5.67% 
    2/2/96  200 Green Tree    30.39     19.25   -36.65% 
  12/23/96  100 Tidewater     46.52     40.44   -13.08% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13325.00  $8822.51 
   8/13/96  200 Carlisle C  5264.99   8800.00  $3535.01 
   6/26/96  150 Cisco Syst  5389.99   8887.50  $3497.51 
   1/21/98  200Andrew Corp  5218.00   5562.50   $344.50 
    3/5/97  150 Atlas Air   3458.74   3262.50  -$196.24 
  
  
   11/6/97  200 FelCor Sui  7518.00   7325.00  -$193.00 
    2/2/96  200 Green Tree  6077.49   3850.00 -$2227.49 
  12/23/96  100 Tidewater   4652.49   4043.75  -$608.74 
  
                              CASH   $5206.47 
                             TOTAL  $60262.72