Monday, March 26, 2012

UPDATED CEF TABLE/HPQ CVO MTOR/HARLAND CLARKE/Sold 50 HBAPRF at $20.65/Bought 50 HMA at $6.87-LT Category

Meritor (MTOR) reaffirmed its guidance for its 2012 fiscal year ending in a SEC Filed Press Release The company expects adjusted earnings to be between $1.08 to $1.39 per share. That reaffirmation last Wednesday was sufficient to cause a 12.6% pop in the share price. I own two senior bonds. Bought 1 ArvinMeritor 10.625% Senior Bond Maturing on 3/15/2018 at 96  Bought 1 ArvinMeritor 8.125% Senior Bond Maturing 9/15/2015 at 93.5 On 3/7/12, the common shares closed at $6.66 and at $8.48 last Friday. MTOR Stock Chart

Cenveo priced its new 11.5% senior notes due in 2017 and a 7% convertible also due in 2017 last Friday. The 11.5% 2017 senior notes were issued at 96.238. The net proceeds from these offerings will be about $291.7 million.

The proceeds will be used to fund a tender for existing bonds. Earlier, the company had conditioned the tender on being able to sell "at least $450 million". Cenveo Announces Cash Tender Offers for Its Outstanding Debt Securities I then noticed a press release on 3/8/12 that the company was commencing an offering of $450 million in senior notes due in 2020. Cenveo Announces Commencement of Senior Notes Offering That had to flop since the next news items were an offering for the 2017 convertible debt, Commencement of Senior Exchangeable Notes Offering, and a limit on the amount CVO was willing to accept of its 2013 subordinated bonds. Cenveo Announces Amendments to Its Pending Cash Tender Offer for Its Outstanding 2013 Senior Subordinated Bonds It seemed to late last week that the company was having some difficulty floating this refinancing, and the common shares fell significantly in price.

I previously sold two of the 2013 senior subordinated bonds before these events took place.  Sold 2 Cenveo 7.875% Senior Sub Bonds Maturing in 2013 at 95 Averaged Down by Buying 1 Cenveo 7.875% Senior Subordinated Maturing 12/1/2013 at 81.5 I will keep an eye on the pricing of that bond and the new 2017 senior bond when it becomes available for purchase by the public. Cenveo's common shares closed at $3.43 last Friday after closing at  $5.23 on 5/13/12. CVO Stock Charts

Hewlett-Packard's Board voted to increase the quarterly dividend to 12 cents per share from 10 cents. Form 8-k Over 200 million votes were cast against the re-election of several Directors including Marc Andreessen, Rajiv Gupta, John Hammergren and G. Kennedy Thompson. The most "no" votes, 249+ million were cast against Hammergren. Over 276+ million "no" votes were cast against executive compensation.

In a research report summarized in Barrons, a Bernstein analyst reaffirmed outperform ratings on KO and PEP based on positive sales trends in Western Europe. I own both, with the larger position in KO:
KO Unrealized Gain as of 3/23/2012=$2,748.02

1. Harland Clarke (own three 9.5% senior bonds maturing in 2015): HC reported a net loss of $78.9 million for the 2011 4th quarter on revenues of $403.7 million. SEC Filed Press Release The loss was primarily due to a non-cash impairment charge of $109.2 million or $93.3 million after-tax relating to the GlobalScholar and Spectrum K12 acquisitions and other items as explained in the press release:

Adjusted EBITDA for the 4th quarter was calculated by the company at $111.6 million, down 4.7% from the 4th quarter of 2010. 

Harland Clarke also filed its 2011 Annual Report. Harland Clarke Financial Solutions estimated that its backlog was $399.3 million as of 12/31/2011.  The company has too much debt in my opinion, and there is a lot of senior secured debt as shown at pages 39 and F-26 et. seq.  As of 12/312011, the Company owed $1.719 billion on its senior secured credit facility. I own a senior unsecured note, and HC shows at page F-27 of its Annual Report an outstanding balance for that note of $271.3 million. There is also a senior floating rate note due in 2015 with $204.3 million outstanding.

On the same day as the earnings release, Harland announced an acquisition that makes no sense to me, but it is easy to see the reason for it. For $70 million in cash, Harland purchased New Funeuil which engages in call center operations, staffing, toll collections and toll road services and back office operations according to Harland's SEC filing. Ronald Perelman owns, indirectly or directly, 100% of the companies being sold to Harland in this transaction. HCHC Faneuil 8-K And he controls Harland. This is a link to Faneuil's website. This is a link to Perelman's MacAndrews & Forbes Holdings website. More about Perelman and MacAndrews & Forbes can be found at Wikipedia.

I did not note any significant movement in the 2015 bond in response to the foregoing. FINRA Information on Harland's 9.5% Senior Bond Maturing 5/15/2015 

2. Sold 50 HBAPRF at $20.65 (see Disclaimer): I sold this security in the same account where I recently purchased 100 shares of MSPRA at $18.9. (3/19/2012 Post). MSPRA pays the greater of 4% or .7% above the 3 month LIBOR rate on a $25 par value. HBAPRF pays the greater of 3.5% or .75% above the 3 month LIBOR rate on a $25 par value. Prospectus Both securities pay non-cumulative qualified dividends. The HBAPRF shares were bought at $19.89 last August. 

3. BOUGHT 50 HMA at $6.87 Last Wednesday (Lottery Ticket Basket Strategy)(See Disclaimer): Health Management Associates (HMA) operates hospitals and other health care facilities in non-urban areas. As of 12/31/2011, the company operated 66 hospitals with a total of 10,330 licensed beds. A list of those facilities can be found starting at page 32 of HMA's recently filed Form 10-K.

I was allowed to exceed the $300 limit for LT purchases due to prior profitable trades. In this strategy I can exceed $300 by the amount of the total net realized gains. I have no prior losses in HMA, so my total prior trading history was a net realized gain of $123.33:

The purchases made in 2010 were not classified as Lottery Tickets and were made at higher prices than last week's LT purchase. Bought 100 HMA at $8.82 (April 2010); Sold 100 HMA at 9.28 (May 2010); Bought 50 HMA at 7.55 (July 2010);  Sold:  50 HMA @ 8.57.  So I view that this stock has more risk attached to it now even at a lower price.  

I do view the stock as undervalued at its current price. 

On valuation, the trailing P/E is less than 10. The forward P/E on estimated 2013 earnings is 7.92. The five year estimated P.E.G. is .66. Price to sales is .3. HMA Key Statistics The current consensus E.P.S. for 2012 is 88 cents. Moreover, the 2011 4th quarter adjusted E.P.S. number was 26 cents, beating the consensus estimate of 20 cents. SEC Filed Press Release Announcing 2011 4th Quarter Earnings On the same basis, the company earned 16 cents for the 2010 4th quarter. 

2011 Annual Report: Form 10-K For 2011, HMA reported $5.804 billion in revenues and net income of $178.710 million or 72 cents per share from continuing operations (86 cents on an adjusted basis).

One potential long term positive would be the provision requiring individuals to purchase health insurance or pay a fine, which is scheduled to take effect on 1/1/14, pursuant to the Patient Protection and Affordable Care Act. If the GOP has the power, it will repeal this law. The Supreme Court will likely decide whether the law is Constitutional later this year, and the case will be argued this week. NYT If this law survives with its insurance requirement, then it will cut down significantly on HMA's bad debt problems. The provision for doubtful accounts was 12.4% of net revenues as of 12/31/2011. 

While I believe that HMA is undervalued, it does come with a lot of baggage, and most of that baggage is common among publicly traded hospital companies. 

Medicare and Medicaid will likely be curtailing reimbursement rates as the U.S. budget problems deepen in the years to come. Some changes, already enacted into law, are discussed at pages 12-16 of the 2011 Annual Report.  

Potential and alleged violations of federal law are a constant source of problems. The most current and serious alleged violation against HMA may be by a former director of compliance Paul Meyer who was also a 30 year veteran of the FBI.  Mr. Meyer alleges that HMA improperly billed Medicare through improper patient admissions. Businessweek His allegations are summarized in an order from Federal District Court Judge Scola remanding the case back to a state court where Meyer initially filed it. MEYER v. HEALTH MANAGEMENT ASSOCIATES, INC. - January 20, 2012. 

While I would not predict the outcome of this suit, the allegations are worthy of note as providing possible future downside catalysts. Downside pressure on the stock price has already resulted from those allegations, as have a number of class action lawsuits. Key Developments page at Reuters

Another issue is the amount of leverage. As of 12/31/2011, long term debt and capital lease obligations totaled $3.489489 billion. The debt is discussed starting at page 74 of the 2011 Annual Report. 

Due to my assessment of the negatives, I have classified any potential purchase as a LT, which limits my total exposure to $300 plus any prior net realized gains.

I did read a recent Credit Suisse report on HMA, available to Schwab clients. The CS analyst has an outperform rating on the stock with a $12 price target. Barclays recently reiterated an overweight with a $8 price target.  

I believe the company paid a special $10 per share dividend in March 2007. HMA Historical Prices It has not paid a dividend since 2008 and is not likely to do in the foreseeable future in my opinion. Over the past two years, the stock did briefly trade above $11 in 2011. HMA Interactive Chart  I would likely sell my small position when and if the price returned to $9 which was last crossed in November 2011.

Health Management Associates Inc. Cl A fell 7 cents to close at $6.66 last Friday.

4. Updated CEF Portfolio TABLE: The following table updates my last posting of this table and corrects a few errors in it. For a few CEFs, I have positions in multiple accounts and will sometimes add or subtract from a position in one account without making a change in this table. The last table, for example, did not include a recent add of 100 IRR in a retirement account and only showed the 100 shares owned in a taxable account. I also recently substituted 200 IMF for 200 of the functionally equivalent WIW. I also received last Friday reinvested shares purchased with dividends paid by RVT and RMT:

Currently, I am only reinvesting the dividends paid by ADX, RMT, RVT, CHN, SWZ, EOI, IGR and IGD.

CEF Portfolio as of 3/23/12

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