Thursday, April 26, 2012

Earnings: RSH TRST FNB BDGE/KO Stock Split/Buffett Rule

Britain has fallen into a recession for a second since the onset of the financial crisis. Gross Domestic Product: Preliminary Estimate, Q1 2012

The Federal Reserve reaffirmed its present intent to keep rates at exceptionally low levels at least through late 2014.

The Coca-Cola Board recommended a 2 for 1 stock split. I currently own 132+ shares (see snapshot, item # 1 Coca Cola). KO shares rose 81 cents yesterday to close at $74.93.

Jim Cramer had some positive comments about EBAY last night. eBay closed at $39.86 yesterday and rose another 54 cents in after hours trading. Back in March 2009, Eric Savitz wrote a negative article in Barrons, calling the stock a value trap at 8 times estimated 2009 earnings. I mentioned then that I would buy some shares since Eric was "one of my contrary indicators". Savitz on Ebay The stock was then selling at less than $12 per share. While I made a good buy on EBAY, I allowed my magic coin to dictate when to sell. I may need a new magic coin.

The Senate recently voted down the "Buffett Rule" tax bill, which would impose a minimum tax of 30% on those making more than $1 million per year. The vote was party line, as you would expect, with one Senator from each party crossing the line.  This was a cloture vote which requires 60 votes to advance the bill. Based on many conversations, TBs do not understand Senate cloture votes. Accurate Information is Not a Side to an Issue/ W & the Housing Crisis/Lying Works In Politics (December 2008).

PolitiFact rated as true a representation by Senator Portman (R) that this change would raise less than $5 billion per year. The Committee on Taxation estimated that the Buffett Rule would raise $46.7 over the next ten years. With the size of the budget deficits, this tax code change would be immaterial in isolation from other tax law changes designed to raise federal revenues as well as spending cuts. While Portman is correct in noting that $46.7 billion over ten years is not material, that is not a justification for refusing to pass the bill. Instead, it only highlights the problem in Washington.

I would view myself as a conservative on fiscal issues. Given the magnitude of the government's fiscal problems, the solution is fairly obvious, spending cuts and revenue increases lasting for at least a decade, provided those actions are taken now, which is not going to happen. There would be widespread support for revenue increases equal to about 1/3rd of the spending cuts. Since both political tribes, egged on by their constituent members, have proven their inability to deal with the problem, and will likely continue to make the problem worse, the solution will probably be forced on the U.S. by its creditors in a far more draconian manner than a sensible solution now.

1. Trustco (own: Regional Bank Basket Strategy): TrustCo reported net income for the first quarter of $8.9, up 20.7% over the prior year quarter. The E.P.S. number was $.095 which was down from the $.096 number for the 2011 first quarter. The reason for the lower E.P.S. was due to a significant increase in the share count. 

TrustCo sold a large number of shares last year, and I was critical of that transaction. Item # 1 TRST The bank sold 15.640 million shares at $4.65. form8k Since the bank did not participate in TARP (p. 12 form10-k), it did not need to issue stock to fund the buyback of the government's preferred stock. 

Since this transaction was dilutive to existing shareholders, accomplished at prices last prevailing in 1995 (TRST Interactive Chart), and undertaken for no good reason in my opinion, I voted against the Board and will continue to do so for as long as I own shares. I will also vote against management compensation packages. LB is not a forgive and forget kind of investor. 

As of 3/31/2012, the net interest margin was 3.23%; the efficiency ratio was 52.51%; the tangible equity to tangible assets ratio was 7.87%; NPLs to total loans stood at 2.03% with a coverage ratio of 94.9%; the return on average assets was .84% (prefer to see over 1%); and the dividend payout ratio was 68.91%.  

I am reinvesting the dividend to buy additional shares.  The primary reason for owning this bank's stock is the dividend. I own the shares in two taxable accounts, with one account having 287+ shares and the other at 157+. The holdings in the later account are profitable, and I may dispose of them above $5.75 per share based on my reaction to selling shares at $4.65 for no good reason in my judgment. 

Trustco Bank closed at $5.6 yesterday. At a total cost of $5.6, the dividend yield is about 4.69%.

2. FNB (own 50 Shares: Regional Bank Basket Strategy): F.N.B. Corporation reported net income of $21.6 million for the first quarter, or 15 cents per share. That number included 4 cents per share of merger and severance costs. Excluding those items, the bank reported an adjusted E.P.S. of 19 cents. 

The consensus estimate was for 19 cents. 

As of 3/3112, the net interest margin was 3.74%; the efficiency ratio was 61%; NPLs stood at 1.41% of total loans; the allowance for loan losses to NPLs was 92.95%; the return on average assets was .75% for the quarter; and the estimated total risk based capital ratio was at 12.2% (down from 13.4% as of 12/31/2011).  

After buying and selling shares, I am left with my lowest cost shares bought at $7.8.

I have kept this position just for its income generation. My unrealized gain has already turned into a long term capital gain.  If the shares decline to below $7.8 in a stock market correction, I would consider adding to the position again. The one year chart show a bottom  being formed over a two month period last August-September between $8- $9, a bounce off that bottom and a new range bound movement largely between $11.5-$12.5. FNB Interactive Chart 

F.N.B. Corp. rose 9 cents yesterday to close at $11.45.  The dividend yield is about 4.19% at a total cost of $11.45. At my purchase price of $7.8, the yield is about 6.15%. The dividend has been 12 cents a quarter (48 cents annually) since it was cut in half from 96 cents in January 2009. SEC Filed Press Release The stock was traded over $20 per share in 2008 before plummeting to the $6 range in March 2009.

3. Bridge Bancorp (BDGE)(own 155+ shares: Regional Bank Basket Strategy): Bridge Bancorp reported net income of $2.9 million or 35 cents per share, up from $2.2 million in the year ago quarter. This bank did sell common stock in the 2011 4th quarter at $17.5 per share. SEC Filed Press Release 

The estimate, made by one analyst, was for 35 cents. 

As of 3/31/2012, the net interest margin was 3.7%; the efficiency ratio was 60.95%; NPLs to total loans stood at .54%; the allowance for loan losses to NPLs was at 334.5%; the total capital to risk weighted assets ratio was at 15.7%; the Tier 1 capital ratio to risk weighted assets was 14.5%; the Tier 1 capital to average assets ratio was 9.1%; and the return on average total assets was .88%. Those capital ratios are good and are not supported with equity preferred stock issued to the government.

As a reminder for anyone following this bank, the dividend was not cut during the Near Depression. However, the quarterly dividend rate has remained at 23 cents per share from June 2005 to date. Bridgehampton National Bank | Dividends The stock traded as high as $29.48 in 2009; $27.94 in 2010; and $26.04 in early 2011 (intraday on 1/3/11). BDGE Historical Prices The E.P.S. numbers remained close to flat during the Near Depression period (2008-2010: $1.41-1.45, page 14 2010 10k). This bank operates in Suffolk County, Long Island and currently has 20 retail branch locations. Map of Bridgehampton National Bank Locations BDGE did not participate in TARP. SEC Filed Press Release

Bridge Bancorp rose 28 cents in trading yesterday to close at $20.3.

4. RadioShack (own 2 bonds and common as a LT): RSH reported a first quarter loss of  $8 million or 8 cents per share on a .9% decline in revenues to $1.01 billion. SEC Filed Press Release The consensus estimate was for earnings of 4 cents per share on revenues of $1.06 billion. The company had adjusted earnings per share of 31 cents for the first quarter of 2011. Same store sales for RSH owned stores and Target Mobile centers declined 4.2%. The President of RSH called the results disappointing and investors certainly agreed with him.

I would reiterate my earlier contention that this company needs to eliminate its common share dividend. The company also needs to cease purchasing its common stock. During the first quarter of 2012, RSH purchased 57,589 shares at $7.18 and 21,502 shares at $7.02. (page 24 form10q) In 2011, the company purchased 6.3 million shares, using $101.4 million, page 23.

The dividend is not providing any support to the stock price.

The only positives in my view is that the company still has $566.4 million in cash and cash equivalents; had no borrowings under its $450 million dollar credit facility; and claims free cash flow of 24.9 million in the first quarter (page 21 10-Q). The total long term debt was $674.9 million as of 3/31/2012. The relationship between cash and debt gives me some solace that RSH has the time to right the ship.

However, if RSH continues to buy stock and pay generous dividends, it may start a cycle of increasing debt dependence which could threaten its survival at some point. So far, the Board has shown no inclination to preserve capital by eliminating the dividend and stock purchases.

In this regard, I would add that RSH's busted convertible, with a 2.5% coupon, comes due on August 1, 2013. The outstanding amount of that note is $375 million or more than 1/2 of RSH's long term debt. (page 50, form10k12/31/11)

The 2011 total compensation package for Radioshack's President James F. Gooch, was $5,870,078, an absurd amount considering that the stock has hit an all time low under his tenure. The stock had a closing price of $8.375, adjusted for subsequent splits, in January 1982, RSH Interactive Chart, before the onset of a long term secular bull market which started later that year.

I noticed that I had not rated my two Radioshack bonds maturing in 2019 purchased last March. Bought 2 RadioShack 6.75% Senior Bonds Maturing 2019 at 80 I would have rated the risk at 6 then. I would now rate the risk at 7. Personal Risk Ratings For Junk Bonds

On the day of this earnings report, the 2019 sank about 2.6%, whereas the common stock declined 10.55%.

After this dismal and pathetic earnings report, Fitch downgraded the 2019 bond to B- from B+. TEXT-Fitch I also received an email notification the Moody's downgraded this bond to B1 and kept the outlook as negative. I would not quarrel with those downgrades.

I thought that this article at Seeking Alpha, written by a young investor, contains an intelligent criticism of RSH's strategy and their current management.

I have appropriately classified my common share position as a Lottery Ticket and would not invest more. Item # 3 Bought 40 Shares of RSH at $6.89-LT CATEGORYLottery Ticket Basket Strategy

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