Tuesday, May 8, 2012

Bought 100 SBSI at $20.4/Select Medical/Earnings: GTN RRD FBSS MTOR

Intel increased its quarterly dividend by 7% to 22.5 cents. This brings the annual dividend rate to 90 cents. Based on my average total cost of $17.82, my dividend yield will become 5%. I own 273+ shares and have ceased reinvesting the dividend after the 2011 third quarter (snapshot of purchases at Intel)

The I.R.S. has extended the date for cost reporting for debt and options from January 1. 2013 to January 1, 2014. www.irs.gov.pdf Brokerage firms will now have to report the cost basis for bonds bought after 1/1/14. Adjustments to the cost basis for bonds is a complex topic.  

The Trader column in this week's Barrons had some favorable comments about Xerox (own as Lottery Ticket). Lottery Ticket Purchases: Links in One PostLottery Ticket Basket Strategy

Michael Santoli argues in his Barrons column that the emphatically unloved Supervalu stock could double from its current price. I own SVU as a LT and two Albertson's senior unsecured bonds as part of my Junk Bond Ladder Strategy, after selling 4 bonds.

I have become uncomfortable buying anything at the current levels, other than minor and inconsequential positions, particularly given the developing recession in Europe, their ongoing sovereign debt crisis, the slowdown in China, and the anemic U.S. recovery with a stalling job recovery. Personally, I would like to see a further decline of at least 10%.  I prefer a sharp decline rather than the piecemeal variety.

I never thought the Greeks would slow down for long on their perceived inherent righs to spend other people's money without any concern about repayment. In the recent election, the two parties that agreed to the EU's austerity proposals will no longer be able to form a government. NYT  Bloomberg With another large refinancing due this month, it is just a matter of time before the Greek government defaults again on its restructured finances.

Select Medical announced yesterday a tender offer for any and all of its outstanding 2015 senior subordinated note. I own just one of those bonds. The company also announced the commencement of a private offering of $365 million in senior notes. The 2015 bond did rise yesterday to a price slightly in excess of its par value. I also received an email notice that Moody's had upgraded the 2015 bond to B3. The common shares, SEM, rose 56 cents, or 6.67%, in trading yesterday to close at $8.95.

1. Bought 100 Southside Bancshares (SBSI) at $20.4 Last Tuesday (Regional Bank Basket Strategy)(see Disclaimer): When I developed this basket strategy back in 2009, I decided to devote anywhere from $40,000 to $50,000 to it. That range is not set in stone.

Last year, the exposure declined to almost $30,000 due to profit taking. Over the past couple of months, I have increased my exposure selectively, and have only sold one position to harvest a quick profit. Bought 60 HBNC at $17.55 (3/29/12 Post)-Sold 60 HBNC at $24.96 (4/30/12 Post). Along with other recent additions, the purchase of 100 SBSI shares last Tuesday took me close to the $40,000 minimum commitment again 

The other recent purchases include the following: Bought 50 BHLB AT $21.66 (March 2012 Post); Bought 50 FISI at $15.55 (April 2012 Post); Bought 50 BHB at $30 (February 2012 Post); Bought 50 FCBC at $12.5 (February 2012 Post); Bought 50 UVSP at $15.1 (March 2012 Post); Bought 50 SYBT at $21.84 (March 2012 Post); and Bought 50 MBVT at $26.25 (May 2012 Post). Of the recent purchases, three stocks were bought back after being sold: MBVT, FCBC and SBSI. 

SBSI is based in Tyler, Texas and has 48 branches in 17 cities in Texas. The locations are set forth in this document: southside.com/branch.pdf

Southside Bancshares will pay a 5% stock dividend on May 9th. The bank has been paying that 5% stock dividend since at least 1997. Southside Bancshares Stock Splits and Dividends In the same announcement as the stock dividend, the Board increased the quarterly cash dividend to 20 cents from 18 cents per share. Assuming a continuation of that rate, the dividend yield would be about 3.92% at a total cost of $20.4 per share.

Cash dividends have been paid at least since 1995. Southside Bancshares Cash Dividend History 

For 2011, the bank reported net income of $2.38 per share. This was basically unchanged from an E.P.S. of $2.37 in 2010. As shown at page 34, gains on securities available for sale have been an important component of this bank's earnings. Those gains totaled $33.446 million in 2009; $25.789 million in 2010; and $11.795 million in 2011. 

Capital ratios as of 12/31/11 were good:

Capital Ratios for Holding Company and Bank Subsidiary

For the Q/E 3/31/12, reported shortly after my purchase, Southside Bancshares reported net income of $10.1 million or 58 cents per share.  The bank had income of $5.972 million from security sales, up from $1.551 million in the first quarter of 2011.

The consensus was for 48 cents per share.

As of 3/31/12, the end interest margin was 3.52%; the efficiency ratio was at 57.18%; NPAs stood at .43% of total assets; the allowance for loan losses to NPAs was 144.32%; the allowance for loan losses to nonaccruing loans was 181.04%; and the return on average assets was 1.26%.  

A potential downside for the shares is that the consensus E.P.S. 2012 estimate is $1.91 per share and $1.92 for 2013. SBSI Analyst Estimates Three analysts contributed to those estimates. The lack of growth in earnings is a potential negative, assuming that the consensus estimates prove to be accurate. A mitigating factor would be for operating earnings to increase with less income derived from security sales.

I have previously bought and sold SBSI shares. Bought 50 SBSI at $19.49 (July 2010); Bought 50 SBSI @ $18.73 (October 2010); Sold 107+ SBSI at $20.5 (July 2011). I did not adjust purchase prices for a 5% stock dividend received in 2011 and included in the shares sold last July.

Southside Bancshares rose 59 cents in trading yesterday to close at $20.52.

2. Fauquier Bankshares (own 153+ Shares: Regional Bank Basket Strategy): Fauquier Bankshares, a very small bank operating in Northern Virginia, reported net income of $954,000, or 26 cents, for the 2012 first quarter, up just one cent from the 25 cents reported in the 2011 first quarter.

As of 3/31/12, the net interest margin was 3.89% (down from 4.12% for the 2011 first quarter); the efficiency ratio is too high at 72.88%; the total risk based capital ratio was okay at 13.31%; the tier 1 leverage ratio was 8.9%; NPLs to total loans stood at 1.06%; the allowance for loan losses to NPLs was at 141.91%; and the return on average assets was an uninspiring .64%.

Two closed end funds that I own, RVT and RMT, are the largest owners of this stock. FBSS Major HoldersSEC Schedule 13G filed by Royce & Associates.

Fauquier Bankshares declined seven cents yesterday to close at $12.83.

3. R.R. Donnelley (own bond: Junk Bond Ladder Strategy): RRD reported adjusted earnings of 44 cents per share, 8 cents better than the consensus estimate on a 2.3% year-over-year decline in revenues to $2.52 billion, which was less then the consensus estimate. The GAAP E.P.S. number was 21 cents per share which included restructuring charges, a loss on extinguishment of debt and acquisition related expenses.

Gross margin declined to 23% from 24.3% in the 2011 first quarter. The company reaffirmed guidance of an adjusted E.P.S. between $1.84 to $1.92 for 2012. SEC Filed Press Release Net sales for the U.S. Print and Related Services declined 3.1%. Adjusting for acquisitions, net sales decline in that business segment by 3.6%

On the day of the earnings release (5/2/12), the RRD common shares declined 6.86% to close at $11.81. I thought that the report reinforced the perception that RRD is operating in a declining business, similar in that regard to Pitney Bowes, which also pays its shareholders to much in dividends. The RRD common shares closed at $11.17 yesterday.

Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89

I recently flip a 100 shares of RRD stock, holding it long enough to clip one quarterly dividend. Sold 100 RRD at $12.24 (5/2/12 Post)- Bought 100 RRD at $11.6 (4/12/2012 Post). I may nibble on the common again at below $11.

I also recently flipped one of its bonds: Bought 1 R.R. Donnelley 8.875% Senior Bond Maturing 5/14/2021 at 92.69 (2/13/12 Post)- Sold 1 RRD Senior 8.875% Bond Maturing 2021 at 100 (4/11/12 Post).

4. Meritor (own 100 shares of the common and two bonds as part of the Junk Bond Ladder Strategy): For its second fiscal quarter ending 3/31/12, Meritor reported adjusted net income from continuing operations of 33 cents per share, beating the consensus estimate by seven cents. Revenues declined 1.4% year-over-year to $1.16 billion. MTOR reported an increase in adjusted EBITDA margin to 8.2% from 7% in the year ago quarter. Free cash flow was a negative $69 for the quarter. That poor results was "primarily driven by the reduction in European factoring balances associated with declines in European revenues". The company reaffirmed its fiscal 2012 guidance of an adjusted E.P.S. of $1.08-$1.39. The company retired $84 debt maturity as planned in March. As of 3/31/12, the company had $109 million in cash and $954 million in long term debt. SEC Filed Press Release

I currently own 100 shares of the common and two senior unsecured bonds. Added 50 MTOR at $6.55Bought 1 ArvinMeritor 10.625% Senior Bond Maturing on 3/15/2018 at 96Bought 1 ArvinMeritor 8.125% Senior Bond Maturing 9/15/2015 at 93.5

MTOR shares initially popped last week in response to the earnings release, hitting $6.92 on 5/2, and thereafter skidded to close at $6.04 yesterday.

5. Gray Television (own 2015 2nd Lien Senior BondJunk Bond Ladder Strategy): GTN reported first quarter net income of $2.192 million or 4 cents per share on revenues of $80.674 million. SEC Filed Press Release That result compared favorably to the 9 cent per share loss on revenue of $69.742 million in the 2011 first quarter.

The one analyst following the company estimated break-even for the quarter on revenues of $77.43 million.

As of 3/3112, Gray had $822.366 million in long term debt. Of that amount, the company had borrowed $461.763 million on the senior credit facility. This was more than $10 million less than on 12/31/12. (10-Q at page 11). The senior credit facility has priority over the second lien bond which had an outstanding balance of $365 million. The company had available $40 million on its credit facility.

On the day of the earnings release, the common stock, GTN, rose 7.87% to close at $1.92 (5/2/12). The shares have since retreated some to close at $1.83. I do not own the common. The purchase of common shares could only be accomplished under the Lottery Ticket strategy. I am close to being full on that strategy, given the rule that my total exposure can not exceed my realized gains to date.

Bought 1 Gray Television 10.5% Second Lien Bond Maturing 6/29/2015 at 95 

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