Wednesday, May 2, 2012

Lottery Ticket Basket Strategy Table/Sold 100 RRD at $12.24/Bought 50 MBVT at $26.25/Earnings HUN BC VLY EMR TEX PCS PAR

I watched Monday night a movie called The Greatest Game Ever Played, which is the kind of movie that Disney does extremely well. The film takes some liberty with the facts, but it is nonetheless an interesting true story. It primarily involves golf's 1913 U.S. Open won in a playoff by a U.S. amateur, Francis Ouimet, who had to beat in that playoff two of the best professional golfers of that generation, Harry Vardon and Ted Ray, both from Britain. Ouimet was a young American who could not afford to pay a caddy. A ten year old boy by the name of Eddie Lowery (see photo) caddied for Ouimet for all four rounds plus the 18 hole playoff. Ouimet and Bobby Jones were the best American amateur golfers of their generation.

PAR Technology, a LT selection, reported earnings last week. PAR shares rose 3.77% last Thursday in response to that report. The estimate, made by one analyst, was for an E.P.S. of 3 cents on $56.95M in revenues. The company reported earnings at 7 cents per diluted shares on revenues of $55.6M  

Huntsman, a LT selection, reported net income of $163 million for its first fiscal quarter ending 3/31/12, or 68 cents per share, up from 26 cents in the year ago quarter. Adjusted E.P.S. rose to 74 cents from 45 cents. The consensus estimate was for 40 cents. Adjusted earnings exclude losses from discontinued operations and other one time items. Revenues increased 9% to $2.91 billion. Huntsman shares rose 8.9% to close at $15.42 yesterday. Recent Lottery Ticket Transactions: Bought 30 HUN @ 9.91 and 30 FCE/A at 11.58 & Sold 40 VCBI at 7.64 (1/11/12 Post).

Yesterday's release of the ISM's manufacturing index for April caused the market to jump. The index was reported at 54.8, up from 53.4 last month, and better than the consensus estimate of 52.9. The new orders component jumped to 58.2 from 54.5.

I found the earnings report from Emerson Electric to be somewhat disconcerting. It was not surprising to see order softness in Europe. The disconcerting comment involved a slowdown in orders from China ("softer than anticipated"). EMR shares fell $3.36 yesterday to close at $49.18. I no longer own shares, but would consider buying some at less than $45. I do not recall selling the shares, though I found one post where I noted a pare at $53.61, (9/29/2010 Post), and an elimination @ 55.42 in November 2010. I noted the purchase of shares in a November 2008 post at $33.33. I have not repurchased the shares since those 2010 dispositions.

Today, I am going to discuss earnings reports from companies where I only own a bond. I view it important to review the earnings reports when my position is solely in a firm's bonds.  

1. MetroPCS (own2018 SeniorJunk Bond Ladder Strategy): The market reacted negatively to the first quarter earnings report, sending the common shares (PCS) down 10.83% to close at $7.08. I have no interest in the common shares.

MetroPCS reported a net income for the 2012 first quarter of $21 million, down from $59.9 million in the year ago quarter. The consensus estimate was for 17 cents. PCS gained 131,654 subscribers during the first quarter. Revenues declined by 7% to $1.27 billion.

Morningstar has a four star rating on the stock. I would consider buying no more than 50 shares below $6 per share as part of my Lottery Ticket Basket Strategy. 
2. Terex (own: 1 2017 Senior Sub: Junk Bond Ladder Strategy): Terex reported income from continuing operations of $20.5 million, or 18 cents per share, for the 2012 first quarter. Net sales increased 16% year-over-year excluding acquisitions. Including  acquisitions, net sales increased 44% to $1.8194 billion. Terex completed a large acquisition of a European company called Demag Cranes AG.

Bought: 1 Terex 8% Senior Subordinated Bond Maturing on 11/15/2017 at 96.947 (August 2011) 

3. Brunswick (own 1 2023 Senior:  Junk Bond Ladder Strategy): BC posted a net profit of $39.7 million or 43 cents, up from $27.5 in the year ago quarter. SEC Filed Press Release This was 4 cents better than the consensus estimate of 39 cents. Brunswick also raised the low end of its guidance for 2012 to $1.3 per share from $1.2. The high end remained at $1.5. Revenues for the first quarter were higher than expected at $974.2 million, but were 1.2% below the year ago results. 
Moody's raised its rating to Ba3 from B1 on 4/20/12.
4. Sold 100 RRD at $12.2435 Last Thursday (see Disclaimer):  I am not a fan of RRD, though I have traded the senior bonds and have just flipped the common stock for a small profit. I bought the 100 shares sold last Thursday at $11.6 (4/12/2012 Post). 

I will receive a $26 quarterly dividend on 6/1/12. 

After selling most of my RRD bonds, I still own 1 senior maturing in 2016. Bought 1 R.R. Donnelley 6.125% Senior Bond Maturing 1/15/2017 at 89 (August 2011); FINRA. If the 1st quarter earnings are satisfactory, scheduled to be released before the market opens today, I may buy back one of the bonds.

R.R. Donnelley & Sons Co closed at $12.68 yesterday. 

5. Bought 50 Merchants Bancshares at $26.25 Last Thursday (Regional Bank Basket Strategy)(see Disclaimer): I decided to buy back MBVT shares after reading the last earnings report. I had previously bought 50 shares at $22.9 and sold those shares at $26.5:

2011 MBVT 50 Shares +$160.1
That transaction occurred in one of my satellite brokerage accounts where preservation of capital is the paramount concern.

As noted in prior posts, Merchants is a very small bank operating in Vermont. It has 34 branches in that state. Branch Listing | Locations | Merchants Bank It was organized in 1849 and took a national charter in 1865. About Us | Merchants Bank

MBVT did not participate in TARP, which is viewed positively here at HQ.

It is also viewed as important that this bank remained profitable during the Near Depression period, with an E.P.S. of $1.77 in 2007; $1.96 in 2008; and $2.04 in 2009 (see page 47 of the 2009 Annual Report). That earnings history is stellar compared to most banks in the U.S. An additional positive is that the dividend was not cut during the recession, and remained at a $1.12 annual run rate.

For the first quarter of 2012, the bank reported net income of $3.61 million or 58 cents, up from 50 cents in the first quarter of 2011. SEC Filed Press Release

This bank is not managed by Masters of Disaster, always a comforting thought, as shown in the extremely low ratio of non-performing loans to total loans. That ratio is just .22%.

As of 3/31/12, NPAs to total assets was even lower at .16% as of 3/31/2012. The total capital ratio was 15.95%; the tangible capital ratio was 6.88%; the net interest margin was 3.34%; and the efficiency ratio was 62.16%.

The current quarterly dividend is 28 cents per share. A negative is that the dividend has not been increased since 2005. Dividends | Investor Relations | Merchants Bancshares At that rate, the dividend yield would be about 4.27% at a total cost of $26.25.

For this security, I would be satisfied to sell it anywhere north of $30 within the next two years. If I could sell it at $30 in exactly two years, the total annualized return would be over 10% which would be viewed favorably for this kind of investment.

MBVT went ex dividend  yesterday (5/1/12) for its quarterly distribution.

Merchants Bancshares Inc. (Vermont) closed at $26.41 yesterday.

6. Valley National (own 250 shares: Regional Bank Basket Strategy): Valley had a disappointing first quarter report, missing the consensus estimate of 19 cents by one cent.  SEC Filed Press Release dated April 26, 2012 Earnings for the first quarter of 2011 were 21 cents which included net gains of $3.9 million after tax, or two cents per share, from securities transactions. Even if I overlook that that trading gain, earnings still declined by 1 cent which is a poor result, particularly compared to other banks in this basket strategy. I will keep VLY shares, however, for their income generation. I am not reinvesting the dividend.  

As of 3/31/2012, the net interest margin was 3.7%; the efficiency ratio was 63.01%; the total non-accrual loans to loans stood at 1.12%; the allowance for non-covered loan losses to NPLs was 95.32%; and the total risk-based capital ratio was 12.27%.

Comments made during the earnings call sounded more upbeat about the future opportunities, particularly in Valley's expansion into the NYC Boroughs and Long Island with 44 full service branches. Earnings Call Transcript - Seeking Alpha

Valley National Bancorp closed at $12.61 yesterday.

7. Lottery Ticket Basket Strategy Table as of 5/1/12: I periodically post tables containing positions in one of my basket strategies. The gain from yesterday in this basket was primarily due to just two positions.

I have not decided what to do with one of those positions, Huntsman, while I intend to sell the other PLXT which will be a long term capital gain of close to 100%. The total exposure to LT positions can not exceed the realized gains from this strategy. Snapshots of the realized gains can be found in the Gateway Post linked above.