Monday, February 27, 2012

For The Ultimate Contrarian...

Here is the trailor to one of my favorite documentary type movies: We Live In Public. Somewhat ironically, you can stream it for free on Netflix.

It's the sort of film really does a lot to make you think. I noticed that it had a lot of thoughts about human psychology that could be applied to investing... it is the ultimate contrarian film.  Fair warning: it probably isn't safe for work.

What do I gather from this? The internet is the ultimate prisoner's dilemma.

Saturday, February 18, 2012

Bob Sturges At The New Miami Forum.

As was previously announced by Nevada Gold, CEO Bob Sturges recently spoke at the New Miami Forum in regards to the environment for gaming in Florida. Bob was the first speaker, but the whole thing is pretty good and worth a view. Sturges is a really rational and level headed thinker. As I have said in the past he is also one heck of an impressive executive.

New Miami Forum - Casinos In Miami from Brad Nickel on Vimeo.

Disclosure/Disclaimer: I am long shares of Nevada Gold. This is not advice of any kind. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

Tuesday, February 14, 2012

Taxes & Companies (Big & Small)

As the Federal Government moves to close tax loopholes for big corporations, it seems reasonable that people will move from larger companies to smaller ones for investment purposes. After all, most small companies can't afford to lobby for the oddities in the tax code that help GE play the tax game and are likely not going to be hurt as much. The bigger companies may well have a touch of earnings pressure come about in the short term, until they can pass along the additional costs to the consumer.

Just a thought that I found interesting and thought I would share.

Disclosure/Disclaimer: I invest almost exclusively in really small companies- the largest by market cap is SuperValu and it is the largest by manymanymany multiples. This is not advice of any kind. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

Friday, February 10, 2012

Guest Post: Rurban Financial

One of the things that I love about this blog is that I often get the chance to talk to other value investors and we get the chance to bounce ideas off of one another. Recently, I had the privilege to discuss a whole lot of ideas with one of the readers of Ragnar.

While talking one afternoon, I told him that if he ever wanted to do a guest post, that he would be more than welcome to send something my way. He obliged. Frankly, I was pleased with the results. As I have said in a previous post, I never have a problem with people emailing with me to share ideas (or, in certain instances, do guest posts). I will add though, that sometimes stuff gets buried in my inbox, so, If I don't respond to you, feel free to send a follow up email.

Unfortunately, in regard to this post, I was wanting unable to post it immediately, so, earnings have since come out, and the market price has improved significantly (I got the post a few days before the last earnings release)... However, it is still a great read, and potentially a great investment.

Without further ado, here is a fellow value investor's (under the pen name: DTEJD1997) write up on an interesting little bank called Ruban Financial.

Disclosure/Disclaimer: I have no financial position or interest in or against, in any regard, to any of the entities mentioned. This is not advice of any kind. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

Rurban Financial (RBNF $3/share 1.27.12) 

I would propose that shares of Rurban Financial (RBNF $3/share), are an interesting example of a bank left for dead.  RBNF has been through difficult and turbulent times. Investor and analyst interest in this company is non-existant, and thus we have a good opportunity for superior investment returns.   RBNF is well capitalized and is quickly getting stronger, but this not reflected in the current market quote.
Rurban Financial is headquartered in NorthWest Ohio, Defiance Ohio specifically.  RBNF has operations in North West Ohio, Central Ohio, and Central Indianna.  Most of their locations are in rural communities, but they do some amount of business in the cities of Toledo, Columbus, and Fort Wayne. Rurban Financial is a holding company that consists of a bank division (The State Bank), Rurban Data Systems Inc., and some mortgage origination offices.

RBNF is a fairly small bank, with a market cap of about $15MM.  The average trading volume is about 2800 shares a day, so this investment is probably suitable for personal accounts only.  

RBNF has about $625MM of assets under management.  Book value per share is about $9.76.   TANGIBLE BOOK value is $5.91.  Tier 1 capital ratio is approximately 8.57% and thus puts them in the "well capitalized" category.  These figures are from September 2011.  I strongly suspect that all forms of book value, and Tier 1 capital levels are higher than this at the end of January 2012.  

Tier 1 capital is approximately 8.57%, 8% is the minimum requirement for a "well capitalized" bank.  The important thing is that the bank is "well capitalized". It is also important that earnings & capital levels are trending in the right direction.  

Rurban has actually been earning money this past year, it's loan book is getting better, not worse.  This is supported by the CEO Mark Klein's statements in the 2011 3rd quarter report: 
"Elevated costs associated with the administration of problem assets are fairly well behind us,  and we are focusing more intensively on improving efficiencies within the Bank."

The 3rd quarter earnings were not a one quarter temporary bump.  Here is what was said in the 2011 2nd Quarter report:
"Earnings, total  revenue, Tier 1 and total risk-based capital, as well as services-per-household, all  revealed positive movement while non-performing  assets, delinquencies, and non-interest  expenses were all down."

Finally, in the 1st Quarter of 2011 CEO Mark Klein wrote:
"The most compelling aspect of the improving trend, particularly in the current quarter, is that we  are seeing less deterioration with our loan portfolio, and as a consequence, fewer additions to  delinquent and nonperforming status."

The end result is that earnings and loan quality are improving for Rurban and have been trending that way for at least 3 quarters in a row.

Like most other banks, Rurban has not been without it's problems...


RBNF has had many problems these past four years.  Some of them were self-inflicted, some were not. The primary problem with RBNF was it's RDSI (Rurban Data Systems Inc.) division.  This division did transaction processing for small banks primarily in the Midwest.  This was a boring, but profitable sideline.  At some point in the distant past,  RDSI decided that they were going to develop their own software to compete with Fiserv.  This was most of the business going on in RDSI and was a major expense center.  

In their quest to get this software developed, RDSI merged with another small software company, New Core Systems (NCS).  This is a very long & complicated story.  The end result is that the software development burned through a lot of cash and failed in the end.  RBNF took a large charge to write down the value of this division in June 2010.  Most of the people associated with this division were let go.  As of late January 2011 there are about 32 people in this division vs. 110 when it doing software development.  It has been scaled back to it's original position of doing boring transactional processing, and is now mildly profitable.  RDSI is now a much smaller part of RBNF.  Management does not anticipate taking any further charges here in the future.

The other thing that went wrong with RBNF is that they had a lot of loans go bad.  This was a problem common to a lot of banks.  RBNF has taken charges to write down and disposed of these loans.

RBNF also got hit with a large FDIC insurance charge.

RBNF has also had to deal with a very difficult economy in Ohio and Indiana.

Fortunately RBNF had a VERY strong capital levels before all these problems started.  If RBNF did not have such strength and reserves, it would have enetered bankruptcy by now.

The end result is:

A). RDSI has been scaled back.  People have been let go (32 now vs. 110).  A charge was taken to write down the bad investments.  This division is stabilized and mildly profitable.
B). The bad loans have largely been charged off and addressed.
C). Barring the general economy relapsing into further recession/depression, most of RBNF's problems are behind it.

Well, all of this sounds great, but what are the future possiblities for this bank?

In order to get an idea of what RBNF is capable of producing, we can look at the financial returns of other banks.  I would propose that we look at the following:

A). Return on Assets
B). Return on equity & book value
C). Extrapolation of TTM results for RBNF


Good & capable management of a bank can earn returns on their assets of about 1% in normal economic times.  That would equate to net earnings of about $6.25MM ($1.30share) for RBNF.  A very well run bank could earn a return of about 1.5% on it's assets, if RBNF could achieve that, earnings would be nearly $2/share.  I don't think RBNF is a currently a well run bank, but it certainly could be a decently run bank in a year or two.  This would indicated future earning potential of at least $1/share.


Rurban has a book value of almost $10/share.  A well run bank, in normal economic times, could earn 15% on it's equity.  That would put Rurban's earnings at close to $1.50/share.

Rurban has a lot of goodwill & intangibles on it's balance sheet as it has acquired smaller banks in the past and has a data processing division which has a lot of intangibles & goodwill associated with it.  You could mark down all goodwill & intangibles to ZERO and be left with a book value of about $6/share.  I am conservative investor and I don't much care for goodwill & intangibles, but I think marking it down to ZERO would be a bit too much.  How about marking intangibles down by 2/3?  That would give Rurban an "adjusted" book value of about $7.35/share.  I think that is probably pretty accurate and fairly reasonable.

You could say that Rurban is an average/mediocre bank...OK I might be willing to concede that point.  Average banks don't have 15% ROE.  Yes, that is quite right, how about a 10% ROE for an average bank?  I think that is probably a conservative estimate.  With that estimate, Rurban would be earning about $.73/share.

You could argue that Rurban is an average bank, that it is operating in a difficult economic climate in a economically depressed part of the country, and you would be right.  So maybe take that estimate of $.73/share and mark it down by 15%.  You will still have earnings of  $.62/share.

In the latest 3 quarters, RBNF has earned $.29/share.  I think 4th quarter earnings will be at least as good as third quarter earnings, probably a bit better even.  That would equate to earnings of maybe $.14 or $.15/share.  I think RBNF will have earnings of about $.45 for the last 12 months.  That equates to a P/E ratio of about 6.5.  I think earnings in 2012 will be higher as RBNF has put a lot of it's problems behind it, I think 2012 earnings will be at least $.62/share.  That equates to a forward P/E of slightly less than 5.

Also note that RBNF is expensing about $180k a quarter in goodwill and intangibles resulting from the takeover of two smaller banks.  These banks were the Exchange Bank and National Bank of Montpelier.  These expenses will continue for another 4 to 5 years.  What is important to remember is that these expenses are non-cash.  If you add these back into earnings, RBNF is doing better than first glance.

I have spoken with top level management at RBNF and have found them to be receptive to shareholder questions and concerns.  They appear to be very shareholder friendly.


A bank that is well capitalized, earning money (probably $.62/share), has a loan book that is improving, is only trading for $3/share?  I think Rurban will trade for a discount to other banks, but a P/E of 5?  

I think an appropriate P/E for Rurban to trade at would be in the high single digits, maybe a 9 P/E.  That would put Rurban at a price of about $5.50 to $6/share.  I think that estimate is conservative, and at the low end of estimates.

In 3 years I think RBNF will easily be earning $1/share.  At that point, I think RBNF will reinstate a dividend.  RBNF has a history of paying dividends in normal economic times.  Management has stated that this is reviewed by the board of directors every quarter.  There is no intention to pay a dividend now, but that it will be seriously considered once regulatory capital levels have improved and business in general improves.

The end result is that RBNF is earning money NOW, growing it's business and is likely to earn more money in the near future.  After a year or so of good earnings, a dividend will almost certainly be reinitiated. A bank with characteristics such as this will be trading for a P/E ratio higher than 5.

*NOTE*  I personally own shares of Rurban in my investment accounts and may trade it at any time without  notice.  Please don't take my word as to the suitability of Rurban as an investment, please conduct your own research and due diligence.

Tuesday, February 7, 2012

Floored: The Movie

"Floored" is a good documentary about the traders at the Chicago Mercantile Exchange. I found it last night while surfing around on Netflix and decided to give it a view (I say this, as a lot of you should be able to watch it for free). It was certainly entertaining and educational. It makes you see a ton about how people behave, as well as how technology and money have an effect us. Certainly, I am not so callous as to limit the effects of said things to certain people in some far off financial hub; we are all human and as a whole, will generally react in very similar ways to similar situations. Some, to a lesser extent than others...

It also did a good job of making you feel for the guys that lost everything-literally everything, not just their money. Certainly, it takes a different type of person to trade, just the same way that it takes a different type of person to do value investing.

Here's to drinking cheap bourbon and not smoking cigars...

Disclosure/Disclaimer: I have no financial position or interest in or against, in any regard, to any of the entities mentioned. This is not advice of any kind. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.

Wednesday, February 1, 2012

Running Like Hell From The Facebook IPO.

Sooooooooo. I just went through the Facebook S-1 to take a look at what it said about second most popular site on the internet. While I had figured that the company would fetch some lofty valuation, I thought "well, I shouldn't judge them before I actually look at the numbers..."

After reading through the filing, I thought "Anybody that would value this company at $75-$100 BILLION dollars is either stupid or delusional to the point of historically needing to have been put on trial." Ok, so, that might seem a bit excessive. But, lets take a look at it before anyone says anything too rash.

Let me be clear, I have no idea as to how to accurately predict the growth of the company hence, I am going to take it to the almost illogical extreme for this thought exercise. Presently, it seems that their ad revenue growth is slowing considerably. In 2009, ad revenue was $764 million. In 2010, it's revenues from ads were up an impressive 145%, or, up to $1.686 billion. Then, in 2011, growth started to slow... to 69% providing us with a total of $3.154 billion in ads sold. While there will certainly be a long term shift from advertising in print to the internet, Facebook doesn't have a monopoly on ads. I highly doubt that they will ever have anything close to that. After all, Google had over $36.5 billion in advertising revenues last year... more than 10x the amount of Facebook.

Facebook presently boasts 845 million active monthly users, which equates to $3.72 dollars in yearly ad revenue per monthly active user (based on a 2011 total of $3.154 billion in ads).

So, lets say that everybody in the world magically had a computer with internet access- presently, 6.8405 billion people. Now, lets also assume that they all develop the same usage as our present average monthly Facebook user and that companies were willing to pay Facebook the exact same amount for advertising as they presently do per user... Facebook would then generate $25.4466 billion in ad revenue (don't get me wrong, is impressive, but, still not up to Google standards). If the company can keep the same margins of earnings related to the revenue (presently, ~21.2%: based on $3.154 billion in ads, which is slightly less than their total revenues, and $668 million in earnings for the A and B shares) then you are looking at a company that would earn just under $5.18 billion dollars a year.

Now, in what I don't think is a stretch to call an "overly rosy scenario" if the company is at that point valued at $75 billion, the stock would have a P/E ratio of ~14.5. If the company is valued at $100 billion, then the P/E ratio would become ~19.3. At that point, there would be very few ways for Facebook to justify a P/E that was at that level, unless you thought that they could juice margins, people will start spending a whole lot more time on Facebook (even though on page 3 of the prospectus, the company boasts that users upload 250 million pictures to the site PER DAY), we find an alien life form that would want to use the site, advertisers pony up more money for advertising on the site, or a few other various reasons. Maybe it get's infinitely cheaper for Facebook to add users in the future? But, due to how marginal cost works, I don't think that will last forever... Besides, their margins are already about as hefty as Googles!

Regardless, anyone buying the stock had better have some really good insights as to how the company can grow, because if the news stories are right in regard to it's coming market price, it will be trading between 112x and 150x 2011 earnings. In the meantime, I will stick to stuff that I have a very high degree of certainty is cheap and pass up any chance that I get to buy shares of Facebook on the open market. When comparing Facebook to Google, it almost seems like a bet on Facebook is not only a bet for Facebook, but, also a bet against Google; remember, Google has over 10x the ad revenue of Facebook, nearly 11.5x the cash on hand, and is nearly 15x as profitable, with a market cap that is ~2x what Facebook's is expected to be.

The bottom line seems to be this, Facebook is going to need to figure out alternative ways to make money; ads just won't cut it to justify the stock price that that has been predicted.

Good luck to all of you buying shares in the IPO.

Disclosure/Disclaimer: I have no financial position or interest in or against, in any regard, to any of the entities mentioned. This is not advice of any kind. Always do a ton of your own research before contemplating doing anything that I say, do, write, or so much as think about.