Good article concerning FNV at Motley:
fool.com
Is it Fin-over for Finova?
By Brian Graney (TMF Panic)
March 29, 2000
Putting on our investing scrubs, it's time to play doctor and dig around for possible recovery patients that have recently landed in the Wall Street shock trauma unit. The most visible prospect is mid-sized business lender Finova Group (NYSE: FNV) , which stabilized this morning after hemorrhaging badly over the past two trading days. Monday's revelations of an unexpected $80 million first-quarter charge and the early retirement of chairman, president, and CEO Samuel Eichenfield for health and personal reasons have sent the company's shares down for almost a 50% loss this week.
Such severe and sudden pullbacks often present bargain-minded investors a chance to do some exploratory surgery of their own to find out whether the company in question is really headed to the stock market morgue. However, a healthy dose of caution is warranted. While some companies can end up recovering from such a severe short term-blow and provide a great return, others never do and wind up lingering around on stock market life support for an eternity. The challenge for investors is to decipher between the two, which is not a talent easy to master.
What makes the Finova case interesting from a recovery point of view was that many market observers had thought the stock had been unfairly beaten down even before this week's blow-up. As of last Friday, all 17 analysts listed in the Bloomberg database as following the company had the equivalent of a "buy" rating on the stock, which at the time was trading 23% below its high recorded last July.
If the company was considered cheap last week at 9 times trailing earnings of $3.41, then surely it must be stupid cheap at less than 5 times those same earnings today, right? To find an appropriate answer to that question, potential buyers need to understand that a great deal of the recent share price slide is not due to bottom line losses or lost business opportunities, but rather to lost "investor confidence."
In Finova's case, the fact that the firm needs to bolster its loss reserves to swallow a $70 million loss from a major customer prompted worries that the company's risks are too concentrated in a few big loans. Since the company has some rather large exposures in troubled areas, such as the battered nursing home industry, the main worry is that more surprise write-offs are in store. While the company does have some $300 million in non-accruing assets as of the end of last year, its reserves for credit losses appear to provide more than adequate coverage at 90% of that total. More losses might crop up, but the firm should be able to weather the storm.
Finova operates in a niche of a sector that is growing, providing capital to companies that are too small for large commercial lenders but too large or complex for local or regional lenders. Operating earnings have increased at an 18% compounded annualized rate over the past five years, as return on average equity has steadily marched up to 14.4% from 12%. And as far as succession goes, Eichenfield's retirement may have been early, but it wasn't exactly a surprise. He's 62, after all. His successor in the president and CEO roles, Matt Breyne, is experienced and was being groomed to step in at some point. According to Salomon Smith Barney, Breyne has been with Finova for 13 years and has been working in the industry for 21 years.
Finova's competitive positioning in its industry and $439 million in operating cash flow last year may not be perceived to be worth as much as they were a week ago, but they are definitely worth something. And while the business may not be the easiest to understand, it has been consistently profitable. For stock doctors looking for a possible recovery patient, Finova may offer an opportunity to render a true, contrarian second opinion. |
