Some details on NFI for those interested:
08:52am EST 30-Jan-03 Flagstone Securities (W.Coleman Bitting) NFI
NovaStar`s 4Q02: Another Blowout Quarter - Estimates Up
* It is difficult to overstate the power of NovaStar's EPS report. Fourth
quarter results highlight both the capacity of the non-prime lending and
investing business model to create compelling economic value, and management's
deft execution of this model. The worth of these commodities, consistently
unappreciated by the market, is becoming increasingly difficult (and expensive)
to ignore.
* Earnings of $1.62 per share topped our $1.50 estimate by 8%, were up 42%
from $1.14 per share in 3Q02, and were up 200% from $0.54 per share in 4Q01. The
company also declared a $0.33 per share special dividend related to 2002
earnings, and increased its 2003 EPS guidance to $7.00 - $8.00 per share.
* Although NovaStar's investment portfolio continues to generate
extraordinary returns, what differentiates 4Q02 from previous quarters is the
dramatic growth in the origination franchise. Production volumes surged 65% in
4Q02 to $1.1B from $650M in 3Q02 as the company grew its wholesale account
executive staff by 51% and increased its net branch count by 17%. Expecting to
double its net branch franchise in 2003, management projects production will
grow by around 100% in 2003, to between $4B and $6B, propelling continued growth
in the high-ROI mortgage security portfolio.
* Net interest income jumped 65% vs. 3Q02, reflecting the fact that all of
4Q02 production was held on balance sheet for the entire quarter, and reflecting
a hike in portfolio margin to 13.0% from 10.6%. Net interest margin growth is
likely due to higher mortgage security accrual in the increasingly advantageous
forward LIBOR environment of 4Q02. With $1B of unsecuritized production on
balance sheet, 1H03 gains and high-ROI mortgage security portfolio growth could
be dramatic.
* 4Q02 results are more impressive still considering that NovaStar had $90M
of underinvested cash and liquidity after its 4Q02 mortgage security
resecuritization.
* GAAP book value, which does not attach any value to NovaStar's origination
franchise, increased to $16.62 per share from $15.50 per share in 3Q02. We
believe this growth is largely due to mortgage security mark-to-market gains in
the increasingly advantageous forward LIBOR environment of 4Q02.
* After preliminary review we have increased our 2003 and 2004 estimates to
$7.50 and $8.00 from $6.50 and $6.75. At last night's close, NovaStar traded at
4.1X our 2003 estimate, a 24% forward earnings yield. We continue to believe
NovaStar offers the highest absolute and risk-adjusted returns of any company in
the mortgage finance sector. |
