Spent this AM working on UACA. My thoughts/comments:
Most of their loans are prime not sub-prime - their 10-K says "The Company's primary competitors for Prime loans are regional banks and the captive finance affiliates of major automotive manufacturers.". So this company does not work the same turf as MFN et al. They say they compete primarily on basis of quick approvals and close sales contacts.
They make money by
1) selling loans as asset-backed securities, retaining servicing. They book as income the present value of the future cash flows due to the excess spread (gross loan rate minus asset-backed rate), with allowances for loan losses, prepayments, etc. In 96, net spreads were 5.85%, in 97 they've been about 5.2%, in 95 they were 4.25%. Company aims for net spread of 5-5.5%. (46% of revenues in 3rd q)
2) interest rate spreads on loans that are being held for future asset-backed sales. (10% of revenues)
3) servicing fees on securitized loans. (38% of revenues)
They have been growing loan volume at 30% annual rates until recently - loan volume increase was only 9% in Q3 due to tightened credit controls.
As for the sub-prime lenders, they have been seeing increased delinquencies and net losses. UACA has a leveraged exposure to increases in credit losses because they (not the asset-backeds) take the hit. The recent write off (1.20/share or 16M after-tax) indicates that 97 to-date and 96 earnings were overstated (that is, the gains on loan sales reported were too high because provisions for loan losses were too low). Loans have an average life of 2 years or so (although 80% are issued for 60 mo or greater).
Reported earnings in 97 will be 0.60 or so, but some of the write-off should really be applied to 96. If I do that, real earnings were $1 in 96, $1.20 in 97.
I think earnings going forward will grow quite slowly - loan acquisition is growing slowly, and gains on securitizations will be lower than historical due to higher reserves. This may be offset by higher gross spreads (due to recent decline in interest rates) and higher servicing revenues (which should be nearly 30% higher over next 6-12 months due to increased servicing portfolio).
Nevertheless, the company had over $4 per share of operating cash-flow in first 9 mos of fiscal year - there is no possibility of bankruptcy here.
I figure even with slower growth, company ought to be worth 10-15x this years adjusted earnings (which should be near 98 earnings), or $12-$18/share. So it looks pretty attractive at these prices. Keep in mind that $10/share is only 2x this year's operating cash flow.
P.S. Carey: looks to me like you should have bought WFSI back in May, in 20-20 hindsight. It's up 50%, while this stock is down. |
