Raymond, Ron B., et al,
I suspect that one of the reasons for ISTN's price drop over the last month or so is partly due to the 1+ million outstanding warrants they redeemed in the latter half of 1997. A lot of the warrant holders, now stock holders, may not be the type that want ISTN as an investment (they might have just taken advantage of the arbitrage opportunity), and wanted to wait until 1998 for selling due to capital gains reasons. This is just a hypothesis, of course. Anyway, the share dilution was due to the redemption of these warrants, which were part of the 1994 IPO.
One of the reasons I bought ISTN in early 1997 was because of the large amount of cash. The reason why this cash pool has grown is because ISTN has now turned into a self-insurer, as opposed to just a service plan / warranty marketing company, like APCO and others. In 1996 they used 2 insurance companies for their service plans. In 1997 they used their own newly formed insurance subsidiary and one external insurance company. Thus, a large part of this cash is the insurance "float", and this is also why you see that book value is less than the cash they have. They are making money with other people's money (OPM). This is one of the methods Warren Buffett used to get rich, with his National Indemnity reinsurance company, making money not only on the revenues, but also on the income off the float. I don't think that the "Street" sees ISTN as an insurance company yet. The only insurers that I can think of this cheap are some of those Bermuda supercat re's, like RNR.
Anyway, I think that Chester Luby has done a great job so far. FYI, his family used to run a chain of auto dealerships out on Long Island, so he probably understands this business quite well. ISTN also provides services for the "Warranty Gold" program advertised on www.autobytel.com and others.
Christina |
