June 15, 1999 09:17
Ameri-First Securities Reiterates Strong Buy for AMRESCO
DALLAS, June 15 /PRNewswire/ -- The following is being issued by Ameri-First Securities, a member of the National Association of Securities Dealers, CRD number 45289:
Ameri-First Securities reiterated its Strong Buy rating for AMRESCO (Nasdaq: AMMB). Commercial Finance continues to show strong lending growth across the board. An active interest rate hedging program
protects profit margins. For 1999, Ameri-First is increasing its target for securitized loan packages completed by Commercial Finance to $570 million up from $500 million, and projects $750 million for
franchise and small business loan securitizations completed next year. Selling at 3.5 times 1999 diluted earnings, AMRESCO is a compelling growth and value stock, selling significantly below the peer group
earnings multiple of 13.7. Our 1999 Basic earnings estimate is $1.45. Our diluted earnings estimate of $1.15 is based on a contingent earnout of stock that may never be issued. Therefore, we maintain our 12 month price target of $15.00.
AMRESCO, Inc. (AMMB - $4 1/16)
Growth & Value Investment
52 Week range - Common $34.25 - $1.31
Market Nasdaq NMS
Common Outstanding(E) 49,099,000
Fully diluted shares(E)* 70,353,000
Estimated Float (shares) 43,150,273
Market Capitalization $199,464,688
Book Value $11.95
Tangible Book $5.96
Long Term Debt ($mil.)(E) $1,774.1
Shareholders Equity ($mil.) $651.3
Debt / (Debt+Equity)(E) 73.1%
1997 EPS diluted $1.53
1998 EPS -$1.61
1999 EPS Basic (E) $1.45
1999 EPS diluted (E)* $1.15
PE ratio (1999 EPS)(E) x3.5
(E)=Estimate *Based on MIC contingent issuance of $86.1 Million of
stock.
Investment Conclusion
AMRESCO, through its primary commercial finance unit, AMRESCO Commercial Lending Corp. (ACLC), closed a $220.9 million loan securitization on June 4, 1999. We estimate the Company will book a resulting capital gain in the range of $13 to $15 million in the second quarter resulting from this transaction. Equally as important, we believe loan origination growth is continuing to accelerate at ACLC. ACLC makes franchise and small business loans to borrowers with excellent credit ratings. Growth in originations is the result of
AMRESCO's geographical expansion into new markets with a corresponding increase in lending personnel.
Management missteps by a leading competitor, Franchise Mortgage Acceptance Corp. which was recently acquired for $309 million, has allowed ACLC to capture market share.
ACLC loan production increased to $190.1 million in the first quarter, up 56.7% over last year. We anticipate a similar increase in the current quarter. Based on accelerated growth, we believe the company can securitize upwards of $570 million in loans, up from our initial estimate of $500 million. We believe AMRESCO can continue to grow ACLC at a 50% annual clip which will be the key factor in the growth in
earnings for the Company. Our price target is $15.00, which is 11.7 times our diluted 1999 earnings estimate. In summary:
-- Higher interest rates should not impact originations at ACLC. Strong demand by small business borrowers, fewer competitors, coupled with ACLC's growing sales force, and hedged rate exposure will enable steady performance. Higher rates will slow profitability for MIC, AMRESCO's VA refinancing loan unit, reducing 2Q earnings to $0.26.
-- For ACLC we are increasing our target for loan securitizations to $570.0 million in 1999, up from $500 million. We believe $750 million can be achieved next year based on origination capability.
-- Value is compelling in that AMRESCO can grow its earnings 20% annually while the stock is currently selling at a 74.5% discount to the peer group earnings multiple of 13.7 based on our estimated 1999 diluted earnings of $1.15.
-- In May AMRESCO enhanced liquidity $111.4 million by securitizing loans held by AMRESCO's Builder Finance unit. General working capital including bank credit increased $30 million from $116 million at the end of the first quarter. $80 million was used to pay down commercial paper conduits primarily relating to AMRESCO Builder's Group.
Insider ownership 2,897,052 (5.9%) Fiscal Year Dec.
30 Day Avg. Daily Vol. 637,900 998 diluted -$1.61
Dividend Yield nil EPS 1999 diluted (E) $1.15
(E)=Estimate (A)=Actual
Quarter 1Q98(A) 2Q98(A) 3Q98(A) 4Q98(A)
EPS Basic $0.36 $0.46 $0.02 -$2.27
EPS Diluted $0.35 $0.45 $0.02 -$2.27
Quarter 1Q99(A) 2Q99(E) 3Q99(E) 4Q99(E)
EPS Basic $0.21 $0.33 $0.47 $0.47
EPS Diluted $0.21 $0.26 $0.31 $0.38
Background
AMRESCO is a specialty finance company that maintains five principal lines of business which include Commercial finance, Mortgage Investors Corp. (VA loan refinancing), Asset management, Commercial mortgage banking, and Home equity financing. Commercial Finance is dominated by ACLC (renamed Business Lending) but is also comprised of AMRESCO Builders Group, a construction lender, Independence Funding, an SBA lender, TeleCapital, a lender to the payphone industry, Communications
finance, and a structured real estate finance group. Commercial Finance was the largest contributor to operating profit in 1998 contributing $46.6 million, a 144% increase over 1997, and more than the $32.9 million in operating profit contributed by MIC in the 5 months of 1998 that it was owned by AMRESCO.
As a result of the large capital losses sustained in the latter part of 1998 from turbulence in the capital markets, AMRESCO has restructured some business units to focus on cash income rather than investment of capital. As a result, the commercial mortgage banking division is focusing on generating cash income from originating mortgages as well as the fees from servicing loan portfolios. AMRESCO has also been reducing debt which will allow it more maneuvering room under bank covenants which could allow it to possibly divest its Home Equity business. The Company does not plan any acquisitions during 1999. The stock has fallen back sharply as arbitrageurs previously bought the stock aggressively on speculation that AMRESCO would accept a buyout offer at an unconfirmed price of $14.00. The recent rise in interest rates will impact profitability at MIC as refinancing activity decreases with higher rates. As a consequence, we lowered our 1999 basic earnings estimate to $1.45 from $1.53. Diluted earnings estimates are not necessarily meaningful as $86.1 million of common stock related to an MIC contingent earnout may never be issued. Revenue for the company grew 20% in the first quarter over last year. Total loan originations reached a new quarterly record of $3.79 billion, up 46% from $2.6 billion in the first quarter of 1998.
Liquidity Position
At the end of the first quarter, AMRESCO had $61.5 million in cash and another $54.5 million of liquidity available on bank lines giving the Company $116 million for working capital. The May 27th Builders Group
securitization for $111.4 million increases working capital roughly $30 million as $80 million was used to pay down commercial paper conduits primarily related to Builders Group loans. Working capital estimated at $146 million and collateral behind the Company's primary bank line is sufficient to pay down $57.5 million in senior notes due July 1, 1999. On August 11, 1999, $167.5 million of its bank line falls due, effectively reducing the line to $570.0 million from $737.5 million. As the balance at the end of the first quarter was only
$553.4 million, no cash pay down is needed. At the end of March, the Company had a $1.1 billion warehouse facility of which $600 million was available. AMRESCO will also have healthy cash flow in the second quarter with projected operating earnings of $31 million from Corporate Finance and MIC.
More Market Share for ACLC
ACLC is winning new business to achieve record loan production as it continues to increase its sales force while facing less competition from a traditional competitor, Franchise Mortgage Acceptance Corp. (FMAC).
As a key competitor, FMAC was unable to manage the liquidity of its loan portfolio during last fall's credit crunch when demand for mortgage paper in the cash market and asset backed securities market was significantly curtailed. FMAC originates both home equity loans and franchise loans and securitized $1.2 billion of loans in the asset backed securities market during 1998. FMAC was acquired in March this year for $309 million. FMAC's last franchise loan securitization was completed during the summer of 1998.
FMAC sold $400 million in loans to its acquirer, Bay View Capital, however no franchise loans securitizations have been completed this year. With excellent performance by ACLC and the AAA credit quality of the loans securitized, ACLC continues to attract borrowers that expect timely performance and loan funding from a lender.
The Mortgage Investors Corp. (MIC) Earnout
The greatest issue overhanging earnings but not Company performance is the nature and timing of the MIC earnout. AMRESCO contracted to pay an earnout of between $70 and $105 million based on MIC's earning performance when it bought MIC last August in addition to $70 million in cash and stock that was paid at that time. Based on earnings contributed in the first quarter and subsequent negotiations with MIC
shareholders, the full $105 million earnout was earned. During April, the terms of the earnout were renegotiated giving AMRESCO flexibility in issuing stock or paying cash to satisfy the earnout. Under the
original terms, a payment due in April was postponed until September of this year. The shareholders of MIC have given AMRESCO an option to pay the full amount in cash by the end of September. Otherwise,
AMRESCO can pay the earnout as 18% cash and 82% stock. The rescheduling of the earnout enables the Company to avoid issuing stock at current levels which would significantly dilute earnings per share. With the Builders Group securitization, the Company has some flexibility under its primary bank line to pay the earnout in cash. For the purpose projecting diluted earnings, we are required to include the contingent issuance of stock to satisfy the earnout.
AMRESCO Valuation Comparison
Price PE ratio PE ratio Market Cap. Symbol 6/14/99 L4Q Fiscal '99 Est. $million
AMRESCO AMMB $4.06 --- 3.5 $199.5
CIT Group CIT $28.13 14.8 13.1 $4,553.5
DVI DVI $16.25 13.1 12.5 $229.6
Financial Federal FIF $19.25 15.7 15.1 $285.5
Finova FNV $53.13 17.5 15.6 $3,241.7
Heller Financial HF $27.19 12.3 12.2 $2,443.4
Peer Group Average 14.7 13.7
Valuation
The valuation comparison table above shows that AMRESCO is trading at a 74.5% discount to the peer
group average earnings multiple for five specialty finance companies. Our price target of $15 is a multiple of
only 13.0 times our 1999 fully diluted earnings estimate of $1.15, or a slight discount to the peer group
multiple of 13.7. As contingent MIC stock may never be issued the stock is trading at only 10.3 times our
1999 basic earnings estimate of $1.45 which results in a 24.8% discount to the peer group multiple.
Risk Factors
The primary risk for AMRESCO is the ability to fund loans utilizing secondary markets. Secondary markets
would include financial conduits and warehouse credit lines. AMRESCO acts as a broker and originator of
loans. Specifically, ACLC uses warehouse credit lines to fund loans held in inventory prior to sale
(securitization) in the capital markets. Commercial Mortgage banking relies on financial conduits to finance
originated loans and buyers who resell the loans via a securitization. MIC resells originated loans in the
cash market which can increase or reduce profit margins depending on the direction of interest rates.
ACLC does hedge interest rate exposure while it holds loans in inventory for securitization. Simple hedging
techniques do not guarantee that profit margins can be protected. In the current quarter, the spread between
treasury bill rates and rate on corporate debt has widened. As spreads widen, the profit margin on a
securitization will be reduced with only a treasury hedge in place. MIC on the other hand has no
accumulation risk. Loans originated are quickly sold on the cash market. However a sustained period of
higher interest rates will reduce the demand to refinance existing mortgages.
The general economy effects demand for credit. A contraction of growth can reduce demand for credit and
thus impact the Company's revenue and income.
Summary
We believe the stock could be substantially higher than current levels once the market begins to focus on
the earnings growth and performance of AMRESCO's Commercial Finance business and that of ACLC in
particular. This growth will be paced by franchise and business loan securitizations completed by ACLC.
We believe AMRESCO can continue to grow its earnings at close to a 20% annual rate based on a 50%
growth rate for Commercial Finance units. At its current price, the issue is not whether the Company will
earn a healthy profit in 1999, rather it is how those earnings are valued based on AMRESCO's future growth.
With a projected 20% annual growth rate, AMRESCO's current price earnings ratio for 1999 earnings is far
too low. Our price target of $15.00 is at a 24.8% discount (based on our basic earnings estimate of $1.45) to
the specialty finance peer group earnings multiple of 13.7 for fiscal 1999.
AMRESCO Inc. Earnings Estimate 1999 by division ($000) fiscal yr. (Dec.)
Revenue 1998(A) 1999(E) (%)incr 1Q99(A)
Commercial Finance 122,047 182,308 49.4% 34,700
Mortgage Investors Corp. 74,702 156,022 108.9% 38,800
Asset Management 112,687 121,333 7.7% 30,900
Commercial Mortgage
Banking 71,018 100,000 40.8% 28,700
Home Equity 145,069 151,100 4.2% 35,100
Total Revenue 525,523 710,763 35.2% 168,200
Operating Income:
estimated profit margin(%) 1998(A) 1999(E) (%)incr 1Q99(A)
Commercial Finance 46,591 71,100 52.6% 7,932
38.2% 39.0%
Mortgage Investors Corp. 32,926* 49,927 51.6% 11,427
*4.5 months of activity 44.1% 32.0%
Asset Management 39,838 36,400 -8.6% 13,407
35.4% 30.0%
Home Equity Lending (74,719) (3,794) (2,794)
Commercial Mortgage
Banking (104,371) 6,700 (1,377)
Operating Inc. bef.
Interco. exp. (59,735) 160,334 28,595
Inter-Company expense
(Est.) 42,098 51,611 11,611
Operating Income (101,833) 108,723 16,984
Income tax (32,662) 38,053 6,746
Net Income (69,171) 70,670 10,238
Basic EPS $(1.61) $1.45 $0.21
Diluted EPS $(1.61) $1.15 $0.21
w.avg. basic shares
out.(E) 48,744 47,677
w.avg. diluted shares
out.(E) 42,963 61,307 49,162
(E)=Estimate
Disclaimer and Disclosure: This analysis has been prepared from original sources and data believed to be
reliable but no representation is made as to its accuracy or completeness. This is not intended to be an
offer to buy or sell or a solicitation of an offer to buy the securities referred to herein. Ameri-First Securities
and/or its officers, employees, agents, and or one of its affiliated entities may from time to time have a
position in one or more of the securities referred to herein. This issue may not be suitable for all investors.
SOURCE Ameri-First Securities
/CONTACT: B.C. Bowden of Ameri-First Securities, 214-559-7147/
(AMMB) |
