Sunday, August 05, 2007

2nd Quarter Earnings Update

Earnings season has come and mostly gone for the companies in my portfolio. Here's a brief overview.

The Bad
The company reported 1 million in net earnings, or $.20 diluted EPS.
Shareholder's equity increased to 37.41 million, or $7.406 per share.
The big negative for this quarter was the .5 million increase in reserves for the discontinued bond program, as well as the addition of this statement:

"Highlands has provided claim information to the Company with respect to alleged losses during 2001 and 2002 for bail bonds issued in the State of New Jersey and for federal immigration bonds. Highlands has indicated in filings that it has additional exposure for bail bonds issued in states other than New Jersey. Highlands has not provided sufficient information for the Company to quantify certain of these additional losses or allocate such losses among the 2001 and 2002 years in which the Company participated and the 2000 year in which the Company did not participate. As of June 30, 2007, the Company is reserving to its best estimate of future Highlands losses based on the most recent loss information received from Highlands with respect to immigration bonds and New Jersey bail bonds only."

Also, commission expense continues to go up as business shifts to other products.
The one positive is that the company started providing more information about their premiums, including how much is ceded to the reinsurance companies. For the six months ended june 30, written premiums ceded were 14.29 million, compared to 4.16 million last year.

SFK Pulp Fund
SFK earned distributable cash of only 7.6 million for the quarter, although several factors were affecting the figure.

On the NBSK side- besides it being a maintenance shutdown quarter, the company also lost some business from some customers and was unable to replace it in time. Sales volume in the quarter was only 75,514 tonnes, while production per quarter for the mill averages approximately 93,000. Since NBSK pulp is a commodity product currently at record low inventory levels (24 days according to Canfor), I am not worried about the quarterly drop in volume.

The other main factor was the continued strengthening of the Canadian dollar. Quarter over Quarter prices actually fell from $821 CAN to $800CAN, even though prices have been rising in US terms. Also, the company took an additional 3.8 million charge from writing down U.S. accounts recievables.

The main thesis behind SFK still remains intact. Although the Canadian dollar has continued to increase since the 2nd quarter, this affects all other Canadian pulp mill operators equally, and Econ 101 tells us producers will continue to curtail production. (The most recent announcement being from Pope and Talbot for 68,000 tonnes NBSK pulp) Also, we are seeing the fiber price imbalance between Western and Eastern Canada also starting to reverse, which will put additional upward pressure on pulp prices. There will be a profitable spot for a low cost producer like SFK in such an environment when all is said and done.

The Good
Fairfax Financial
FFH has come along way and things are really starting to shine.
Underwriting income for the quarter increased to 87.2 million, net earnings per share of $8.92.
Book value increased to $165.50 per share, debt continues to be paid off or extended.
I've long stated my agreement with Prem's prediction of a one in fifty year event coming along in the markets. The positioning of his portfolio looks brilliant right now.
-Majority in cash and long term US government bonds, and no exposure to mortgage securities.
-Equity portfolio is 80% hedged with shorts against the market or specific stocks.
-a large CDS portfolio against financial services companies. At the end of the quarter this had a market value of 198 million. By the end of July, given recent market events, the market value of this has increased to 537 million, and so far since August the move has been significant as well.
Also, so far the hurricane season has been benign, and if things continue this way we can look for a positive reserve adjustment by year end.

Exchange Bank of Santa Rosa
YTD net income of $6.59 per share, Book value of $78.16 per share.
Continued excellent loan performance and conservative accounting:
-Nonperforming loans as % of total loans at .41%
-Total Delinquent loans as % of total loans at .66%
-Allowance for loan losses of 1.81%

As I am writing this, I'm realizing that I have never done a complete and thorough write-up on Exchange Bank. Many of you are probably wondering why I would invest in a bank given my negative thoughts on the financial industry, so look forward for some clarification soon.

1 comment:

adw said...

Do you rated bcis a hold, buy or sell at this point