Thursday, November 01, 2007

Earnings Roundtable

Four of my companies released earnings today. Unfortunately I have not yet listened to the conference calls for any of these companies, so I will hopefully be able to expand on this commentary shortly. For now...

SFK Pulp Fund
First, the bad. SFK's earnings have and continued to get hit by the relentless rise in the Canadian dollar (see chart). This has the effect of lowering their revenues, which are based in terms of US dollars, while their costs remain the same. The thesis has basically been that 90% of NBSK pulp capacity is in Canada or Europe, so the entire industry is getting squeezed by the recent rise. And SFK represents a very low-cost competitor on the production curve, and worldwide demand should continue to grow into the future. So the timing has so far been off, but Pope and Talbot recently filed for creditor bankruptcy. Either the prices they charge will have to increase or their going to have to disband operations, because their EBITDA (Earnings before interest, taxes, depreciation and amortization) was negative 5 months ago before the Canadian dollar run-up. On that note, they did announce a $20 increase for this month as well. As for where the Canadian dollar is going from here, that is something I feel like looking into.

Harvest Natural Resources
There is not much to talk about in this one, especially without listening to the conference call. Since Chavez signed the contract after the third quarter ended, the company will not record the benefit and the results of the operations on their financials until the next quarter.

Exchange Bank of Santa Rosa
This report probably went by unnoticed because it is still not published on their site, but it is available on the FDIC Call Thrift Data. Overall, I continue to be impressed. Earnings per share for the quarter came out to $3.14, and $9.73 for the last 9 months. But more importantly, the loan underwriting and reserves continue to be phenomenal.

30 day + delinquencies / gross loans = .78%
90 day + delinquencies / gross loans = .67%
Allowance for losses / gross loans = 1.78%

I'm going to have to make a post comparing this reserving with some of the companies Fairfax owns credit default swaps against. The allowance for loan losses doesn't even cover the 90+ day delinquencies for many of these companies, even after some very large loan loss provisions recently.

Fairfax Financial
Fairfax reported exceptional earnings today. The insurance operations had an underwriting profit of $62 million for the quarter, the holding company now has $836 million in cash, and debt continues to fall. Simply put, the team at Fairfax has done a remarkable job to get Fairfax where it is today.

With respect to the credit default swaps, the portfolio had a fair value of 546 million at the end of September. If we compare the last two numbers of the table in this post, we can see that since quarter end these spreads have widened significantly more. The question on current value will almost certainly be brought up on the conference call tomorrow, but I'm not so certain they will answer that. Last quarter they mentioned the updated fair value of the CDS portfolio in their earnings release. It would seem uncharacteristic of them to release this number on a conference call, where some people will certainly hear it before others. The management at Fairfax will probably avoid giving any updates in order to avoid speculation in their own shares.

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