This is a guest post by Randy Durig, CEO of Durig Capital
LaBranche [[LAB]] is a 109-year-old investment firm and the parent of LaBranche Structured Holdings, Inc. (whose subsidiaries are market-makers in options, exchange-traded funds and futures on various exchanges domestically and internationally), LaBranche & Co., LLC and LaBranche Financial Services, LLC (which provides securities execution, fixed income and brokerage services to institutional investors).
LaBranche has roughly $293 million dollars in cash and liquid assets. After they remove all of their long term debt (they have committed to call these bonds), they will have a net of $5.54 cash, or liquid assets, per share. LaBranche has a very strong balance sheet.
When you subtract the cash and debt out of the enterprise, LaBranche’s has a negative enterprise value.
Since the value of the ongoing company is so low after subtracting the cash and equity assets, this profitable ($0.07 profit in pro forma) company is valued only partially, which is for merely it’s cash and cash related assets. Simply, LaBranche should trade at it’s cash level plus the value of it’s business operations. To us, this makes LaBranche appear to be trading so low that the 109-year-old business operations are actually trading for free.
LaBranche receives another yes. They had an outstanding quarter showing a profit of $0.07 pro forma while still paying interest on their 11% bonds, which will be called. Taking out the interest expenses associated with the bonds and adding future taxes, our calculation is that their quarter would be at $0.10 cents per share, which is far better than the analyst estimates for a loss of a nickel to six cents.
LaBranche’s business model is now focused on the fast growing ETF support and Trading Globally, and those are good businesses. With the 2009 crash that affected Wall Street and possibly new regulation coming from the Obama administration, many of the traditional investment firms are on shaky ground allowing a very well financed company with a long history to proceed with their growth plans.
LaBranche has increased their share buyback to $100 million dollars. Knowing that currently their entire stock market capitalization is close to $200 million dollars, even though they have close to $300 in liquid capital. A buyback at the current price of $4.08 would reduce the number of shares by 24.4 million, and the cash and liquid assets per share would also increase to $6.99 per share. This is a very rare instance: purchasing company stock (of which the cash and assets must be above the current value) where the cash actually increases per share.
When finding companies trading below the cash value, like in the case of LaBranche, this is such a rare event. Often, what we call a “Train Wreck” is needed to be priced well below liquidation values. We believe the biggest negative issues with LaBranche, which are often needed to create this extremely low value, were the following:
1. The World (especially the finance industry) went into a great economic tale spin.
2. The New York Floor Specialist trade industry (due to innovation) is in a long term decline.
This economic downturn helped LaBranche foster their need to sell the money losing the New York floor specialist unit (which was a small and shrinking part of it’s business), and then eliminate the long term debt. These two large cost saving moves will increase their profitability, but possibly more importantly the moves allow LaBranche to increase their cash availability and finance flexibility while eliminating it’s largest negative problem that’s under LaBranche’s internal controls. LaBranche has been known for years in our investment world as a floor specialist, so selling part of their 109-year-old identity and tradition aids our belief that LaBranche is serious about re-establishing a newer, stronger based business model for the new decade.
We’re forecasting that LaBranche’s normalized pro forma earnings will be $0.10 a share per quarter going forward giving the company our 2010 estimate of $0.40. Even though regional investment firms are currently achieving a 24 PE at this time, we also believe the normalized PE should be around 15. Without the buyback, this would give LaBranche a company value of $6.00 a share. Any buyback at these levels would be beneficial to future earning, and $100 million could increase our earnings estimate by over 45%.
LaBranche currently is in a position that we are trying to identify for our clients – a good business with operations showing many strong tangible signs of improvement at what, we believe, is an extremely low value or, in LaBranche’s case, even below the level of cash and liquid assets. The extremely low value and hard to establish business model combined with the excellent balance sheet gives LaBranche the potential for great appreciation and/or possible buyouts – hopefully, this limits or protects our clients to the downside. Even if the company’s operations haven’t hit bottom, LaBranche’s negative enterprise value alone could be the catalyst for an increase in value.
We believe LaBranche should be valued by it’s cash plus business operations. With the cash and liquid assets of $5.54 per share plus the company’s business operations value based on 15, our 2010 estimate gives us a $6.00 company value.
We believe, at this time, LaBranche’s normalized stock value should be around a $11.54 value before calculating in the very large size of the company, a $100 million buyback.
Simply, can you rationalize this? For every 65 cents you invest currently in LaBranche, you own $1.00 worth of liquid assets in addition to the 109-year-old ongoing business for free!
This is obviously a very cyclical industry, where the company buttons down the hatches during tough times and makes out-sized profits during the good years.
Absolutely yes, I and related accounts own this company. We started buying around $4.09 per share.