High Cash Stock Review: LaBranche (LAB)


This is a guest post by Randy Durig, CEO of Durig Capital

Company Overview

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).

Company with Pristine Balance Sheets

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.

Extremely Low Enterprise Value

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.

Operation or Enterprise Driving Value to Shareholders?

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.

Good Business?

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.

Train Wreck and Fog Clearing?

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%.

Summary

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.

Disclosure

Absolutely yes, I and related accounts own this company. We started buying around $4.09 per share.

  • Aron

    Hi Jae,

    Very interesting opportunity. Are you sure there are no off balance sheet obligations that might be clouding the valuation or that might be hiding risk?

    Aron

  • Ken

    Been tweeting about LAB for a while :) Surprised you didn’t mention that they have an outstanding tender for 15 mil shares at $4.60 a share. In addition M. Labranche is the only insider selling and he is only selling 500,000 of his stake. Even after tendering 500,000 he should own an larger % of the company after the overall reduction in shares outstanding. Another thing to note is that a good chunk of their tangible book is their NYMX holdings that they received as a seat holder of the NYSE.

    LAB in my opinion is a no brainer, been buying it since $2.50 and insiders have clearly stated with their actions and/or lack of actions that they believe it is undervalued as well. I am hoping it drops back down after the tender expires.

    Cheers!

    -Ken
    .-= Ken´s last blog ..Festival of Stocks #178 February 1st 2010 =-.

  • zehua

    Jae Jun:
    This company is losing a lot of money right now. Why do you say it is making 0.07 per quarter?
    In addition you mentioned that valuation of financial companies is too difficult so you will not touch this section, right?

    Thanks,
    Zehua

  • Ken

    @Zehua Jae didn’t write this post it appears to be a guest post from Randy Durig. The author mentioned 7 cents per share “pro forma” which excludes non reoccurring charges. They took a non cash expense to earnings because they sold part of their company to Barclays for less than they were carrying it. So while they posted a loss, the reality is that they got 25 million in cash for their specialist business and actually made a little money operating the company.
    .-= Ken´s last blog ..Festival of Stocks #178 February 1st 2010 =-.

  • Ken

    Typo on my previous post. They have a holding in NYX not NYMX.
    .-= Ken´s last blog ..Festival of Stocks #178 February 1st 2010 =-.

  • I still don’t know much about LAB and don’t know much about the trading business. I knew you had LAB for a while Ken. How did you find the company?

  • Ken

    I have been following them off and on since about August of 2008. I found them originally because a family member owned some shares, at the time I knew they had a tangible book of around $5-$6 but they generally traded around that value.
    .-= Ken´s last blog ..Festival of Stocks #178 February 1st 2010 =-.

  • Alan

    Found in the latest 10-Q on the SEC website, cash and equivalents are 155.6M, receivables are approximately 78M. Where does the 298M in cash and liquid assets come from?

    Long term debt is 189M. Market Cap is 239. So enterprise value would be 239 + 189 -234 or a POSITIVE 194. Where does the negative EV come from?

    The numbers I read on the 10Q do not seem to agree with what you’ve written. Could someone explain to me the differences?

    Thanks,

    Alan

  • HI thanks for all the comments, first LAB is restructuring their business significantly, and the massive changes added to the confusions. I quoted equity, which also included the major stock holdings in NYSE listed NYX shares, and agreed upon but not closed re engineering of the business

    To Ken I wrote this article before the tender offer, so you made a very good observation. Now if they complete the high end of the tender, the cash will move to around $6.15 per share and profits also increase pro-ratable to the earnings.

    Since, I have never seen a share purchases below cash, for each share LAB buys at 4.60 knowing they have over 5.54 in equity it gives the remain shareholders .94 cent additional money to pro-rate to shareholders. To be this is one of the best tender offers I’ve seen from just a mathematics standpoint , as I think the market is saying so also lifting the price above the tender offer, also very rare.

    Again Thank you Jae

    Randy Durig
    http://www.investment-income.net

[checklist-collection]
[checklist-collection]