Beating Buffett

InteractiveBrokers  [NDQ:IBKR - $17.55] is up about 0.72% while virtually everything else is down today.

I’ve heard rumors that IBKR could be the target of a privatization by its founder and the price action in the calls seems to give some credence to this possibility.

January $20 and $22.50 calls have actually traded at $1.05 and $0.45 already and there’s a $0.15 - $0.30 bid/ask spread for the January $25 [with no trades yet today].

The shares seem to have limited downside as they’ve already reflected some pretty poor recent quarterly results without suffering any damage.

A nice seven-month play…

If IBKR merely holds above $17.50 through the Dec. 18, 2010 expiration date:

·         The $17.50 calls will be exercised.

·         You will sell your shares for $17,500.

·         The $17.50 puts will expire worthless.

·         You will have no further option obligations.

·         You will end up with no shares and $17,500 in cash.

This best-case scenario profit would be $17,500 - $14,300 = $3,200 for the 7.25 months through expiration date.

$3,200/$14,300 = 22.3% cash-on-cash or about 37% annualized achieved on shares that

ü  Go up.

ü  Stay unchanged.

ü  Hold at $17.50 or above.

What’s the risk?

If IBKR falls below $17.50 on Dec. 18, 2010:

·         The $17.50 calls will expire worthless.

·         The $17.50 puts will be exercised.

·         You’ll be forced to buy another 1000 IBKR shares.

·         You’ll need to lay out an additional $17,500 in cash.

·         You’ll end up with 2000 IBKR shares.

·         You’ll have no further option obligations.

What’s the break-even on the whole trade?

On the original 1000 shares it’s the $17.55 purchase price less the $1.65 call premium = $15.90 /share.

On the ‘put’ shares it’s the $17.50 strike price less the $1.60 /share put premium = $15.90 /share.

Your overall break-even would be $15.90 or (-9.4%) below the trade origination price of $17.55 /share.

Disclosure: Author is long IBKR shares and short IBKR options.

Penson offers a broad range of securities, futures and derivatives processing infrastructure products and services, either unbundled or as a suite of end-to-end, fully integrated solutions. 

These include clearing, execution, custody, margin lending, facilities management, technology, and other related products and services that allow us to process a high volume of transactions while maintaining a stable, reliable support environment. 

Additionally, they support trading in multiple investment products, in multiple currencies, in multiple markets and in multi-lingual applications.

Equities, Options & Futures                                   Clearing, Settlement and Custody

Intelligent Execution Solutions

Prime Brokerage

Active/Retail Trader Platforms

Access to Global Markets

Portfolio Margining

Market Data Services

Investment Advisor Services

Mutual Funds

Fixed Income

Suite of Algorithms

Access to Dark Pools

Foreign Exchange (FX)

Trade Aggregation Capabilities

Penson Worldwide [NDQ:PNSN - $7.85] is not well known by the public but is a solid niche player with a market cap of about $200 MM and average daily trading volume of around 145M shares. 

Penson came public in the hot market of 2006 and saw its shares climb from $15 to over $34 by early 2007. EPS peaked with the market at $1.26 that year before dropping to a low of $0.42 in the dismal environment of 2008. Operations have remained profitable throughout the tough times and current Zacks estimates for 2010 – 2011 now run $0.42 and $0.91 while others see $0.49 and $0.83 respectively.

Penson has signed an agreement to purchase the securities processing division of Broadridge Financial Solutions. This should close in the fourth quarter of 2010 making PNSN the second largest in the field and giving it economies of scale that should serve to increase profitability.

The single biggest hurdle towards higher profitability has been the near-zero, short-term interest rate environment. PNSN typically makes a large portion of its profits through net interest revenue from both customer balances and from conduit stock lending to other broker dealers. Once interest rates start moving higher this source of earnings should ramp up very quickly and significantly.

At the present price of $7.85 /share this increased earnings power does not seem to be reflected in Penson’s quote. Here are the historical per share numbers from the time of Penson’s IPO in 2006.

The takeaways from the chart are that while earnings have been volatile, revenues have been much steadier and book value has continued to build even through the tough times.

 When times were good PNSN shares changed hands at more than three times book value. Today they are offered at about 67% of book.

On average PNSN has ranged from 14x – 19x earnings. If you look out to next year’s expectations for $0.83 - $0.91 the shares are now at just 8.6x – 9.5x those very achievable numbers. Even fourteen times the lower estimate for 2011 would bring PNSN back to $11.62 or 48% above yesterday’s close.

Is that a rational target price? Why not? Just a glance at the chart shows these shares have touched $12.23 - $34.91 during each of the previous four years and they’ve been as high as $10.54 already since the start of 2010.

Penson would appear to have little downside from today’s $7.85 quote and substantial upside as a play on better markets and higher future interest rates.

Disclosure: Author is long PNSN shares and short PNSN puts.

Euronet Worldwide, Inc. [NDQ:EEFT – May 7,2010 close: $15.24] is an electronic payments provider. They offer payment and transaction processing and distribution solutions to financial institutions, retailers, service providers and individual consumers. Primary product offerings include automated teller machine (ATM), point-of-sale (POS) and card outsourcing services; electronic distribution of prepaid mobile airtime and other prepaid products, and global consumer money transfer services.

Despite the weakness in global economies EEFT posted all-time high year-over-year revenues in each of the past two quarters while showing positive earnings versus losses (due to non-recurring charge-offs) in the previous year’s interims.

Euronet Worldwide has previously always traded at a premium multiple to both earnings and book value. Here are its per share numbers (including non-recurring items) as reported by Value Line:

* 2008 and 2009 data include non-recurring items

Q1 raw numbers were a gain of $0.05 against a $0.23 deficit but the non-GAAP figure was $0.32 and management stated they see $0.31 as likely for Q2. Standard and Poors now carries full year estimates of $1.32 and $1.47 for 2010 and 2011- both of which would represent record high EPS.

At last week’s closing quote of $15.24 EEFT shares were offered at about 11.6x this year’s and under 10.4x the 2011 consensus estimate. Those are extremely low by all historical standards. A rebound to even 15x expected 2010 EPS would bring EEFT back to close to $20 per share.

Their price/book value relationship is similarly cheap. Excepting last year’s panic market Euronet shares have traded between 2x -4.9x book value. With book value now about $11 /share that could easily support a $20+ price target.

Are those $20 goal prices realistic? Why not? EEFT changed hands above $20 during each of the calendar years since 2004 (including this year) and fundamentals are looking stronger than ever before. Standard and Poors sees present day ‘Fair Value’ as $19.10 in their latest report on EEFT.

As Europe gets back to normal Euronet’s revenues and earnings should continue their growth and the share price should recover to more normal valuation levels.

Disclosure:  None

With Friday’s action complete;

 The DJIA is now (-0.5%) the S&P 500 is (-0.4%) and the NASDAQ Comp is (-0.2%) since year end 2009.

It’s a sad sight considering not much real news has occurred here in the US since the recent highs in April.

For the full week the DJIA dropped 5.71%, the S&P 500 declined by 6.39% and the NADSAQ Compositie finished 7.95% lower.

BP ADRs [NYSE:BP $48.28] have taken a major hit due to their Gulf of Mexico offshore oil leak. No doubt this is both a financial and a public relations setback for this massive (about $300 billion revenues) company. That said, the shares fell from a January 19, 2010 high of $62.38 to this afternoon’s $48.28 – a reduction in market cap of approximately $44 billion. It appears very unlikely the ultimate damages will approach that magnitude.

BP went ex-dividend for $0.84 at the opening today and the shares are likely to trade down as many investors may have been waiting to lock in one more dividend  before bailing out due to the bad news headlines.

Current estimates for BP now run from $6.10 - $6.70 for this year and between $7.15 - $8.11 for 2011 although the spill and its ramifications make these subject to a large degree of uncertainty. Even the low-end estimates make the P/E less than 8x this year’s and 6.8x next year’s expectations. Both those numbers are well below BP’s typical multiple (10-year median P/E = 13x).

Spill related costs will probably restrain any near-term dividend growth but the present $0.84 quarterly payout represents a generous 6.96% current yield, especially attractive in today’s ultra-low interest rate environment.

This combination of BP’s well-below normal P/E and its higher than typical dividend should provide a floor for BP ADRs barring a much worse than expected final outcome when the damage from the Gulf is tallied up.

If the recent sell-off appeals to your contrarian sensibilities here is a LEAP option buy/write that could provide a fine 21-month total return even if these shares do virtually nothing from now through January of 2012.

Read more…

Calamos Investments [NDQ:CLMS - $12.45] is a diversified investment firm offering equity, fixed-income, convertible and alternative investment strategies, among others. With roots dating back to 1977, the firm serves institutions and individuals via separately managed accounts and a family of open-end and closed-end funds, providing a risk-managed approach to capital appreciation and income-producing strategies.

This fine money management firm is not well known but they’ve developed a solid track record and a very profitable franchise since 1977. Calamos shares came public in late 2004 and cruised along between $19.40 and $44.10 from the IPO date right through 2007.

The disastrous market of late 2008 through early 2009 forced a big deleveraging of the balance sheet and caused a net loss for 2008. $400 million of debt was repaid leaving no short-term debt at all. Each quarter of 2009 saw renewed profitability and full year 2009 EPS came in at $0.62 versus d. $1.19 in 2008.

Revenues and earnings continue to improve as excellent investment results in their open and closed end funds have led to much higher assets under management and the accompanying fee income.  Zacks now sees 2010 – 2011 earnings of $0.91 and $1.08 respectively.

Here are the per share numbers for Calamos (post IPO) as reported by Value Line:

The dividend was recently increased from $0.055 to $0.075 quarterly making for a decent 2.41% current yield that is well covered with a payout ratio of about 33% of expected earnings for 2010. Capital spending needs are very low.

CLMS shares had traded with P/Es averaging > 20 during most of the post IPO years versus today’s multiples of 13.7x this year’s and about 11.5x next year’s projected EPS. It doesn’t seem a stretch to think CLMS can regain at least an 18 multiple and trade back up to $16 - $17 /share within the next 12 months. That would be good for 30% - 40% total return (including the dividend) from last week’s close of $12.45.

Is that a reasonable target zone? Sure. CLMS traded as high as $14.79 as recently as March 15^th and showed calendar year lows of $19.40 - $24.23 during each year from 2004 – 2007. Standard and Poors now carries a ‘fair value’ of $18.10 for Calamos shares. When markets were hot (in 2005 – 2007) peak prices in the $30’s and $40’s were achieved.

In addition to outright purchase I’m writing (selling) some November puts on CLMS. These options trade thinly so use limit orders and patience to get your trades done at the suggested prices.

Disclosure: Author is long CLMS shares and short CLMS options.