The CC sounded positive but any good news for INV shareholders seems to be many months away. The lack of a dividend announcement was no surprise. If there was any good news it was that the Q4 loss was less than the $0.25 forecasted. Hope springs eternal.
Based on IBM's news release, the new IT system was up and running in Q4. One would think all period expenses were taken in that quarter too. Capitalized costs would of course be spread over several years.
" SOMERS, NY--(MARKET WIRE)--Feb 18, 2004 -- IBM and American Mortgage Network (AmNet), a wholesale mortgage bank serving mortgage brokers nationwide and a wholly owned subsidiary of American Residential Investment Trust, Inc. (AMEX:INV - News), announced that AmNet has launched IBM's eServer iSeries server to add capacity and flexibility for its mortgage broker customers. The launch was completed seamlessly in the fourth quarter of 2003."
You're right about general corporate expenses holding the increase in fixed expenses below the increase in the number of offices. However, some centralized expenses increase even more; for instance, hiring consultants to install a new IT system. I wonder when this expense (will) hit the books.
In any case, there will be significant increases in fixed expenses. Even a 10% increase adds $.16 pretax to the loss.
An acquisition would dilute cash and book per share, INV's only current positive metrics.
I guess I have soemthing to learn here - one postiive about these boards. Thanks for setting me straight on the derivatives.
All things being equal, a 20% increase in offices should NOT mean a 20% increase in expense. Adding offices should not significantly increase general corporate expenses - head office payroll, accounting/legal fees, etc.
I still believe that INV, with a quality business setup and more offices, can approach '03 loan production. The problem here is raising margins, something that the market may not permit.
Even though the profit outlook for '03 seems bleak at the moment, there is potential for substantial share appreciation based on the underlying business value. For example, if INV can effect a business combination with a similar comapny that is making money, then the $5/sh in cash will mean something. I don't like how management has been playing this out over the past six months, but there is real potential for some announcement, at any time, to send the stock soaring. This is why, in my opinion, the stock did not tank after the latest depressing earings report and CC.
What if INV forgoes a dividend, or even a stock buyback, in favor of an acquisition? They mention this possibility every quarter, in the same breath they "justify" another quarter ignoring shareholder interest.
The stock attraction of INV now, imo, is only value -- cash and tangible net per share - not profits (non-existent) or growth (faith). Any acquisition would hurt value, probably very dramatically.
If/when INV executes profitably again -- if/when the expansion and diversification plans are successful, how likely would an acquisition be to lower p/e?
So, INV has consistently failed to bolster shareholder interest, declining to take credible actions to demonstrate confidence in their own business model.
Meanwhile, apparently, they prefer/consider moves to dilute value.
The point of hedging is to reduce interest rate fluctuation risk. INV has done a good job of this.
You should look at total revenue net off derivatives. Hedging offsets gain on sale. Your logic would have had INV losing >$6M in the third quarter, the best in their history, because $15m was a "derivative gain."
All things being equal, won't fixed expenses rise 20% if they open 20% more offices? Thjis does not count investment in product diversification, and the new personnel associated.
Why would $800m BE "ultraconservative." They already had ~$22M in expenses in the fourth quarter and $25M in the third quarter, when variable costs were much higher with $1B/mo in production. Remember, they have less than 8M shares.
The 4Q loss was due almost entirely to 3.6M expense for derivative investments ("hedging"). I believe that this number fluctuates more or less unpredictably; for all of '03, INV realized an insignificant derivative gain.
Its better not to include this fluctation in calculations of breakeven - after all, for all we know, INV could show a profit here in 1Q '04. Therefore, excluding the 3.6M charge, INV would have made a profit of 600K or so - BEFORE the income tax adjustment. So 1.9B of fundings was close to breakeven for 4Q '04.
As for the future, I don't see how expenses might rise as quickly as you suggest. I used 800M in my earlier calculations in order to be ultra-conservative. But the only way I see costs rising that fast is if they go full force into the diworsification (and and sure wouldn't put it past these guys!)
Do more research.
The q4 warning was for a consolidated loss of $.05, not $.25, bad enough, but nowhere near as bad as what's coming.
Even so, both the warning and actual loss were misleading. The pre tax loss was $3.0M, or $.38. So, how and when will they become profitable?
Profitability for '04 should not be that difficult to come by. If they convert 50% of January apps in Feb, then they will match Feb'03 production. Jan '04 was 30% lower than Jan'03, but last year management remarked that that January was unusually strong, so some falloff could reasonably have been expected.
This means that the first 2 months of '04 should have production of about 85% of the same period for '03. Extrapolating for the whole year, this gives us about 9.3B of funding for '04, well above a presumed breakeven of 8B (670M/month). The continued opening of new offices near the end of '03 and into '04 should help, along with continuing depression economic news that may keep interest rates down well into the fall.
This should translate into at least $.50 to $1 eps, assuming that we don't through too much cash in the toilet via our new adventures. If the above goes according to this (conservative?) plan, then, with $5 cash/sh and positive '04 earnings, the stock price could hit double digits in the peak summer season - just as it did last year.
There is a lot that I don't like about management's strategy, and unless they change their tune, I can't see INV trading higher than BV. I am also worried about '05, when interest rates will be higher, and the mortgage market will shrink noticeably. But downside risk is limited, and upside potential remains, at least for this year.
I'm relieved and surprised to see it is up today. I was sort of hoping that the conference call would be a non-event. I think much of the negativity was already priced in. Looks like another quarter of waiting.