Description

Advanta currently consists of a business credit card operation, an equipment leasing operation running off and a small venture capital portfolio ($10mm). Advanta has sold a sub-prime mortgage portfolio and a consumer credit card operation in the past two years and is currently being sued by both purchasers (Fleet and JP Morgan Chase) basically for mistating results at the divested businesses and pumping up the portfolio prior to sale. There is a reserve for the Fleet lawsuit which is currently at trial of $70mm and no reserve for the JP Morgan suit. I would recommend if you have interest in the idea getting all the relevant data for both lawsuits. In my opinion the Fleet lawsuit has some merit and the award is likely to be somewhere between $70-$100mm and the JP Morgan Chase lawsuit seems like it has very little merit. Other problems include the leasing business which has required residual charges almost every quarter as well as higher than expected defaults under leasing contracts, write-downs of the venture capital portfolio, and management credibility given the unwillingness to buy back significant amounts of stock as well as the persistent lawsuit surprises. In addition there is the taint of rising charge-offs as the business card portfolio seasons and the typical suspicions regarding securitization accounting and the black box of their credit card portfolio. To invest in this idea requires one to do significant amounts of research for themselves. The interesting aspect is that Advanta's book is $14.10 per share and the non-voting B shares trade at 53% of that book (the voting A shares trade at 61% of book). Add to that the fact that the company is running off the leasing business thus creating more capital, and is currently operating with a negative or neutral spread on much of the cash they collected from the sale of their mortgage operation and you have potential for significant upside from these levels. The business card operation should generate 1.40 this year and $1.60-$1.70 next year, so the P/E on the B shares is 5.4x this year's earnings. Obviously there are charges from the leasing book and from the VC writedown, but the VC portfolio doesn't really have much further to fall and the leasing business residual has an assumed loss rate of almost 10% which could be doubled and would cause the book to decline only approximately $2. Assume the real book is $10 per share, a sub-par ROE in the credit card business of 15% implies earnings of $1.50 or slightly higher than what they are doing in that business this year. Even at 10% and a $10 book you are buying a $1.00 of conservative earnings at 7.5X. Like all credit card companies there are many assumptions which is why i strongly suggest doing your own homework on this idea, but there seems to be a reasonable margin of safety considering the low price and the liquid balance sheet.

Catalyst

runoff of leasing portfolio. Resolution of Chase and Fleet lawsuits