2010 | 2011 | ||||||
Price: | 23.40 | EPS | -$0.56 | $2.32 | |||
Shares Out. (in M): | 3 | P/E | 0.0x | 10.0x | |||
Market Cap (in $M): | 72 | P/FCF | 0.0x | 0.0x | |||
Net Debt (in $M): | 10 | EBIT | 0 | 0 | |||
TEV (in $M): | 82 | TEV/EBIT | 0.0x | 0.0x |
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Metabank (CASH) is an Iowa-based bank with a fast growing prepaid debit card operation (Meta Payment Systems—MPS) that will benefit from a rising interest rate environment. With a little luck, I believe the stock is capable of tripling over the next two years if the Fed raises rates to 3%+. (I will note that liquidity is limited, so this is more appropriate for PAs or smaller funds willing to be patient.) And my apologies to Ringo, but I was already writing CASH up when he posted TBBK and mentioned CASH as a potential follow-up.
Conway originally wrote the idea up in early 2007 when the stock was at $29. I recommend reading it to get a quick review of the company and the prepaid debit card business if you are not familiar with it in addition to the TBBK write-up, which I coincidentally wrote up a few years ago. Since then, CASH has performed well, although the traditional banking division did manage to make a few bad loans (nothing too serious however, and the company avoided any bailout money), and the profitability of the payments division has been hurt because of the low rate environment despite rapid top-line growth.
Results for the December quarter were excellent. CASH reported $1.2M of net income, or $0.45 per share, with $0.9M coming from the payments division, $0.5M coming from the traditional bank (and -$0.2M for corporate overhead). MPS saw its fee-based revenue grow 29% from $15.1M from a year ago to $19.5M. Net interest revenue also grew 34% from $2.5M to $3.3M, although this is from a small base. Non-interest bearing deposits also grew 37% over the year.
The quarter actually would have been much more profitable, except that Meta effectively has to pre-fund loan loss provision expense associated with MPS’s tax refund business (prepaid cards and refund anticipation loans to Jackson Hewitt and H&R Block customers), which generates the majority of its revenue in the current March quarter. This was $3.6M of the $4.7M in total loan loss provisions, or roughly $0.89 per share in after-tax EPS. This was offset, however, by $1.9M in securities gains, so the net drag to CASH was roughly $1.7M, or about $0.42 of EPS.
Credit quality remained good. Nonperforming assets (NPAs) rose marginally from $14.7M in September to $15.2M (they fell from 1.76% of total assets to 1.65%) and remain quite manageable, with only $0.1M in gross charge-offs and $0.5M in recoveries. NPAs stand at 124% of reserves, but the loss severity of the bad loans looks limited given the low charge-offs in the quarter.
In January, the company decided to reorganize MPS in effort to reign in costs and focus its many initiatives to those with the best revenue opportunities. This resulted in a reduction of 47 staff positions (about 10% of the entire company), reducing operating costs by $5M annually ($1.00+ in EPS), and will be neutral to March EPS and accretive thereafter.
In February, CASH also completed two common stock private placements, raising $8.9 million on the sale of 415,000 shares representing 13.5% of current outstanding shares. The offering was accretive to book value and intended to finance the continued rapid growth in deposits and assets, not plug any holes in the balance sheet from bad loans. CASH’s TCE ratio (tangible common equity divided by total assets) was a somewhat thin 5.1% at the end of the year, so the added capital is timely and puts the TCE ratio closer to 6%.
Below is a snapshot of MPS’s balance sheet:
|
| Dec-09 |
| Dec-08 |
|
|
| Balance | Yield/Rate | Balance | Yield/Rate |
Loans |
| 402 ($Mil) | 6.62% | 442 | 5.74% |
Mortgage-backed securities |
| 347 | 2.47% | 184 | 4.35% |
Other investments |
| 122 | 0.60% | 77 | 1.80% |
Total interest earning assets |
| 871 | 4.13% | 702 | 4.94% |
Non-interest assets |
| 50 |
| 83 |
|
Total assets |
| 922 |
| 785 |
|
|
|
|
|
|
|
Non-interest bearing deposits |
| 541 | 0.00% | 395 | 0.00% |
Interest checking |
| 16 | 0.54% | 15 | 0.30% |
Savings |
| 10 | 0.32% | 9 | 0.48% |
Money market |
| 35 | 0.85% | 41 | 1.37% |
Time deposits |
| 142 | 2.75% | 154 | 3.56% |
FHLB advances |
| 76 | 2.63% | 88 | 3.56% |
Other borrowings |
| 39 | 1.54% | 27 | 3.56% |
Total funding |
| 860 | 0.81% | 729 | 1.40% |
Other liabilities |
| 12 |
| 12 |
|
Total liabilities |
| 872 |
| 740 |
|
Equity |
| 50 |
| 45 |
|
Total liabilities and equity |
| 922 |
| 785 |
|
Net interest spread |
|
| 3.32% |
| 3.54% |
The reason why we should be excited about CASH’s prospects in a rising rate environment is that $541M of its deposits are non-interest bearing, or a substantial 62% of the total funding. As interest rates rise, CASH will enjoy operating leverage as yields on its assets rise while its funding cost remain near zero. With a 5% net interest spread vs. 3.32% currently, CASH’s annual net interest revenue would be about $15M higher, translating to around $2.50 of EPS.
For calendar year 2010, I am forecasting MPS to generate $90M in revenue, and $8.8M in net income. I expect the traditional banking operations to generate $20M revenue and lose $1.0M. Combined, I expect the company to earn $2.32 in core EPS for the calendar year. For 2011, I am forecasting $129M in revenue for the entire company, $13M in earnings (10% profit margin) and $4.00 of EPS. In 2012, I am forecasting $159M in revenue, 22M in earnings (14% profit margin—lagging benefit of rising rates), and $6.70 in EPS. I will warn that modeling this company is difficult and management is very reluctant to give any guidance on the operating lines, so take the umbers with a grain of salt, but with top-line growing near 25%, the benefit of rising interest rates, and their restructuring, these numbers are fairly easy to get to.
MPS does have $19.9M invested in four trust preferred securities that the OTS (Office of Thrift Supervision) has forced CASH to classify as “substandard” because one of the national ratings agencies has rated them sub-investment grade. The securities are Huntington Capital Trust II SE, Bank Boston Capital Trust IV, BankAmerica Capital III, and Key Corp Capital I. Although interest payments continue to be made on a timely basis and no requests for payment deferrals have been made, CASH is at risk of a potential write-down. I estimate it could be as much as $6M in a worst-case scenario.
CASH, through its tax refund prepaid card operation, is getting more heavily involved with tax refund anticipation loans (RALs), which have been a lightning rod for regulatory risk in the past.
CASH is a bank. They have over $400M in loans, and in this struggling economy, it is possible and even likely that there will be some more credit quality hiccups on the way to recovery.
CASH’s estimated tangible book value for March is $17.50 per share. With the stock at $23, that puts P/TB at 1.3 times. While the stock did dip below $10 during the financial crisis, I believe book value represents a realistic floor value, translating to downside of 25%
Even though CASH is technically a bank, its metrics make it more of a processing company—notably net interest income made up only 25% of revenue while fee-based income made up the remaining 75%. Most banks get 70%+ of the revenue from net interest, which generally gets a lower valuation multiple.
Total core revenue in the December quarter was $27.4M, or about $110M annualized. CASH’s market cap is $72M, putting the company at a trailing price-to-sales ratio of 65%--this is cheap for a processing company that will likely post healthy profit margins in the foreseeable future.
Charles Schwab trades at 30 times 2010 earnings, largely on expectations of improved profitability from rate increases. If you are looking for an interest rate play, CASH has far more upside.
CASH trades at a non-heroic 1.3 times book value and 10 times my 2010 EPS of $2.32. This is depressed by $1-2 because of the low interest rates. They are growing their top-line at nearly 30% and operating in a prepaid debit card industry that is growing rapidly as a whole. A company with normalized EPS of $4.00 growing near 30% per year can trade at 15 times earnings or $60 per share.
As Ringo recently pointed out in his write-up of TBBK, TBBK bought Stored Value Solutions (formerly run by Brad Hanson) for $60.6M when it had $115M in deposits, for a 50%+ deposit premium—pricey perhaps, but justified given the $800M in deposits it has today. In addition to a large stream of non-interest revenue, CASH’s MPS operation (currently run by Brad Hanson) has $592M in deposits, of which $541M were non-interest bearing—the most valuable kind of deposits. CASH’s entire market cap is only $72M, 13% of the non-interest deposits. The company is worth substantially more than the current value in a take-out.
Why is the stock cheap? In addition to the temporarily depressed earnings from the low rate environment, I believe there are two non-fundamental reasons why the stock is cheap:
No one on the sell side covers the company, and the last VIC posting was July 2008 until Ringo’s mention of them last week in his TBBK write-up. The company has been lost to investors since the financial crisis.
The high degree of seasonality, the September year-end, the rapid growth, the haphazard quarter-to-quarter profitability, and lumpy/one-time items of the last few quarters makes them difficult to model. This has disguised the value of the growth they have been reporting, but it is also what creates the current opportunity.
I believe the company is on the verge of consistently reporting profits, which will make the progress and the value much more apparent.
Catalysts:
Upside from rising interest rates
March quarter is their seasonally strongest quarterUpside from rising interest rates
March quarter is seasonally strongest quarter
Reporting consistent profitability along with rapid growth
show sort by |
# | AUTHOR DATE SUBJECT |
---|---|
12 | |
CASH reported strong June earnings (fiscal Q3) of $1.11.
Revenue was up 15% while expenses were up only 1%, demonstrating nice operating leverage.
Credit quality improved with NPAs falling from $10.3M to $7.3M.
Stock has moved up to $35, but is still a good buy trading at less than 10 times current earnings, with substantial upside from a rising interest rate environment | |
11 | |
The first quarter results were excellent.
They reported $1.74 of EPS, including $0.15 of severance expenses. Also, only part of the $5M in annual run-rate savings from the restructuring were in the quarters results. You could argue that the true results were probably around $2.00.
Additionally, the loan loss provisions of $9.5M were very high in the quarter, most of it related to the tax refund business at MPS. Loan loss reserves increased by 5.3M in the quarter, although apparently, much of this will be run down with residual tax-refund related charge-offs for the June quarter. I suspect that there is some padding in the reserves, however.
Asset quality trends were also very good, with NPAs falling from $15.1M to $10.3M, or down to roughly 1% of total assets.
Total revenue at MPS was up 15% YOY. Total active cards grew 29% from 17.8M to 23M and total transactions grew 36% from 3.9B to 5.1B.
The bank segment lost 1.1M on a 2.0M loan loss provision. With the improving credit quality, I suspect the losses are behind the bank and that it will begin to make a small amount of money going forward.
The seasonality and moving parts make this company fairly difficult to model, but I am penciling in $3.40 for calendar 2010, putting the stock at roughly 10 times earnings. Revenue is growing 15-20%, operating leverage is in play, and there is upside from rising interest rates over the next couple years.
This remains a very good story. | |
10 | |
David,
#1 For my modeling, I am modeling MPS and the traditional bank segments separately and summing them up. To get to $4, I am modeling about 16% in fee revenue growth in MPS in 2010 and 22% in 2011. (MPS's fee revenue growth in 2009 was just under 100% for the year, driven heavily by its tax program, so the slower growth rate in 2010 is the result of 2009's very high growth.) For 2011, I get $129M in fee revenue, $13M in net interest revenue and $13.5M in net income. I expect the traditional bank to lose $1M on roughly $21M in revenue. That gets me to $12.5M in net income. I assume 3.2M shares. $4 of EPS. #2 Not only are the deposits seasonal, but the revenues are as well. In September 2008, deposits were $285M. In December 2008 they rose to $467M and then gradually trailed down to $442M in September 2009, only to surge to $592M in December 2009. MPS's fee revenue jumped from $15.1M in December 2009 to $33M in March 2010 and then back to $15.7M in June 2010. (Part of this is seasonal, but a lot of it is secularly growing the tax business.) Management is very reluctant to give any guidance for March 2010, but I have penciled in $35M in fee revenue for MPS. It will probably be wildly off. #3 I don't really know what the moat is. I understand that MPS has many different patents (I'll verify next time I talk with the co.), but who knows how legit these are. I don't. I guess I am trusting not only their results but the fact that Brad Hanson has founded two successful companies in the space. #4 They don't list the duration in the Q or K, but the company has made it clear that they will benefit from a rising rate environment. In general, the majority of its loans are adjustable rate or have fixed maturities less than 5 years and as you can see from the table in my write-up, the yield they are getting on the MBS portfolio has plummeted from 4.35% a year ago to 2.47%--certainly a sign that this portfolio is sensitive to short term rates. #5 I don't really know how big they can grow the deposits. They are tight-lipped about their relationship with Jackson Hewitt and H&R, but my sense is that MPS is not in all of their locations and that this will provide strong growth not only for deposits but for the fee revenue. That is just one of their programs. As I noted earlier, they are doing the payroll debit cards for WalMart. They have lots of programs and are working with large companies. In some respects, MPS's smaller size vs. someone like USB's payment business or Fifth Third's may actually be a advantage in dealing with some customers because there are potentially fewer conflicts of interest. This whole space is wide-open and MPS is a leader and past results have been pretty impressive. As with any small company there is risk, but the valuation in context of its current revenue, recent growth, management (Brad Hanson), benefit from rising rates (eventually), and overall growth in the space, seems well worth it. | |
9 | |
Skyhawk, I like the premise of the business and have some questions. 1. Earnings - Can you provide some explanation of how they can earn $4/sh in 2011? 2. How seasonal are the deposits? 3. What kind of moat does it have? 4. What is the duration on the asset side? If interest rates go up, how long before it starts hitting the bottom line? 5. How big can they realistically grow deposits from here? Thanks, David | |
8 | |
Sky, Any insight into why Netspend and CashAmerica are already filing to blow out of their stake? Considering that both are strategic partners, I was surprised to see them try to potentially exit this quickly. Also, how do you thinking about the accretion/dilution in issuing equity at $21? It obviously helps feed growth but comes at a high cost, if you think the stock is really worth closer to $50 today, the cost of that equity was extremely hgih and you have to be very aggressive about assumptions of returns on that incremental equity to think that it is a bad idea. Why not issue preferred instead, which counts as equity for regulatory purposes but doesn't permanently dilute the per share equity value. It seems that this platform belongs more naturally at a large bank, like Wells, that has the balance sheet to support the growth. What do you think the chances are that it gets sold? Have there ever been conversations, from what you've heard? | |
7 | |
Xanadu, Meta actually does the WalMart prepaid card program, certainly a testament to Meta's ability to work with some of the largest corporations in the world. | |
6 | |
Xanadu, It wasn't an accounting restatement, but they did have to delay their 10Q filing because their previous auditor (McGladrey and Pullen) declined to review the financial statements because they had a relationship with H&R Block, which was a customer/partner of Meta. Meta subsequently retained KPMG as its auditor. As far as the WalMart opportunity, any trend that promotes debit cards is an opportunity for CASH. WalMart is pushing most of its employees to direct deposits, but there are estimates that 10-25% of Americans do not have bank accounts. Prepaid cards, checks, and cash are their remaining options. A target of Meta's has long been the unbanked population. | |
4 | |
MPS (Payments) is the engine that is driving CASH. Think of MPS as a generator of zero-cost (or less) deposits for the bank and growing those deposits at a rapid rate of growth. Much like Berkshire Hathaway's insurance float. Looking at MPS this way, its operating margin (card fees - card processing exp - MPS G&A expense) is really the "interest expense" on the non-interest bearing deposits MPS generates. For 2009, MPS turned an operating profit of $6.38m on total CASH non-interesting bearing deposits of $490.65m for an "interest expense" of minus 1.3%. In other words, these deposits cost CASH/MPS less than zero. Add in the banking side's traditional interest bearing liabilities of $309.48m costing a total of 2.88% - and one can see that CASH's total deposits and liabilities of $800.1m cost a mere 32bp. By comparison, WFC's cost of liabilities for 2009 was 91bp and USB's 130bp - though obviously both of these banks are financing huge liabilities in relation to CASH's paltry balance sheet. Whether CASH can sustain the growth in MPS while continuing to run it at an operating profit in the long run will depend on whether there are any competitive advantages to the payments business. Even if there are not and the industry commoditizes -- for now, the open-loop debit card business is a bit of a wild west land grab as it is growing rapidly. So CASH may have a first-mover advantage that could last for the next few years before the big banks really move in. Needless to say, I like CASH a lot. |
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