Abhimanyu’s Dilemma
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Risk vs. Uncertainty
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Low Risk + High Uncertainty = High Rewards
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Abhimanyu’s Dilemma
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• Founded 1994; Bought 3 mothballed facilities for close to zero. • Dunkirk: $1 Million Cash Paid; $10-20 Million a year in FCF potential. potential • Bought stock at $14-15/share in 2002. • Had earned $1.26/share $1 26/share in 2001 • Dunkirk could add $1.50 to $2.50/share in earnings in a few years. • How could I miss? • No downside; Huge Upside!
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• One year later (2003), USAP was trading at $5/share versus our purchase price of $15 in 2002! • Severe industry slump slump. Business was break-even. break even • Dunkirk losing money. • What was intrinsic value? • Hard to tell, but easily over $5/share. • Conclusion: Do nothing. Wait!
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• One year later (2004), USAP was trading at $10-11/share. • Dunkirk slightly profitable. • Rest of business profitable. • Huge backlog and growing growing. •IV easily over $11/share. • Conclusion: Do nothing. Wait!
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• Rule No. 1 and Rule No. 2. • In 2005, USAP trades at $15/share. • Now we can sell at break-even. • Buy More? Sell? Do Nothing? •Answer: Buy More: IV over $30/share. • Thesis finally playing out after 3 yrs.
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• In 2006, USAP is rocking! • Huge Backlog. • All plants running fullout 24x7 • Stock goes over 90% of IV • Start Selling: ROI – 19-100% annualized.
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A Current Dhandho Stock Pick • Meets seven of the nine criteria in The Dhandho Framework: 1. 2 2. 3. 4. 5 5. 6. 7.
Simple Business Existing Business Distressed Business in a Distressed Industry Durable Moat Few Bets, Bets Big Bets, Bets Infrequent Bets Margin of Safety – Huge! Low-Risk; High-Uncertainty Business
• Do your own thorough research before making any investment. • Pabrai Funds has lost money in the past on several stocks.
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Delta Financial Corp. (DFC) • Subprime Mortgage Lender. • Severely Distressed Industry – Several bankruptcies in 2007 • Delta is very different, but it’s stock price is at a throwaway price due to the severe industry distress and misunderstood business. •50% loans originated at own Retail Centers – 1.1% (Ultra-Low) • 78% average Loan to Value. 92% of Loans are Fixed Rate • Conservative portfolio accounting – revenue recognized over life of loan but expenses recognized immediately. www.pabraifunds.com
Delta Financial Corp. (DFC) • Minimal California Exposure • Mostly a Re-fi Lender. Not affected much by housing starts. • 1/3 owned by insiders; Plus Pabrai Funds owns 19.8% • About 1/2 of the total stock is “locked locked up” up • 20% of shares are shorted. • Float is quite thin. If you buy, please use limit orders. • Market Cap: ~250 250 Million • Earnings out today – higher volume today. • Solid Management –They are the biggest owners . Conservative. www.pabraifunds.com
Delta Financial Corp. (DFC) • Intrinsic Value: • Mortgage Banking Earnings Engine: • Securitized Portfolio Fair Value Adj. Adj : • Excess Book Value:
>$1.50/share >$8 31/share >$8.31/share ~$4.25/share
• Earnings will be growing as now there is less competition and DFC has been hiring and growing its business. • Earnings could be much higher than $1.50/share in 2 2-3 3 years. Let’s apply a 15x multiple on it. • Intrinsic Value: >$35/share; Current Stock price: $10.20!! www.pabraifunds.com
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Delta Financial Corp. (DFC)
Pabrai Funds Buys DFC Subprime Meltdown
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Thank You. Mohnish Pabrai Managing Partner Pabrai Investment Funds Irvine, California, USA
[email protected] Tel. e +1949.275.5652 9 9 5 565 www.pabraifunds.com www.pabraifunds.com
