Saturday, December 6, 2008

Resource America Buyback

“…Energy is not the business of Resource America. Neither is real estate. Our true business is providing investment opportunities for the individual investor.

“It is primarily a financial business for us … so our senior people have backgrounds in banking, accounting, finance. We have people here with specific knowledge in the three fields in which we operate, and the company is then unified by the fact that these experts are all tied together on the financial side.”

– Edward E. Cohen, 2001

Resource America, Inc. (ticker: REXI) CEO Jonathan Z. Cohen recently presented at the FBR Capital Markets 2008 Fall Investor Conference:

Resource America reports Q4 earnings on Monday, December 8, 2008.

With a $50 million stock buyback plan in place and current market capitalization of roughly $70 million, Jonathan Cohen can deliver considerable value to shareholders by buying back stock. On the company’s Q3 conference call, Leon Cooperman, CEO of Omega Advisors and a significant shareholder in nearly all of the Cohen family’s public companies, asked:

“If you’re taking a forecast of roughly $1 for next year, so that’s about $17.5 million of net income, dividend is running around $5 million, assuming everything is the same, the total business is like it is, stock price is like it is, what will be the priorities for using that $12 million, $13 million of let’s say free cash flow in terms of usage?”

Jonathan Cohen replied: “That cash flow will obviously be used, once we’re finished retiring debt, to be a buyer of our stock as well as an investor in future businesses.”

Fair enough. So assuming Mr. Cooperman’s $12 million free-cash-flow figure remains flat for the next three years, Resource America will receive $36 million with which to invest. At an average price of $8 per share, the company can reduce its share count by 4.5 million shares – from 17.6 million outstanding to 13.1 million outstanding – or a decrease of roughly 26%.

Judging by the above FBR Capital Markets presentation, as well as the scalability of the business model, Resource America may well achieve significant growth without the reinvestment of much additional capital. But even in the case of flat profits for the next three years, the hypothetical share-count reduction will increase income attributable to each shareholder by roughly 33%.

The most important question, though, in light of the Cohen family’s prodigious record of building businesses, is whether or not buying back shares is the best use of capital?

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This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.