Earnings Recap - CCUR Holdings (CCUR)
We are long CCUR Holdings (ticker: CCUR), which on February 5th issued its earnings report for the 2nd quarter (12/31/19) of its fiscal 2020 (link here). CCUR operates merchant cash advance (MCA) and real estate business segments through its subsidiaries Recur Holdings LLC and LM Capital Solutions, LLC and actively pursues other business opportunities to maximize the value of its assets through evaluation of additional operating businesses or assets for acquisition. We covered the thesis underlying this investment in a prior writeup and multiple blog posts (please see our 7/31/19 writeup in our Research section, as well as the SCC blog posts here).
The quarter produced very strong results, with $2.7MM of net income, or $0.31/share, on revenues of $1.8MM (earnings were higher than revenues due income on and appreciation of CCUR's large securities portfolio). Below is the meat of the earnings PR:
On a trailing-12-month (TTM) basis, CCUR has earned positive net income of $8.35MM, or $0.94/share, representing a huge earnings yield of 19.6% on the recent $4.80 stock price. In comparison, note that the earnings yield for the overall stock market is an anemic 4.1%--and this is based on *adjusted* earnings [aka earnings with certain negative items ignored so management teams so incentivized can claim higher earnings than actually exist in reality], rather than straight GAAP earnings (as in CCUR's case). In addition, this marked the fourth consecutive quarter of positive income for CCUR, which is notable given the seemingly endless losses that occurred at the company under CCUR's prior management & business model (aggregate losses for the period prior to FY2018, the fiscal year in which present management took over the company, totaled $165MM - see here). CCUR also has a hidden asset not appearing on the balance sheet, namely $58.4MM of federal NOL carryforwards and $42.6MM of state NOL carryforwards, which expire between now and 2037. Over the trailing four quarters under CCUR's new business model, book value per share has appreciated from $5.73 to $6.58, a 14.8% increase--yet the stock still trades well below this figure, reflecting apparent skepticism of market participants regarding the company and its management.
We think CCUR recently took a large step towards proving the doubters wrong by announcing a $0.50/share special dividend, payable to common stockholders of record on February 24, 2020, to be paid on March 9, 2020 (see PR here). We think this further indicates that CCUR's management intends to treat all shareholders (including, importantly, small ones) fairly. Why is this so significant? With companies dominated by a large shareholder (as CCUR, which has a 40%-holder), there is always the possibility that said large holder will take advantage of his position to disadvantage minority shareholders through economically lopsided & unfair related party transactions. However, when a large holder "sees the light" and treats small shareholders scrupulously fairly, a lollapalooza scenario can unfold, including (1) increasing overall investor confidence, translating into multiple expansion in the subject company's stock price (making it a better acquisition currency), (2) increasing confidence among business sellers that the subject company will be a good home for their businesses, leading more attractive acquisition opportunities, (3) increasing confidence among the pool of potential hires for the subject company, leading to a more motivated and talented workforce at the company, etc etc etc. All of these factors feed on and reinforce themselves in a virtuous self-fulfilling positive ecosystem, the end result of which can be truly astounding. We have seen exactly this scenario play out at Berkshire Hathaway over the past 55 years, leading to an aggregate increase in the stock price from the $12-$18 range in the mid-1960s (when Buffett took over the company) to $342,000+ today. We are certainly not predicting that CCUR's stock price will be six figures in a few decades like BRK-A, however we believe the necessary (but not sufficient) factor of treating all shareholders as true parters in the business is becoming increasingly proven through the actions of CCUR's management (the rest will obviously be up to the investment and business decisions they make over time).
Regarding CCUR's valuation, we previously stated that 1.25X book value would be appropriate for an alternative finance company this profitable (albeit small). Megacap ($430B) financial juggernaut JPMorgan (ticker: JPM), with a return on assets of a measly 1.3%, trades at a price/book ration of 1.8X (note that the only reason JPM can boast of a 13% return on equity (ROE) is because of its use of massive financial leverage). In contrast, on a TTM basis CCUR has earned 12% on assets, or almost 10X the ROA of JPM, and employs very little debt to generate its bottom-line returns. If CCUR traded at the same P/B as JPM, its stock price would be nearly $12, or ~150% higher than currently. Even at a comparatively modest P/B ratio of 1.25X, CCUR would trade over $8/share, indicating there remains room for substantial upward movement in the stock based merely on multiple expansion (never mind further increases in book value per share). If CCUR's management continues to earn a 12% ROA, we think it is only a matter of time until the stock re-rates significantly higher.
DISCLOSURE: Long CCUR.