Three Quick Ideas

Leatt, CIB Marine, First Acceptance

From time to time I like to present quick summaries on stocks and securities that intrigue me, whether or not I have done deep research or hold a strong opinion on their potential value. I am particular to companies with business models, products, or services rarely seen amongst well-known, large-cap companies. It’s a wild world out there. For every Apple Corp., there is a company trying to find Bigfoot or unearth buried treasure. Here are three stocks that have attracted my notice lately.

Leatt Corporation, ticker LEAT. This is one I should have been all over months ago. Alas. Anyway, Leatt manufactures safety equipment for motorsports like BMX, snowmobiling, and cycling. Leatt’s neck braces are its marquee product. The company claims its braces meaningfully reduce the risk of serious injuries. Reviews appear positive.

Leatt is headquartered in South Africa, but offers its products worldwide. The company operates and reports in US Dollars. Leatt is growing like crazy and that growth is flowing through the bottom line. From 2017 to 2020, revenues rose 92%. The momentum has continued in 2021, with revenue soaring 71% in the first quarter. The company has net balance sheet cash and insiders own 43% of Leatt’s common shares.

Leatt shares are up a cool 730% over the last year, but shares still appear reasonably priced. On a trailing basis, Leatt trades at 15.7x earnings and at an enterprise value/EBIT ratio of ~11.4. If the rest of the year is anything like the quarter just reported, those multiples are about to undergo some serious compression.

Some questions come to mind. Are recent results sustainable, or are they partially or entirely the result of COVID-related changes in consumer behavior? How differentiated are Leatt’s products, and does it have unique intellectual property? The company seems to spend a reasonable amount on research and development, but this kind of meteoric growth will attract competitors. Can tiny Leatt stay competitive? What will the company do with its cash flow? Capex needs appear to be well-covered and the company has virtually no debt. Are acquisitions in the future? Maybe scaled up product development, or returns of capital? There are plenty of questions for potential investors to answer.

Next up is CIB Marine Bancshares, Inc., ticker CIBH. CIB Marine, with a presence in Illinois and Wisconsin, is one of the nation’s statistically cheapest banks, and it may get cheaper soon. To make a long story short, CIB Marine has two series of preferred shares outstanding. The terms of the preferreds are are highly favorable to the company. Dividends are non-cumulative and the shares are perpetual with no put features. CIB Marine has opted not to pay dividends on these preferreds for years on end, and a large holder, Hildene Capital Management, is fed up. Hildene wants CIB Marine to commit to a plan to redeem the outstanding preferreds, but there is little Hildene can do from the outside. And so, Hildene has been pushing for control. A proxy contest is underway.

After some fits and starts, it appears Hildene and CIB Marine have come to tentative terms on a plan for the bancorp to repurchase $18 million in preferred shares at 85% of par value, with additional repurchases to take place in the coming years. If executed, this plan will immediately reduce the face value of the outstanding shares by 50% and increase book value per common share. The company is working on achieving regulatory approval to transfer $18 million from the bank to the bank holding company.

If the agreement becomes official and the initial repurchase is completed, CIB Marine’s tangible book value per share will rise by 10% to around $33 per share. Future purchases of preferred stock at a discount to face value would benefit tangible book value even more. For instance, if CIB Marine were to repurchase all its outstanding preferred stock at 85% of face value today, its tangible book value would rise to $35. Doing so would leave them thinly capitalized, so they won’t, but it is a useful exercise.

With shares at $23 and tangible book value at $33, CIB Marine would trade at 70% of tangible book value. Most banks trading at similar levels have notable credit issues, problematic cost structures, or are effectively in slow run-off. CIB Marine is by no means the best bank around, and perhaps not even a good one (just look at the laundry list of issues highlighted by Hildene) but it may not deserve to trade at such a depressed valuation, especially with the prospects of capital returns or a sale once the preferred stock is eliminated. CIB Marine’s capital ratios are strong, and it might make an attractive takeover target.

Last up, we have First Acceptance Corp., ticker FACO. “FACO” is a non-standard issuer of automotive insurance policies, meaning it caters to customers whose poor personal credit or checkered driving record renders them ineligible for policies from Progressive, GEICO, Liberty Mutual, etc. Obviously, writing policies for people in this segment can be highly profitable, but is also very risky. Many, many insurers have run aground after experiencing higher than expected loss ratios in the segment.

Insurance is not an industry I enjoy researching, nor am I an expert. However, I am more inclined to spend time on property & casualty insurers, who don’t have the long-tail risks that life insurers, worker’s compensation insurers, and others do. When GEICO writes a policy on my geriatric Honda, they provide coverage six months at a time. They are not exposed to serious cost inflation risks they way an insurer writing long-term care policies or such is.

FACO is a combination issuer and agent. It writes its own policies and in certain states, earns a commission for selling policies for other issuers. FACO had some historical issues with underwriting and its cost structure, but they appear to have righted the ship. The company has been profitable for three years running. The balance sheet has also improved noticeably. In 2020, FACO’s tangible equity to assets ratio was 25%, up from just 8% in 2017. The company’s investing approach is fairly conservative, with 86% of its $170 million portfolio invested in fixed income securities. Of these, 65% are government obligations, with the remainder in corporate bonds and non-agency mortgage-backed debt.

FACO shares have responded to the company’s improvements in underwriting and balance sheet strength, but they still change hands at a large discount to book value.Lately, FACO has decided to share the results of its turnaround with investors, repurchasing 6% of shares outstanding in 2020 and recently paying a substantial special dividend. If I had to guess, returns of capital will continue. One very interesting aspect of FACO is its ownership structure. Famed investor Gerald J. Ford owns 57% of FACO’s shares. Ford’s son, Jeremy B. Ford, is the board chair. Formerly, the company had borrowed from a Ford entity. The debt has been repaid, but I would assume the company could turn to Ford entities one again if it required capital.

Obviously, anyone considering an investment in FACO should dig into the firm’s underwriting and loss reserves, as well as its investment portfolio. Like many other financials, insurance firms are complex beasts, and reported financials include an array of projections and assumptions. This is a not a place to invest naïvely, based on simple valuation ratios without awareness of broader industry trends and conditions.

Alluvial Capital Management, LLC does not hold shares of Leatt Corp., CIB Marine Bancshares, Inc,. or First Acceptance Corp. for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at