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BPOP - Popular, Inc. and the other Puerto Rico Stocks


bbarberayr
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Been dipping my toes into a couple of the Puerto Rico stocks the last couple weeks, specifically BPOP and EVTC, but there are 4 direct Puerto Rico stocks: 

 

BPOP, the largest bank on the island

OFG - a smaller bank

GTS - healthcare insurer

EVTC - credit card payments and IT consulting

 

There are other stocks which have been hit pretty hard for the exposure to the island like the state/municipal bond insurers AGO and MBIA.

 

My positions are fairly small and it is hard to know where the bottom is, but my rational is simply that:

 

1. They are cheap (BPOP is 68% of book value and sub-10 p/e)

2. They are beaten down - BPOP generally trades with the KRE, but is down 20% YTD compared to a flat KRE

3. The island is recovering and will get rebuild over time and money will flow in and the businesses will recover

 

Seems a lot of the shorter term and nervous money has been selling, plus probable tax loss selling, but for a patient investor, seems like a pretty good bet will turn out to be a good investment.

 

Thoughts?

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Thanks for pointing these out. I hadn't looked into Puerto Rico, but you're right that it seems interesting. I'll spend some time looking at these tomorrow. Evertec looks pretty interesting at first glance... on a $1B market cap they've done roughly $150M of OCF the last few years. There's some debt but doesn't seem unmanageable.

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I'm not sure about I would be so excite about these.

 

Regarding the banks. You're talking about banks in a jurisdiction that is bankrupt and was bankrupt before disaster struck. It's also safe to assume that a lot of the collateral was destroyed. Moreover they operate in a jurisdiction that was facing a lot of emigration which is likely to increase. This is a horrible environment for a bank. Haven't checked lately but a year or so ago Korean banks were trading at those valuations without the gory details.

 

As for the tech outsourcing shop. It's hard to do a lot of tech stuff without electricity. I don't know the outfit but my guess is it doesn't have a lot of power over it's customers and its main thing was cheap labour on the island. Probably the labour that is or will be emigrating so not very promising growth prospects. Their clients are probably not thrilled about the power outages either.

 

It's really sad, but honestly Puerto Rico is probably way more screwed than Greece.

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EVTC used to be a division of BPOP, but was spun out a few years ago with a lot of goodwill and debt.  Because of this, GAAP earnings are understated as they write down these expenses.  So, while I'm not generally a fan of adjusted earnings, in this case I think it makes sense.

 

They are still forecasting a GAAP profit in Q$ of $0.03 - $0.13 and adjusted earnings of $01.8 - $0.28 for Q4, so profitable still.  Last year, adjusted EPS was $1.67, so even if they get back to 80% of that, stock is at less than a 10 p/e.

 

In their OCt 22 conference call presentation (https://seekingalpha.com/article/4121932-evertec-2017-q3-results-earnings-call-slides), they say they have restored 60% of ATM's and 80% of bank branches for BPOP - I'm sure this is higher now, so business is returning.  Plus, all the federal contractors and trades are all spending money in PR, likely using credit cards and generating fees for EVTC.

 

Unless you think Puerto Rico doesn't come back like bci23 writes, almost certainly the stock will be higher in 2 or 3 years.

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Agree that EVTC is the best of the lot. Pre-Maria, I think most people who looked at it would have said it's a pretty incredible business. Their core business is very sticky, they have secular tailwinds of people using credit cards more often, and cash uses seem pretty shareholder friendly (mix of acquisitions, share repurchases and dividends). The secular headwind they had was a shrinking population of Puerto Rico, is their largest market (they operate throughout the Caribbean and South America).

 

On the last call they said transactions are currently at 70% of prior volumes (half the people there still don't have electricity at home... hard to imagine). They say they don't expect debt/covenant issues, but that could be a risk depending on how long it takes for the country to get back to normal. They operated at ~4x debt/EBITDA pre-hurricane, which given the nature of their revenue was pretty manageable. The other risk there is the longer the utilities are dysfunctional, the more people move away. On the call they said estimates are as high as 500k people will move (~15% of the population). That adds to the headwind of an already shrinking population (https://www.google.com/publicdata/explore?ds=kf7tgg1uo9ude_&met_y=population&idim=state:43000&hl=en&dl=en).

 

Last call: https://seekingalpha.com/article/4122015-evertecs-evtc-ceo-morgan-schuessler-q3-2017-results-earnings-call-transcript?part=single

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Agree that EVTC is the best of the lot. Pre-Maria, I think most people who looked at it would have said it's a pretty incredible business. Their core business is very sticky, they have secular tailwinds of people using credit cards more often, and cash uses seem pretty shareholder friendly (mix of acquisitions, share repurchases and dividends). The secular headwind they had was a shrinking population of Puerto Rico, is their largest market (they operate throughout the Caribbean and South America).

 

On the last call they said transactions are currently at 70% of prior volumes (half the people there still don't have electricity at home... hard to imagine). They say they don't expect debt/covenant issues, but that could be a risk depending on how long it takes for the country to get back to normal. They operated at ~4x debt/EBITDA pre-hurricane, which given the nature of their revenue was pretty manageable. The other risk there is the longer the utilities are dysfunctional, the more people move away. On the call they said estimates are as high as 500k people will move (~15% of the population). That adds to the headwind of an already shrinking population (https://www.google.com/publicdata/explore?ds=kf7tgg1uo9ude_&met_y=population&idim=state:43000&hl=en&dl=en).

 

Last call: https://seekingalpha.com/article/4122015-evertecs-evtc-ceo-morgan-schuessler-q3-2017-results-earnings-call-transcript?part=single

 

Another vote for EVTC being the best pick of the bunch. Payment processing is a great business.

 

That said, since ~80% of EVTC's business is in PR, I think an opinion about the future demographic and/or macro situation is needed to play here. The anticipated massive exodus of (in particular) working age people from PR makes me very cautious. Puerto Ricans are US citizens, so it's relatively easy for them to relocate to one of the 50 states.

 

Ditto for what (if any) future action congress will take on. If I thought the PR aid bill Bernie Sanders just introduced had strong probability of passing I would buy EVTC tomorrow.

 

 

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Guest cherzeca

i think PR has zero visibility, and hence i wouldnt invest in PR names. my view is that if you want cheap based upon country risk, russia and greece are better.  at least you know EU will bail out greece (as long as there is an EU), and russia is not an investment problem as long as the name is putin-friendly.  i dont see PR getting a lot of love from trump administration, or its creditors (which recently filed action to declare the oversight board unconstitutionally structured...which it is).

 

someday deep-value will work again and an entry makes sense, but not today and looks like not for rest of year at least. imo

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