Thursday, August 20, 1998
TeleBanc Financial Co.
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Phone: 213-623-4200
Website: www.telebankonline.com
Price (8/19/98): $21 3/4
HOW DID IT DOUBLE?
What do a tree stump and TeleBanc have in common? No branches. However, there is one big difference between a tree stump and the country's first branchless bank to surpass the billion-dollar asset mark. TeleBanc is still growing.
And if providing financial services without the traditional staples of cheery tellers and dozing security guards sounds different, check out the company's mainstream debut...
Last month the company had an initial public offering that wasn't really an IPO at all. TeleBanc was already trading as an obscure over-the-counter company. Same name. Same ticker. Only with such a small float that some days the stock didn't even trade at all. The thinly traded entity was practically invisible, but what was technically a secondary offering was destined to have all the fanfare of a hot new issue.
With the recent success of Net.B@nk <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTBK)") else Response.Write("(Nasdaq: NTBK)") end if %>, a smaller direct banker that is completely reliant on its online site to conduct business, the timing was perfect. While TeleBanc's website was not the primary source of business (the Tele, after all, stands for telephone), it was easy to attract the spotlight with the market's voracious appetite for Internet stocks over the past few months. The shares cashed in on some serious capital gains as everybody held up the bank.
BUSINESS DESCRIPTION
TeleBanc is the parent of TeleBank, which provides financial products and services directly to customers -- without branches. TeleBanc Capital is an investment advisor to fund managers and broker-dealers specializing in residential mortgage acquisitions, primarily acquiring high-quality, low-yield home mortgages.
FINANCIAL FACTS
Income Statement
12-month interest income: $67.8 million
12-month net income: $2.8 million
12-month EPS: $0.32
Market Cap: $126.2 million
Balance Sheet
Total Assets: $1209.5 million
Total Liabilities: $1154.5 million
Ratios
Price-to-earnings: 68
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Back in the spring, the company lined up BancAmerica Robertson Stephens to serve as the lead underwriter of what was then going to be a 2.8 million share offering. The reserved excitement drove the shares higher but all along the way it was victimized by low volume.
The stock was rising but apparently few investors were able to cash in on the company pre-IPO. Even with a June 2-for-1 stock split, which may have served as the perfect catalyst to draw attention to the company, Wall Street was not interested.
In reality, what may have scared many investors away was the wide spread. As is the case with many illiquid companies, the bid and the ask price can be many ticks apart. On July 22, the day before the secondary offering was completed, the quote on the company read a bid of $17 and an ask of $18 5/8 a share.
Stockwatchers may have been hesitant to jump in given the 10% handicap. Even more trying was the fact that while demand had raised the offering to 4.1 million shares, the share price ranged from $12 1/2 to $14 1/2. The investor buying at $18 5/8 was paying a 30% premium to what turned out to be the eventual price of $14.50 a share.
However, given the recent Internet IPO success of Broadcast.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BCST)") else Response.Write("(Nasdaq: BCST)") end if %>, which doubled out of the gate, maybe a 30% markup was more than fair for an undiscovered equity with a Net angle. Regardless, the shares had been trading in the pre-teen levels just the month before -- after the offering was first announced.
The optimists may have been handed an early morning shock when, after the offering was priced at $14 1/2 a share, the stock fell from its previous day's $18 5/8 close to open at $15 1/2 after the deal was finalized. That changed in a hurry as speculators and investors alike bid up the shares all day long. The stock closed out the day at $22 3/8, a stunning 44% intraday recovery. The next day the shares closed $2 3/8 higher. An Internet star was born, even if it was a case of mistaken identity.
WHERE TO FROM HERE?
This is not the energized Internet play most expect. Over the first half of the year assets have only grown from $1.1 billion to $1.2 billion. In TeleBanc you have a company whose strengths are outsourcing financial services and investing in residential mortgages. These are respectable strengths, but those segments clearly should be valued at more realistic levels.
As the usual lead underwriter burden goes, Robertson Stephens issued a "buy" rating on the company exactly one week after the offering. Despite being branded "the Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> of banking services," analyst Gary Craft has issued some earning estimates calling for the company to earn $0.48 a share next year and $1.03 in 2000. With the company selling at 20 times earnings two years out, it's natural to be at odds over the valuation. Is it an undervalued Internet company or an overvalued bank?
It's both. According to Craft, half of the 1044 new accounts opened for the month of June were online accounts. The company has bulked up its marketing efforts as expenses have doubled to $1.2 million over the first half of the year. Recipients of that push have been E-Loan and senior citizen hangout ThirdAge.com, now advertising partners to drive new accounts for TeleBanc.
One amusing aspect here is how the analysts are trying to push TeleBanc's alter-ego. The company is named TeleBanc. It is the parent of TeleBank. Yet, Craft refers to the company in his report as TeleB@nc. The company has not officially changed its name, either at its website or in its quarterly earnings press release issued a week after Craft's buy report. The @ in place of the letter "a" seems innocent enough, although not only is it the e-mail address shorthand for "at" -- it also likens the company to the high-flying Internet pure play of Net.B@nk.
Given the many faces of TeleBanc, and accepting the volatility, a conservative Fool's best deposit is probably to watch this one -- @ a distance.
-Rick Aristotle Munarriz
([email protected])