3SOF

June 18th, 2007:

LPHI video update:




I was wrong on my initial analysis for LPHI, but miris gave a nice heads up on the stock. Unfortunately I took too long to see it and LPHI is now roughly 20% above my initial analysis. Still represents good value, according to this update.

I'm not going to buy it because I'm already full invested and I'm not sure about how the business works. I'm also just a bit afraid that the same thing that happened to its largest competitor may also happen to LPHI. Is this possible miris?

Again, thanks for the heads up

LPHI is an interesting company ... I've been studying its website: http://www.lphi.com/

As I read the following ...

«LPHI is the oldest and one of the largest life settlement companies in the United States.»

... I wonder how much space there is to grow in LPHI's niche market. The fact that LPHI announced a dividend also tells me management doesn't see a better use for its cash:

• Life Partners Holdings, Inc. Announces Quarterly and ''Christmas Holiday Bonus'' Dividend
Business Wire (Tue, Nov 13)

I couldn't care less about dividends.

Another issue I want to learn about is LPHI's habits in terms of dilution. Hmm, looks fine, roughly the same number of number of shares outstanding over the years.

How were the latest quarter results and what's the earnings multiple of the company?

• Life Partners Reports Large Earnings Increase for Second Quarter and First Half of Fiscal Year
Business Wire (Wed, Sep 26)

Pretty impressive. If we double the 1st half EPS we get $1.90 for a full year, so I estimate the earnings multiple at 18.4. Yet, 1st half of 2007 net income was 13 fold higher than 1st half 2006

Some comments from the CEO:

"With continuing growth in revenues and earnings from both our retail market and our rapidly rising institutional market, we expect a substantial increase in both revenues and earnings during the second half and for our current fiscal year in general."

"We are proud to bring value to thousands of wealthy seniors by turning their unwanted life insurance into cash they never realized was available. It is Life Partners' expertise and operational efficiency that has made us very attractive for sophisticated investors in this rapidly evolving market."

It's an interesting business. I wonder if the "substantial increase" is relative to the 1st half or the year ago numbers ... because in this latest quarter EPS declined a bit from the previous quarter, so I wonder if growth reached a plateau or just paused.

hehe, the following is also interesting:

• Life Partners Chairman Strongly Advises against Lending Shares
Business Wire (Mon, Sep 17)

LPHI seems like an outstanding long term opportunity, but it is very important to clarify if the strong growth will continue or will it stall. For the next analysis I'll listen to the latest conference call to see if anybody asked the right question.

QuoteIt's an interesting business. I wonder if the "substantial increase" is relative to the 1st half or the year ago numbers ... because in this latest quarter EPS declined a bit from the previous quarter, so I wonder if growth reached a plateau or just paused.

LPHI seems like an outstanding long term opportunity, but it is very important to clarify if the strong growth will continue or will it stall.

Hmm, according to the following guidance, it appears to me that strong growth will continue:

• Life Partners Predicts Record Earnings
Business Wire (Thu, Dec 13)

$0.44 EPS expected for the quarter ended in November 30th versus $0.36 EPS in preceding quarter. If we annualize this $0.44 EPS we get $1.76 EPS for a full year, which translates into an earnings multiple of 16.4. This looks attractive, considering the company's growth rate of more than 500% from the year ago levels.

I enjoy LPHI's business model. Will keep studying it.

1. Introduction

Everybody knows how financial stocks have been battered in 2007, with the $BKX down 26% on the year. I've been studying a company (LPHI), which is also in the financial sector, but has been benefiting from the turmoil in the mortgage related market.

Here's what the company's CEO says about this issue:

Mr. Pardo continued, "Recently, there has been a lot of speculation about the stability of the financial sector, but we believe that more financial institutions will be turning to life settlements in an effort to offset their losses from real estate or other poorly performing investments and that they will look for the level of professional service that Life Partners provides. The advantages of investment diversification and inherent value of life settlements are attractive to both institutional and individual accredited investors and our business model serves both of those investor groups."

2. Business Description

Life Partners Holdings, Inc., (LPHI) through its subsidiary, Life Partners, Inc., operates as a financial services company that provides purchasing services for life settlements in the United States. It facilitates viatical and life settlement transactions by identifying, examining, and purchasing the policies as an agent. Life Partners Holdings' financial transactions involve the purchase of life insurance policies of terminally ill persons or elderly persons at a discount to their face value. The company was founded in 1991 and is based in Waco, Texas.

3. Business Model Analysis

You probably have a life insurance yourself, maybe in the benefit of your children, right? Now imagine (maybe you don't have to) you're about 60 years old and your descendants are now grown up men or women with their careers and everything. They don't need your protection or your life insurance protection anymore. And yet, you've been paying all that money on a monthly basis to the insurance company. Wouldn't it be good to have some of that money back, now that you don't need the life insurance? Yes, and LPHI is the company to give you that money and then collect the insurance company payment when you die.

There are many more examples which explain LPHI's business model, you can check them here.

Then LPHI often sells the insurance policies to hedge funds and other institutional investors, which collect a yield which isn't sensitive to the global equity or debt markets. It is an uncorrelated and almost risk-free investment, so I believe it will be in high demand going forward.

4. Valuation Model

4.1. Dilution Factor

LPHI has had the same number of shares outstanding over the past six years (adjusted for a 5-4 stock split in September 2007). Mr. Pardo's family, with Brian Pardo being LPHI's CEO, own 50.6% of LPHI and the company has an healthy balance sheet. Moreover it is highly profitable.

Given all this I expect little to zero dilution going forward.

4.2. Revenue CAGR

Here's what has been happening with revenues:

«For its third quarter ended November 30, 2007, Life Partners expects to report over $19 million in revenues, a 160% increase over the $7.3 million it reported for the third quarter of last year. It anticipates reporting a 7% increase in quarterly revenues from $17.7 million in the second quarter of this fiscal year to $19 million in the third quarter.»

7% growth on a sequential basis gives me 31% annualized. I'll use 30% as my revenue CAGR estimate.

4.3. Net Profit Margin

Net profit margin was 23.5% in fiscal 2nd quarter and management expects it to be 27.8% in fiscal 3rd quarter. I would say that this may grow just a bit more as revenue grows, to 30%.

4.4. EPS Multiple estimate

I see LPHI's long term growth rate of EPS north of 30% (because I expect revenue to grow 30% a year and net profit margin to expand from current levels), so an appropriate p/e ratio would be about 30, matching the growth rate. But let's be conservative and expect 20 instead.

4.5. Valuation Model Calculation



The valuation model is just another tool that I have to find out if a stock is an attractive long term investment or not, it isn't a definitive conclusion. Moreover, from now on, I'll downplay the importance of the objective results given by the valuation model, because reality can be substantially different from my forecasts.

But this study is enough to say that LPHI looks attractive from a fundamental standpoint.

5. Conclusion

I've been studying LPHI for several months now... I was a bit afraid of this stock because it went straight up from $5 to $40 in the 12 months between August 2006 and August 2007. This rise was fully justified by the fundamental changes, though, since EPS grew about 18 fold from $0.10 in fiscal 2006 to the $1.79 expected for the year ending in February 2008.

Fiscal 2009 estimates are calling for $2.8 EPS, so the company is trading at about 10 times forward earnings.

I was also a bit wary on the growth outlook, since there had already been such a surge in revenues and profits. But the company's guidance for the fiscal 3rd quarter assured me that strong growth is continuing.

Overall, and reading LPHI's costumer testimonials, I believe LPHI's business model is sound and has longevity. It also has a strong growth potential. Valuation, as we've seen, is attractive.

Technically the stock has been consolidating for six months or so and the 200 days SMA just approached the price. I think now is an appropriate time to buy, give or take 10%.

6. Trading Plan

Buy LPHI, 6.66% of capital. The stock is illiquid, take your time ... you don't have to buy right at the open or even today ... obviously this is a long term investment.

fyi from TB:
Key investment considerations:

We are reiterating our Speculative Buy rating for shares of Life Partners Holdings, Inc. (Nasdaq GM: LPHI) and twelve-month price target of $61.00.

On October 15, 2007, Life Partners Holdings announced the reappointment of its operating subsidiary, Life Partners, Inc., as the exclusive investment advisor for a third closed-end life settlements fund. The fund, entitled the "Life Partners Investment Fund Ltd.," anticipates raising up to $100 million USD with provisions for subsequent funds.
On September 4, 2007, Life Partners announced it signed an agreement to originate life settlements for a special purpose entity that has funding committed by WestLB AG, a major international financial institution.
On September 14, 2007, Life Partners revealed in an SEC filing that Brian Pardo, Chairman and CEO of Life Partners, anticipates the special purpose entity that has funding committed by WestLB will spend between $250 million and $500 million in capital for the purchase of life settlements. We believe that if only half of the low end of projections comes to fruition, it could have a significant positive impact on Life Partners financial results.
We are maintaining our fiscal 2008 revenue estimate of $80.2 million and earnings estimate of $21.4 million or $1.79 per diluted share. We are also maintaining our fiscal

19 slides research:
http://www.knobias.com/research.pdf?id=12063

&

LPHI: Short Interest DN 3.6% to 1.6M in Mid Dec 2007
Wednesday, December 26, 2007 16:19ET

According to new short interest data from NASDAQ, short interest for Life Partners Holdings Inc (NasdaqNM: LPHI) DECREASED 3.6% to 1,579,115 shares as reported in mid-December, 2007.

Based on LPHI's 20-day average daily share volume of 55,930, it would require approximately 29 day(s) of buying to cover this short interest.

Applaud David! and la-onda.
I love the short interest. That could add a nice pop.   

David,
Nice find..this is a huge business today. I work for a bank and am quite familiar with "death bonds" & their potential for considerable further growth.
Thanks,
Nick

seeking alpha:

Life Partners: Dying for Dollars
posted on: January 04, 2008 | about stocks: LPHI   


There are certain industries a fund manager would reject if he were to market his fund as socially responsible investing: tobacco, alcohol and firearms are obvious examples. The harm from these products, inflicted though misuse, is straightforward and well documented. A more sanctimonious SRI investment manager might even exclude the industry that serves as the backdrop to this Small Cap Spotlight — life settlements.

Life settlements (formerly viatical settlements) are financial transactions where someone with an unneeded or unwanted life insurance policy sells the policy to a third party for a price that exceeds the cash value offered by the life insurance company. Sounds innocuous enough, but here's the rub: these financial transactions usually involve the policies of the terminally ill or the elderly.

It's all legal and above board, of course, though inquisitive readers might furrow a brow. After all, prohibitions against stranger-initiated life insurance date back to medieval England. But the sale of insurance policies to third parties returned to favor in the 1980s as a way for AIDS patients to receive cash from their life insurance policies before they died. Those transactions were deemed legal because the policies were not bought with the intent of flipping them.

Life settlements is the fastest growing segment of the life insurance industry, with $200 million face value transacted in 2001 having increased to an estimated $12 billion to $15 billion in face value transacted in 2006. Bernstein Research expects the exponential trend to continue into the relevant future, with transactions growing to $160 billion in face value life insurance over the next 10 years.

As the life settlement scale increases, so does the opportunity, at least for the largest, most-established player in the field, Life Partners Holdings, Inc. (Nasdaq: LPHI). Since its incorporation in 1991, Life Partners has completed over 50,000 transactions for its client base of over 15,000 high-net-worth individuals and institutions in connection with 5,700 policies totaling over $850 million.

Life Partners matches life settlers (the sellers) with purchasers. It finds the former through a network of brokers, insurance, financial and estate planning professionals, through personal referrals and through Internet and print media advertising. The brokers are typically compensated based on a percentage of the face value of the policy sold, which is paid upon the closing of a settlement. Life Partners' revenues are derived from fees for facilitating the transaction.

Life Partners has proven that it is a superior matchmaker. The company reported second-quarter (ended Aug. 31) revenue of $17.6 million, a 267% increase over the $6.6 million posted in the same quarter in 2006. Net income rose to $4.3 million, or $0.46 a share, a nearly 20-fold increase compared to net income of $220,000, or $0.02 a share, posted in the year-ago period. Management credited the increased revenues to "the company's steady trend toward closing policies with higher face values and the increase in both demand for and supply of qualified life settlement policies."

Management recently proffered expectations for the third-quarter of 2007 (expected to be reported in mid-January). On that front, Life Partners expects to report third-quarter earnings of approximately $0.44 per share, compared to earnings of $0.07 per share for last year's quarter. Revenue is expected to post at $19 million, a 260% increase over 2006's $7.3 million.

So what does Wall Street think about a company that produces such exponential growth rates? Well, not much; coverage on Life Partners' is sparse. Zacks rates Life Partners as a "moderate buy." Taglich Brothers issued a "speculative buy" rating in October, with a 12-month price target of $61 a share. Estimates are for full fiscal-year 2007 (ending February 2008) for revenue of $80.2 million and EPS of $1.79. For FY2008, estimates are for revenue of $117 million and EPS of $2.80, which leads to a very reasonable forward P/E ratio of 10.7, and an even more reasonable (and enticing) price-to-earnings-growth ratio of 0.19. The stock closed at $27.70 on Monday, with shares ranging between $6.48 and $42.32 over the last 52 weeks.

And did we mention the dividend? It's currently being paid at the annual rate of $0.24 per share to yield 0.80%.

If you are feeling a little socially irresponsible investing in a company that facilitates taking a flyer on someone else's demise, don't. Although life settlements developed a shady reputation in the investing community (unscrupulous salesmen pining for mammoth commission), regulation has purged the industry of its unsavory elements.

Focus instead on economic reality: Life settlements (and therefore Life Partners) satisfy a legitimate, perfectly logical need. Over a trillion dollars worth of life insurance policies either lapse or are surrendered annually. One study produced by the Wharton School, titled "The Benefits of a Secondary Market For Life Insurance," found, among other things, that life settlement providers paid approximately $340 million to consumers for their underperforming life insurance policies, an opportunity that was not available to them just a few years ago.

In other words, Grandpa's not being exploited, he's simply acting in his own best interest. What's so socially irresponsibly about investing in a company that facilitates that act while producing exceptional returns at the same time?

David,
I went through the last qtr report, and have some concerns:

1. daily avg vol is very low..so this wud potenitally cause a lot of volatility in the stock price
2. this is still a pretty small co. revenues < 20m; which makes me question the valuation of 300m plus. I know its all abt growth..but still its bordering on being overvalued
3. the main driver in growth has been due to their competitor having some issues with SEC which made business come their way..is this sustainable?
4. they claim to be in business for years, and yet they only make 5m in profit?
5. for being a co of this (small) size..im a bit peeved that they have a corporate jet?? Bit extravagant no?
6. also, them not being audited is a bit of a concern to me

I'm going to sit out on this one for now..will see how the next couple of quarters look
Good luck though..
Nick

QuoteOn September 14, 2007, Life Partners revealed in an SEC filing that Brian Pardo, Chairman and CEO of Life Partners, anticipates the special purpose entity that has funding committed by WestLB will spend between $250 million and $500 million in capital for the purchase of life settlements. We believe that if only half of the low end of projections comes to fruition, it could have a significant positive impact on Life Partners financial results.

Indeed, $250 M to $500 M is a huge sum, considering LPHI's fiscal 2008 revenues will be about $80 M. 

Thanks for the information la-onda, I was aware of the negotiations with WestLB, but didn't know that the CEO had already disclosed the potential amounts involved.

Quote from: nicknite20 on January 03, 2008, 08:28:51 PM
David,
Nice find..this is a huge business today. I work for a bank and am quite familiar with "death bonds" & their potential for considerable further growth.
Thanks,
Nick

Thanks for the info Nick

QuoteDavid,
I went through the last qtr report, and have some concerns:

1. daily avg vol is very low..so this wud potenitally cause a lot of volatility in the stock price

So? That's not a problem if you're a long term investor. Average daily volume has nothing to do with value.

Quote2. this is still a pretty small co. revenues < 20m; which makes me question the valuation of 300m plus. I know its all abt growth..but still its bordering on being overvalued

You're making one of the mistakes I used to make, which is to give too much relevancy to revenues. It is EPS that matters, not the level of revenues. Anyway, you're talking <20 M in revenues, do you mean quarterly revenues? LPHI now stands at an annual revenue rate of something like $70 M to $80 M. For fiscal 2008 (ending February 2008), estimates call for $80 M in revenue. 

Quote3. the main driver in growth has been due to their competitor having some issues with SEC which made business come their way..is this sustainable?

I believe that has helped LPHI this year, but the future sources of growth won't have much to do with that issue. I think growth will come from institutional investors demand for an uncorrelated and predictable source of yield and the increased consumer awareness of life settlements. Like management says in its latest guidance.

Quote4. they claim to be in business for years, and yet they only make 5m in profit?

$5 M a quarter? You know, sometimes entrepreneurs are way ahead of its time ... Mr. Pardo, owning 50% of LPHI, may have seen the opportunity 10 or 15 years before it finally arrived.

Quote5. for being a co of this (small) size..im a bit peeved that they have a corporate jet?? Bit extravagant no?

Nah, no big deal.

Quote6. also, them not being audited is a bit of a concern to me

Indeed, I see they're not audited, and that's a concern.

Weighing all the pros and cons of owning LPHI, with the information I have at this moment in time, my decision is to keep holding LPHI for the long term. Thanks for your inputs to this thread

beg to differ David..a corporate jet sends a very negative message to me re the managements view on acceptable expenses (extravagances).

but, i sincerely hope you're right, and this is not a big deal.

Quote from: nicknite20 on January 10, 2008, 12:20:02 PM
beg to differ David..a corporate jet sends a very negative message to me re the managements view on acceptable expenses (extravagances).

but, i sincerely hope you're right, and this is not a big deal.

I'm not worried about the jet, but I'm worried about something else, the legal proceedings in pages 22 and 23 of the latest form 10 filed with the SEC:

Form 10QSB - Life Partners Holdings

As we know LPHI's main competitor was severely impaired by a lawsuit. I wonder if LPHI's business model doesn't go against the insurers lobby or the law ... I guess this "legal risk" is what is taking LPHI down even while were getting such wonderful news like the following:

«On September 14, 2007, Life Partners revealed in an SEC filing that Brian Pardo, Chairman and CEO of Life Partners, anticipates the special purpose entity that has funding committed by WestLB will spend between $250 million and $500 million in capital for the purchase of life settlements.»

• Life Partners Predicts Record Earnings
Business Wire (Thu, Dec 13)

My goal with LPHI's pick was to add some stability and predictability to the Main. I didn't want another "all or nothing" play.

Unfortunately the market action in the face of such good news tells me LPHI is more risky than I initially thought, more than I'm willing to tolerate at this particular moment in time.

My trading plan for LPHI is: SELL.

Good call.

David, you stated that with LPHI you wanted  to add some stability and predictability to the Main.  Have you looked at LDF.  Its a latin American fund that has a nice uptrend and pays over $7 annual dividends.

Dividends are great for some people, especially long termers, but doesn't that take away from the stock price when they pay a dividend?

http://biz.yahoo.com/bw/071214/20071214005631.html?.v=1
The Latin American Discovery Fund, Inc.      LDF         $0.4915          $0.5805          $4.043 (Per Share of Long-term Capital Gain (yearly)