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October 22, 2010
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Novastar Financial NOVS (today trades below 1/share) which had the vision years ago to invest in streetlinks.com (SL) and www.ADVENTafs.com (afs founded by Mark Ernst the previous CEO of HR Block and now # 2 at IRS and Deputy Commissioner - owns 13% of AFS in blind family trust). Today NOVS has a $677M Deferred Tax Asset** or taxable income shield completely written off under FAS 109. I feel they will restructure their balance sheet by 12.31.10. These two markets represent billions.
AFS has proprietary technology and a solution that will be a big beneficiary of the 70 M Americans with no banking relationship, (per NTSP Netspend recent IPO underwritten by Goldman Sachs) as States regulate PAYDAY loan companies (22,000 location in USA more than McDonalds and Burger King combined) out of business and banks like JP Morgan abandon the RAL market because of IRS regs. Independent Tax Professionals ITP conduct 63% of all tax returns (300M Americans 150M work so that is about 150 x 63% or 95M Americans doing taxes with ITP). GDOT Greendot is one of the most recent success stories in this space, (went public a month ago and now carry a 60 P/E ratio and multibillion dollar market cap). GDOT http://finance.yahoo.com/q?s=GDOT has 3.2M cards issued and carries a 2 Billion market cap. NTSP just went public 2 days ago10-20-10 by Goldman Sachs and has a http://finance.yahoo.com/q?s=NTSP. Numbers breakdown as follows. NOVS targeted EPS YE 1.77 see bottom x 58 PE see GDOT = 100 pps (today less than 1) TI shielded from Taxation (investor advantage over GDOT)
NOVS will shield taxable income with a $677M Deferred Tax Asset** as defined by Deloitte & Touche non-qualified or clean opinion last 10K. 9,377,000 common shares outstanding*
SL per Q2 did $28M for six months end June 30th 2010, YOY growth 225% Now SL is at inflection point and ready to grow with their pipe fully layed. Project annual revenue $56m x 25% growth target 70M with a margin target of 30% = 21M 12month forecast say another 25% (very conservative growth 88M with 30% margin = 27M in profit contribution.
NOVS has not provided enough direction on AFS, but if GDOT can have a 58 PE with a plain vanilla prepaid debit card versus AFS fully integrated financial solution for the NON BANKED MARKET and a 677M DTA (100% written off under GAAP FAS 109). GDOT has 3.2M cards outstanding. Look at afs partners to gain a sense. AFS distribution target is via the independent tax preparers (ITP one data point is Drake Software used by some 30,000 ITP. Say each have 1,000 clients that is 30M targets. 1000 can be compared to HR Block store which average 3400 clients. If AFS absorbs 10% of this market it has as many cards issued as GDOT with a $2B market cap today.
SL solution www.streetlinks.com targets the $5B residential appraisal market and one of the few fragmented billion dollar markets ready for a roll up and mandated by 90% of the mortgage market (HVCC stds are a must have per GSE like FHA, FNM and FRE). Streetlinks has layed the pipe to be #1 in this market and offers a national solution few if any can match. They have finally hit the inflection point, (read NOVS CEO proxy letter and 10Q for this message. They employee about 400).
NOVS legacy business model (PM) generated $2.5M for Q3 (annualized 10M) and represented their ability to hedge via deep principal mortgage insurance the multi billion portfolio against credit risk. I suspect NOVS once Mr. Market allows them to price credit risk again will restart this model that generated 400M revenue and paid out in Dividends as MREIT 100% of their 200M taxable income for years. The stock I believe was massively shorted via REG SHO and millions of FTD or counterfeit shares sit in broker ex clearing accounts. Recap Sl 21m+afs WAG 10M + PM 10M = 41M less SGA holding co 11 = 30M.
Another EXTREMELY positive report about the potential of www.ADVENTafs.com and NOVS
http://articles.moneycentral.msn.com/Investing/CompanyFocus/the-next-visa-and-mastercard.aspx
"We think the market opportunity in the U.S. and globally is tremendous," agrees Stewart Stockdale, who leads the prepaid card division at Western Union (WU, news, msgs). "It is still in the early stages."
So who uses them? "Most of our customers make $30,000 to $50,000 a year," says Green Dot CEO and founder Steven Streit. "They are folks who are living paycheck to paycheck. They are very cash-flow sensitive and fee sensitive."
Another factor boosting demand for prepaid cards is the increasing use of direct deposit to pay workers. Jackson has her paycheck deposited directly onto her NetSpend card; she estimates that half the employees on her floor at the hospital where she works have their pay deposited to a prepaid card.
The potential customer base is big. According to government studies, more than 70 million people in the U.S. are unbanked or under-banked, which means they have accounts but pay bills in other ways, such as with money orders or cash. "A large number of consumers today are living outside the financial mainstream," says Hyung Choi, head of U.S. prepaid products at Visa. Less than 20% of this group has ever used a prepaid card, says Choi. "So clearly it is early days."
** From Page 58 of last 10K annual report: A reconciliation of the expected federal income tax expense (benefit) using the federal statutory tax rate of 35% to the Company’s actual income tax expense (benefit)
and resulting effective tax rate from continuing operations for the years ended December 31, 2009 and 2008 were as follows (dollars in thousands):
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2009 and 2008 were as follows (dollars in thousands):
58
For the Year Ended
December 31,
2009 2008
Current:
Federal $ 1,192 $ (2,804 )
State and local (84 ) (985 )
Total current 1,108 (3,789 )
Deferred:
Federal - (12,293 )
State and local - (1,512 )
Total deferred - (13,805 )
Total income tax benefit $ 1,108 $ (17,594 )
For the Year Ended
December 31,
2009 2008
Income tax at statutory rate $ (62,998 ) $ (245,317 )
State income taxes, net of federal tax benefit (3,201 ) (12,028 )
Valuation allowance 72,119 250,161
Interest and penalties (218 ) 1,581
Change in state tax rate (7,768 ) -
Adjustment to net operating loss 2,079 -
Tax benefit of gain recorded in discontinued operations - (13,804 )
Other 1,095 1,813
Total income tax benefit $ 1,108 $ (17,594 )
December 31, December 31,
2009 2008
Deferred tax assets:
Basis difference – investments $ 389,027 $ 377,129
Federal net operating loss carryforwards 163,280 93,783
Allowance for loan losses 93,715 106,073
State net operating loss carryforwards 18,719 13,922
Excess inclusion income 2,291 3,918
Other 9,801 10,091
Gross deferred tax asset 676,833 604,916
Valuation allowance (674,823 ) (601,110 )
Deferred tax asset 2,010 3,806
Deferred tax liabilities:
Other 2,010 3,806
Deferred tax liability 2,010 3,806
Net deferred tax asset $ -