Chuck Royce's New Buys (Part II)

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In a previous article I talked about two new buys (Alere and Saga Communications) of famous small-cap investment guru Chuck Royce. In this article, I will cover two more stocks that he just bought in the fourth quarter. One is BankUnited (NYSE: BKU), a bank holding company based in Florida. The other is Geospace Technologies (NASDAQ: GEOS), the manufacturer of instruments and equipment in seismic data processing.

A Conservative Bank With High Interest Margin

BankUnited is a bank holding company with two wholly owned subsidiaries: BankUnited and BankUnited Investment Services. The company has 96 branches in 15 Florida counties.  The majority of BankUnited’s loan was 1-4 single family residential, which accounted for 44.4% of the total loan portfolio. Commercial loans and leases was the second largest loan, accounting for 26.8% of the total loan portfolio as of September 2012. The high level of residential loan could be beneficial to BankUnited with the improvement in the residential housing market. BankUnited's operation seems efficient, as it generated a higher net interest margin while lending quite conservatively. In 2011, the net interest margin was 6.14% and the loan to deposit ratio was only 56.17%.

Chuck Royce bought more than 243,000 shares of BankUnited for around $24 per share, with a total transaction value of more than $5.8 million. I personally think BankUnited is Chuck Royce’s bet on residential housing improvements. At the current price of $27 per share, the total market capitalization is $2.56 billion. The market is valuing BankUnited at 13.4x P/E and 1.5x P/B. The bank is currently paying a 2.7% dividend yield.

High Margin Business but Expensively Valued

Geospace Technologies, incorporated in 1994, is the manufacturer of instruments and equipment used in the processing of seismic data in the oil and gas industry. In 2012, the majority of its revenue, $82.65 million, or 43.1% of the total revenue, was generated from wireless seismic exploration products. The second biggest revenue contributor was traditional seismic exploration products, with $66.85 million in revenue. In 2012, two customers accounted for 16.9% and 11% of its total revenues, respectively. Since 2010, Geospace has experienced good growth in both the top line and the bottom line. Revenue increased from $129 million in 2010 to $192 million in 2012, while EPS rose from $1.14 to $1.37 in the same period. For the last 3 years the return on invested capital has been good, in the range of 10.22% - 17.85%.  Interestingly, although Geospace consistently generated double-digit returns, it did not employ any debt in its operation. As of December 2012, it had nearly $240 million in total stockholders’ equity, $65 million in cash and short-term investments, and no debt.

Chuck Royce purchased more than 68,800 shares for around $72 per share, with the total transaction value of around $5 million. At the current share price of $109.50 per share, the total market cap is $1.41 billion. Geospace is valued quite expensively on the market, with as much as 17.6x EV/EBITDA. One of the company’s peers, ION Geophysical Corporation (NYSE: IO), has a much cheaper valuation. ION is trading at $7.36 per share, with a total market cap of $1.15 billion. The market is valuing ION at only 6.35x EV/EBITDA. In terms of profitability, the operating margin of Geospace was 31%, much higher than ION’s operating margin of 17%. As mentioned above, Geospace generated high returns on a debt-free operation, while ION had a reasonable amount of debt. As of September 2012, it had $470 million in equity, $47 million in cash, and $101 million in long-term debt.

Foolish Take

BankUnited and Geospace seem to be decent businesses. However, those two stocks are not definitely cheap at the moment. Geospace is quite expensive with high EV multiples. I would rather wait for future price corrections before initiating long positions into those stocks.



hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Geospace Technologies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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