We expect some downward pressure on the stock from the FTC inquiry announced in the fiscal 2008 second quarter and the significant dilutive impact over the next several years after acquiring BioArray Solutions.
Future Dims at Luminent Mortgage
The implosion of the secondary mortgage market, margin calls, and now shareholder lawsuits have put the future of Luminent Mortgage Capital, Inc. (LUM) in doubt. As the company no longer has income to shield from taxes, LUM announced that the company is seeking shareholder approval to De-REIT and become a publicly traded partnership.
This will allow the company to pursue other fee based lines of business more freely while the market for buying, selling, and financing mortgages continues to slow. Under the plan, current shareholders will receive 1/3 of a share in the partnership for each share of LUM. Once approved, the company will probably trade on the OTC market.
As of year end 2007, LUM had completed the sale of $2.4 billion of MBS securities to meet margin calls at a net loss of about $181 million. Further, the company has repaid all its warehouse lines of credit used to finance whole-loan purchases.
The company also obtained a new financing agreement in a form of a repurchase agreement from Arco and a line of credit for up to $190 million. The company has stabilized $538.4 million of repo agreements with five lenders and met all required margin calls and it is in the process of resolving a dispute with a lender over $8 million in repo financing.
The company currently pays no dividend and future income estimates are highly unreliable as it is difficult to determine value for the company's remaining assets. Due to many moving parts and continued assets sales and impairments, current estimates are highly unreliable.
Based on our 2008 EPS estimates, the company is currently valued at a premium to much better positioned peers. LUM's business has dried up due to problems in the credit markets and the company will no longer be active in residential mortgages for the time being.
Any investment in LUM at this time is purely speculative and it is almost certain that the company will convert to a non-dividend paying partnership with high debt and deteriorating assets. The company will most likely begin trading over the counter after the conversion takes place. We see no upside in the current share price and are changing our recommendation to Sell with a six-month price target of $0.30.
Stay Educated on ATA Shares
We believe that shares of ATA, Inc. (ATAI) appropriately reflect the opportunities and weaknesses inherent in the company's business at this time. Although we project substantial increases in revenue and earnings next year, we note that the company is still in the early stages of its growth.
Shares of ATAI currently trade at approximately 90.9x and 22.7x our fiscal year 2008 and 2009 earnings per ADS estimates, respectively. We project that diluted earnings per ADS will increase from $0.11 in fiscal 2008 to $0.44 in fiscal 2009. Should the company meet our expectation for fiscal year 2008, it would represent the company's first full year of profitability.
The shares currently trade at a slight premium to a peer group of education services companies. Given the growth opportunities present in the company's market, we believe that such a premium is appropriate. We believe that shares of ATAI appropriately reflect the opportunities and weaknesses inherent in the company's business at this time.
Given the outlook for expanding growth, the company must execute its business plan without significant missteps to justify a premium multiple. Despite these potential concerns, we consider the growth opportunity to be significant. As the company builds a longer track record as a publicly-held corporation, and as the projected begins to take shape, we expect that many of these concerns will diminish in magnitude.
At present, however, we choose to remain cautious in the near-term. Our price target of $10.50 equates to a multiple of approximately 24x our fiscal year 2009 earnings estimate, and represents a premium of approximately 10% over the current peer group average.
