Making Money on Bankruptcies - Long Picks
October 30, 2008
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RELATED TICKERS: EPIQ
, HURN
, FCN
The Lehman bankruptcy continues to hang heavy over much of the financial world. But there's one company that stands to rake it in from the Lehman bankruptcy and from the many unfortunate failures. It's a small legal services company called Epiq Systems, Inc (EPIQ). EPIQ is getting the biggest bump from the increase in bankruptcies, but I think there are a few others that should have at least a small benefit from this turmoil.
EPIQ recently announced a 32% increase in revenue with a 67% increase in earnings just a couple weeks after announcing that they had landed all the Lehman bankrupcy business, most of which is yet to hit their bottom line.
Who is Epiq Systems? Epiq is a small cap (495M) company that has at its highest levels a father and son team. According to Epiq's website, Tom Olofson led a private investor group that acquired Epiq in 1988 and has served as Chairman and CEO since that time. His son, Christopher Olofson, has served as President and COO since 1998.
What did they have to say about the current trends?
During the quarter, we were retained on the largest Chapter 11 bankruptcy in history as well as 15 other Chapter 11 matters – averaging more than one new engagement a week for the quarter. We also signed several major new Chapter 7 trustee client accounts during the quarter. Chapter 7 bankruptcy filings increased 39% in the first half of 2008. Further increases in Chapter 7 market share and bankruptcy filings position Chapter 7 deposit balances for growth throughout the remainder of 2008 and continuing into 2009 and 2010. We believe there is potential for continued increased filing activity across each of the major chapters of bankruptcy we serve (Chapters 7, 11 and 13).
The above quote is from the recent earnings press release. Bolding is mine.
The company has not yet filed their 10-Q with the SEC. The earnings announcement was made Monday, so we should see it soon. I'll update this blog with a reply when they do.
One analyst estimated that the Lehman business with add $1M in revenue for each of the next two quarters, but that's clearly a lowball. Plus we know they've received a lot of other business. For some perspective, EPIQ made $44M in the third quarter of 2007, and is forecast to pass $50M for the same quarter this year. So $1M additional per quarter doesn't seem like very much in context for the largest bankruptcy in history.
For perspective, Lehman had assets of $639B, while Worldcom had assets of about $126B and Enron had assets of $81B. Reference from here.
EPIQ is in much better shape now than when the dot-com bust brought on a lot of business. According to their annual report filed March 21, 2002, for the fiscal year ending 2001, EPIQ had only two revenue streams - financial services, and bankruptcy services. And when one fell the other rose. Now EPIQ has three revenue streams - bankruptcy services, settlement, and e-discovery.
According to that same annual report, business rose the most right after that tech bubble burst:
Operating revenues increased 56.9% or $8,437,000 to $23,257,000 in 2000 compared to $14,820,000 in 1999
continuing to increase the next year, but at a slower rate:
Operating revenues increased 29.5% or $6,855,000 to $30,112,000 in 2001 compared to $23,257,000 in 2000.
According to Wikipedia, Enron filed for bankruptcy in late 2001, and Worldcome filed for bankruptcy in July 2002. So let's look at one more year's comparison, from the annual report filed March 20, 2003:
Operating revenues of $38,276,000 increased 27.1% or $8,164,000 in the year ended December 31, 2002 compared to $30,112,000 from the prior year.
So we can see that based on history, we should continue to see strong growth in EPIQ's earnings for years after all these bankruptcies hit the news. And again, Lehman's bankruptcy is the largest on record, by a significant factor.
Other companies that should do well with all the bankruptcies and restructuring are the consultancies. They're struggling for now, as businesses have cut expenses. But keep an eye on Huron Consulting (HURN) - the old Anderson Consulting, FTI Consulting (FCN), Navigant (NCI), and LECG Corporation (XPRT). As companies struggle, they like to cover themselves with a whole bunch of consultants, and HURN, FCN, NCI and XPRT will all eventually benefit.
I don't have positions in any of these, but I'm watching them closely. I'm reupping my EPIQ pick in CAPS, and will be gradually adding the others as they bottom.
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