CapitalSource, Inc. (CSE)

SpecialSituation (36.13) Submitted: 4/23/08 7:44 PM : Start Price: $11.59 CSE Score: 6.25

For a good analysis of the underlying financial dynamics at work, take a look at earningspower's post...I think it outlines many of the unique characteristics that make CSE at today's prices a compelling bargain for patient investors looking out 2-3yrs.

Amongst the current, and in some respects unprecedented turmoil, management has once again shown themselves to be amongst the savviest allocators of capital in the industry today. Its recent, and opportunistic purchase of Fremont General's deposit base (at rock bottom prices) is just the latest example of this mgmt. teams long history of operational excellence.

At it's core, my thesis here is relatively simple. If CSE's current dividend yield is delivered, which with the recent Fremont purchase is looking considerably more likely, this stock should trade at a price comparable to its commercial lending peer's yield's of roughly 8-10%. Ultimately, the success of this investment boils down to two questions:

1 - Can CSE achieve the levels of dividends mgmt has projected for the next few years, as well as convince investors that earnings and dividends will continue to grow from its current level?

2 - Will the stock trade, assuming the dividends come through...at prices more in line with its commercial lending peers?

I believe the answer to these questions are yes, yes, and yes. The bottom line is that going forward, for a variety of quantitative and qualitative reasons, I believe the odds favor CSE trading at levels significantly above today's depressed price.

My guess is that opportunistic and patient investors will generate returns north of 100% over the next few years, as the market begins to appreciate this young and misunderstood company...and therefore price it at a much more appropriate level reflective of the quality and stability of its dividend, and future cash generating capabilities.

Report this Post Replies: 1 | Reply