Presumptuous Investors Missed Broad Inc.’s Rise
Eli Broad runs a Los Angeles-based insurance company, which means he’s had plenty of trouble making friends on Wall Street over the past year--let alone trying to influence people.
But suddenly, the Broad Inc. financial group, which includes SunAmerica and Anchor National Life, has become an overnight sensation with investors. The stock gained $1.125 to a 52-week high of $15.875 on Tuesday. Since the end of August, the shares have jumped 21%.
Even more remarkable is that the common stock is rising as Broad Inc. prepares to sell 6 million shares of a new class of stock. With that supply coming, the price of the common ought to be dropping , or barely staying level .
The sudden hunger for Broad stock is a vindication of sorts for its namesake 58-year-old chairman. A year ago, many investors figured Eli Broad’s empire would go the way of other fallen L.A.-based insurance companies, such as First Executive Corp. and First Capital Holdings.
Eli Broad argued that his company was being unfairly tainted just for being headquartered in the same city as the sickly firms. Broad Inc.’s insurance niche--selling conservative, tax-deferred annuities to working people eager to start saving for retirement--was and is a growth business, the chairman has argued.
What’s more, while other insurance companies were sinking under the weight of bad assets (mostly junk bonds in default), Eli Broad insisted that his firm’s balance sheet was strong. A year ago, nearly 90% of Broad Inc.’s assets were in U.S. government securities and high-quality corporate bond and mortgage investments. Eli Broad figured that provided a high safety margin.
Wall Street, however, chose to focus on the other 10% of the portfolio, which included more than $600 million in junk bonds. By last November, investors’ worries had pushed Broad Inc. stock to an embarrassing low of $3.25 a share.
That turned out to be a gross miscalculation on the bears’ part, just as Eli Broad had predicted: In the fiscal year that will end Sept. 30, Broad Inc. is on track to earn $1.30 a share (the firm earned 96 cents in the nine months through June 30). In 1992, analysts expect Broad to earn $1.75 a share.
While earnings are going up, Broad’s junk bond portfolio is shrinking, from $603 million on March 31 to $378 million on June 30, or 3.4% of the firm’s approximately $11 billion in assets owned.
And though some analysts have worried that other Broad assets could go bad--mortgages on commercial real estate, for example--the value of defaulted securities in the firm’s portfolio totaled just 2.4% of assets at June 30, after subtracting reserves already set aside for losses.
Of course, Broad still could suffer higher investment losses. But that risk may increasingly be offset by what the firm is gaining at the expense of competitors: As weaker insurance companies are forced to sell choice assets to raise cash, Broad has become a “cherry picker,” collecting top-quality mortgages, bonds and other investments at good prices for its own portfolio, says analyst David Jackson of the Western Group in Beverly Hills.
That, say analysts, is why Broad’s common stock is rising in the face of the planned 6-million-share offering. Investors must figure that Eli Broad will do some fine cherry picking with the $90 million or so expected to be raised in the stock offering. So Wall Street is looking beyond any potential dilution the stock offering may cause to the 32 million Broad shares already outstanding.
“The market is going to define (insurance company) winners and losers, and it thinks it’s found a winner here,” says Ronald McIntosh, analyst at Fox-Pitt Kelton in New York, an insurance-stock specialist.
The new stock may also be a winner. The shares, to be sold by Merrill Lynch & Co., will be a special series of preferred stock expected to pay a dividend yield of 8% to 8.5%. The stock will have a maximum life of three years, because the company must convert the shares to common stock by Oct. 1, 1994. And depending on what happens to the price of the common in the interim, Broad could convert the special stock to common at any time before then. The company alone controls the conversion decision--not the investors.
The stock’s allure for investors is a hefty dividend and the chance of a capital gain when the stock is converted to common. The catch: The number of shares you’d get upon conversion is controlled by Broad. Basically, if the common stock’s price soars, you’d get only part of that gain as an owner of the special stock--ultimately allowing Broad to issue far fewer than 6 million new common shares upon conversion.
Broad Inc.’s Hot Stock L.A. based financial services firm Broad Inc. has seen its stock soar in recent weeks, despitenews of a planned-6-million share offering. Wall Street views the expected capital boost as a major positive for the firm. Broad Inc.’s NYSE weekly close (except latest) Tuesday close: $15/88
