On October 30, Fremont General reported third quarter earnings
of $0.40 per share, which is an increase of 99% over the previous
year third quarter earnings of $0.21 per share. Earnings
for the 9 months ended September 30, 2002 were $1.00. The
earnings performance of Fremont General is excellent.
For the fourth quarter we are estimating earnings of $0.38
per share bringing annual earnings up to $1.38 per share.
Our slightly lower fourth quarter estimate is due solely to
the upcoming holiday season. Additionally, the current book
value is $5.88 per share and should end the year at about
$6.26 per share.
In Addition to the very strong earnings performance, the
company reduced its long-term debt due in 2004 by $23 million
to a balance of $73 million (this note was originally $220
million). Fremont General indicated that these notes
would be paid off by June 30, 2003, which is one year ahead
The non-performing loan portfolio declined during the quarter
by about 7% and the company's loan loss provision is currently
at 139% of the non-performing loans. This is an extremely
conservative and positive situation since the reserves against
potential bad loans are 39% greater than the total possible
We are somewhat perplexed and disappointed in the stock price
reaction to this extremely positive earnings performance.
We cannot identify a fundamental reason for this lackluster
stock performance. Our suspicions are that the sizeable short
position may be the culprit.
At the present time, there is a short position of about 8,000,000
shares, which is quite sizeable when compared with the total
outstanding of 75 million shares. There are no publicly traded
options, thus it would appear that there is no option-related
shorting. With respect arbitraging against the outstanding
preferred stock it would appear this is not the case because
of the limited liquidity in the preferred stock. Consequently,
it seems to us that there is a short term "Mexican Standoff"
between the shorts and the longs. Given the strong fundamentals
of Fremont General this cannot last too long. Once
this standoff subsides, we would expect the stock to move
Fremont General is currently trading at $4.95 per share.
We estimate FMT will earn $1.38 for FY 2002. A conservative
P/E of 8 would indicate an $11.04 stock price. That would
represent a potential gain of 123% from current levels. We
continue to recommend Fremont General as an extremely undervalued
situation and thus a strong buy.
Stock Traders Press Management