Heartland's stock fell precipitously when the breach was announced from around $17/share to under $5. But anyone who bought the stock then has done quite well. A little more than three years on, the shares closed today at $28.43 good for a 568% improvement (who cares about Facebook IPO? Too bad you didn't buy Heartland the day of the breach!).
Of course, its easy to find winners after the fact - just like I can give you a great weather report for yesterday - and as evidenced by HPY's price lots of people did not have confidence they would make it. What is quite interesting about Heartland through the breach is that their shares are not just surviving, they are thriving compared the S&P 500 index. The chart below shows Heartland outperforming the index by almost 20%.
Stock price is one thing - business metrics are another. In January 2011, I asked - has the bleeding stopped at Heartland? And using a very conservative set of value metrics on the data available through that time it appeared they had. Now that we have full 2011 data, that thesis has been confirmed. Let's dig into the numbers
This is the fifth in a series of posts looking at Heartland's stock and business performance. As Ben Graham said in the short run the market is a voting machine (what people intuit will happen), but in the long run its a weighing machine (the returns).
Just to review our valuation metrics, we are going to take Heartland to the value investor's Mayo Clinic and examine the following data:
- Operating & Net Profit Margins, Free Cash Fow: how much the company earned after taxes
- Balance Sheet: Current Ratio & Long term debt/equity
- Return on Equity: as a proxy for how well the company is run - are they good stewards of capital?
Before we dive into that though, let's take a look at top line Revenue (figures in millions).
| 2011 | 2010 | 2009 | 2008 | 2007 | |
| Revenue | $1,997 | 1,864 | 1,652 | 1,545 | 1,314 |
So in terms of weighting top line Revenue returns, we can see from 2008-2011 a 29% increase in Revenue. There are many, many businesses that would be happy with that performance over the financial crisis time period.
Of course, businesses need profit, top line Revenue is of little importance if the profits don't flow. So let's look at this area and Net Profit Margins.
| 2011 | 2010 | 2009 | 2008 | 2007 | |
| Net profit | 2.2% | 1.9 | -3.1 | 2.7 | 2.7 |
Net profit margins haven't completely recovered from the breach, but they are still steadily improving. 2009 margins showed the negative effect (and why the market "votes" were short term correct), but 2010 showed a return most of the way back to pre-breach profit margins that improved in 2011.
If you were running a candy store Free Cash Flow is the metric you would use to show much money came into your cash register and how much was left.
| 2011 | 2010 | 2009 | 2008 | |
| Free Cash Flow | $71M | -46 | 20 | 52 |
And here we see in Free Cash Flow the distinguising characteristic of a business returning to health and probably the main reason why the stock price has moved up sharply. As I wrote last year of the negative $46M FCF - "This is one area where see the breach effect lingering into 2010, likely the result of paying the fines out of cash flow, and its one to watch to see if the recovery is complete." The 2011 FCF shows the effects in the rear view mirror.
The Current Ratio shows the liquidity in total current assets divided by the total current liabilities. The higher the number the better because this calculation divides Total Current Assets by Total Current Liabilities. As such its an important defensive calculation to check if the business is playing Balance Sheet games to achieve revenues, margins and so on. 2011 shows a slightly smaller but still healthy ratio.
| 2011 | 2010 | 2009 | 2008 | |
| Current Ratio | 1.12 | 1.19 | 0.80 | 0.94 |
Long term Debt to equity ratio looks at the company's solvency, here is another area where we see an effect. The Long term debt jumped from $8M in 2009 to $85M in 2010. The effect is moderating in 2011, where Heartland paid down $15M debt to $70M
| 2011 | 2010 | 2009 | 2008 | |
| Long term debt/equity | 32% | 48 | 6.5 | 9.5 |
Many investors consider Return on equity as the leading indicator of a well run business, it shows how well the company does at deploying capital.
| 2011 | 2010 | 2009 | 2008 | |
| Return on Equity | 22% | 22 | -33 | 24 |
This metric shows a return to pre Breach levels of ROE. Note that 22% Return on Equity places Heartland in the company of elite companies like Coca Cola which had a 27% ROE in 2011. Companies that deliver ROE around 20% generally do quite well over the long haul.
In sum, we can see with three full years of data since the breach was reported, there is a hole in the balance sheet courtesy of fines, but those are in the rear view mirror. The overall stock and business metrics show a thriving business.
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