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MARKET BEAT

Finding the Swan in Ugly Duckling S&L Stock Issues

August 31, 1990|TOM PETRUNO

There's not much debate over who has been selling California savings and loan stocks. The fast answer is everybody. A more interesting issue is who has been buying as the stocks have plummeted--and what do the buyers know that Wall Street doesn't?

One interesting buyer is Theodore H. Kruttschnitt, a private investor who runs California Innkeepers, a Burlingame-based operator of hotels and motels throughout the state. Between May 23 and July 20, Kruttschnitt bought 976,400 shares of Los Angeles-based Coast Savings Financial, a 6.4% stake.

He paid between $5.375 and $7.375 each for his shares. Meanwhile, Coast stock has continued to fall as investors have fretted over the company's future. The stock closed Thursday at $4 on the New York Stock Exchange after trading as low as $2.875 early in August.

Kruttschnitt also owns 9.9% of Bay View Capital, a San Mateo-based S&L now trading at $15.125 over the counter. And he is rumored to have smaller positions in other depressed S&Ls.

The 47-year-old Kruttschnitt is no newcomer to the game of playing potentially undervalued stocks. In recent years, he has taken stakes in such companies as Horn & Hardart (direct-mail marketing, plus Arby's and Bojangles restaurants), Cooper Development (personal care products) and Frigitronics (eye-care products).

But he remains an intensely private individual and isn't well known on Wall Street. Whether he's made a lot of money playing the market isn't clear, though Horn & Hardart appears to be a major disappointment. Kruttschnitt paid upwards of $11 a share for much of his 19% stake. The stock now trades at $4.125.

Of his investments, he will say only that "some work out, some don't."

Why does Kruttschnitt have the guts to buy Coast, when other investors are treating the $10.9-billion (assets) S&L like a bankrupt?

He argues that the market's selloff of financial stocks over the past year "has inappropriately brought down some good, clean companies. I consider Coast and Bay View in both of those categories." If Coast can earn $3 a share next year--about what it earned in 1988--Kruttschnitt figures he's got a winner.

Wall Street analysts give Coast high marks for making the right moves to ensure that it's a survivor in the '90s. Like many S&Ls, Coast currently meets the government's standards for capital, or net worth (the financial buffer against insolvency), but not by a lot: Coast's tangible capital at June 30 was 1.62% of assets.

The government's minimum is 1.5%. For a broader measure of "core" capital, the federal minimum is 3%. Coast's core capital ratio is 3.09%.

To bolster its finances, Coast this week put up for sale 27 branches in San Diego and the Central Valley. Those branches have $1.2 billion in deposits. Kruttschnitt says he's had no direct contact with Coast management, but he calls the branch sale plan a good move because it will boost Coast's capital ratio.

If Coast can get a good price for the branches, Bateman Eichler, Hill Richards analyst Michael Abrahams figures that the S&L will net about $30 million. That would raise its tangible capital ratio to a more comfortable 2.1%.

End of story? Not quite. The biggest drag on Coast's stock, as with other S&Ls, is uncertainty over writeoffs for commercial loan losses. Coast has 90% of its assets in safe single-family home loans. But the other 10% has been trouble.

In the second quarter, Coast set aside $48 million for further loan losses and foreclosed real estate, resulting in a quarterly loss of $1.89 a share.

Federal examiners still are going over Coast's books. Whether they'll force the company to write off more loans is anyone's guess. "We think we're well reserved," says Coast CEO Ray Martin. But there's no guarantee the feds will agree with him.

If everything works out, Coast will boost its capital, avoid new loan losses and go about its business of making home loans from its 93 remaining branches statewide. Martin agrees that earnings of $3 a share are conceivable in 1991. Even if Coast earns $1.50, the stock sells for just 2.6 times that figure.

The risk is that the California real estate market may collapse, taking Coast stock to zero.

One way or another, Kruttschnitt--who must know a thing or two about real estate, being in the hotel business--hints that he sees the market making up its mind about Coast's future soon.

Asked how long term a commitment he's made to Coast, he says that "depends upon the price of the stock over the next several months." Does that mean he'd sell if it goes much lower, or if it rebounds sharply? "I'll leave it at that," he says.

COAST'S LONG SLIDE:

How Coast Savings Financial's stock has plunged since last year.

Sept 29, 1989: $18.50 -- Thursday, Aug 30 1990: $4.00

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