Life Partners Holdings, Inc. Company and Stock Analysis

Company Info and Market Share

Life Partners Holdings (LPHI:NASDAQ) is the parent company of Life Partners, Inc. The company is responsible for facilitating viatical and life settlements contracts. LPHI is an agent for institutions and wealthy investors who purchase individual life insurance policies at a discount and become beneficiaries upon maturing of these policies.

According to the company’s Annual Report, the life settlements market is a $7.3 billion market and the company has about 7% market share in it. They have gone up from a 6% market share to 7% market share in just one year.

Also, the company saw an increase of 8% and 8.2% approx. In its Net Income and Earnings per Share respectively.

What is life settlement? Life settlement is sale or transfer of an insurance policy in lieu of cash. The beneficiary then is the life settlement company – the new owner of the policy. The money paid to the original policy holder is usually higher than the surrender value of the insurance policy.

I have performed research on the topic and following are some of the basic points about life settlements that I’d like to share here today:

  1. Proceeds are Taxable – Should always consult a tax advisor prior to selling the policy
  2. Almost any type of life insurance policy is acceptable – Universal, whole, term, Keynes, Survivorship, etc
  3. The process can be anywhere between 2 to 6 weeks long
  4. Eligibility : Anyone 65 or over, a policy with a face amount of $50,000 or more and an assignable policy or a policy outside of the contestable period.

Given the economic times, an increase in Net Income, Earnings per Share and Market Share makes LPHI a very viable investment. I personally believe that LPHI is a good investment because the credit restraints do not affect the life settlements market as much. Investors are looking to diversify their portfolio and are actively seeking alternative investment strategies. I will perform an intrinsic value calculation to see if this assumption holds true.

Calculating Intrinsic Value of Stock To Determine Fair Value

LPHI’s stock price as of March 1, 2010 was $20.95.

I performed my intrinsic value calculation using the following steps:

    • Calculate growth rate (g) in Earnings per Share from 2002 (the company went public in 2000 but EPS were negligible and P/E ratio was negative the first two years, so I am beginning my calculation starting year 2002):  The growth rate came up to be 25.77% but given the recent economic crisis, I will take a conservative approach and use 15% as the growth value for future predictions.
    • Calculate average Price to Earnings: P/E ratio is calculated by dividing the stock price with the EPS for a particular period. After obtaining numbers from the 10K for 2002-2009 and dividing it by 8 to get an average, I got a figure of 27. Over the years the company has experienced declines in its P/E ratio and for that fact I will use a smaller figure of 18 to balance things out.
    • Calculating future share value: Calculating the value of the stock 10 years from now. This is done by:
      EPSx({1+g)^10}xAvg. P/E Ratio=$1.98 (1.15^10)x18= $144.18 approx.
    • Add Projected Dividend Payout to Future Share Value. After Having calculated projected EPS for 10 years ($1.98, EPS from last year,  multiplied by 15% growth rate every year), we multiply the sum by average dividend payout ratio of 15% (Even though the calculation gave me a figure of approx. 27%, I am using 15% as one year in between the dividend payout was close to 90% whereas it was between 11 and 23% at other times. ). Total sum was $39.947 and multiplying that by 15%, we get a figure of $6 approx. Adding that to the future share value we get $150.18.
    • Now we divide the number obtained in the previous step by the expected returns.
      The stock has shown a growth of 16.75% in the stock price over the past 8 years. We will use 11% as a standard expected return for this particular investment to maintain somewhat of a conservative approach..
    • The intrinsic value obtained after the above calculation is: $150.18/(1.11^10)=$52.90 approx. Comparing this figure to the stock price of $20.22 on NASDAQ at close of day on May 28,2010, it can be concluded that LPHI is a viable investment.

(Please Note, these are my personal calculations and conclusions, I do not assume any responsibility for the changes in stock price or any losses incurred upon taking my advice.)

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