BERAL, INC.
Andrew Racz
Director of Research
300 East 54 Street, Suite 26C
New York, NY 10022
Phone: (212) 319-6949
Fax: (212) 753-1944
E-mail: mlikar@aol.com

Cowen Group, Inc.

(COWN– NASDAQ)

(03/05/2014)

Price

$4.30

52 Week High

$4.52

Low

$2.45

Shares Outstanding

115,930,000

Prior to this, $125 million cash convertible services notes, registered on March 3, 2014

Approximate Market Value

$510 M

   

PETER COHEN

PRESENT AT THE CREATION

The State of Affairs

At the end of February 2014, a relatively obscure, medium sized brokerage company – Cowen and Company - has reported striking figures of the year 2013.

 

 

Twelve Months Ended December 31, 2012 Adjustments

 

 

GAAP

Other
Adjustments

Funds
Consolidation

Economic
Income

REVENUES

 

 

 

 

 

Investment Banking

$

71,762

-

-

$ 71,762

Brokerage

 

91,167

2,736

-

93,903

Management fees

 

38,116

16,701

1,474

56,381

Incentive Income

 

5,411

9,794

-

15,205

Investment Income

 

-

50,116

-

50,116

Interest and dividends

 

24,606

(24,606)

-

-

Reimbursement from affiliates

 

5,239

(5,527)

288

-

Other revenue

 

3,668

(2,420)

-

1,248

Consolidated funds

 

509

-

(509)

-

 

 

 

 

 

 

 Total Revenues

$

240,480

45,882

1,253

288,615

 

 

 

 

 

 

Net income of $6.5 million in 2013 vs a loss of $17.5 million for the year 2012 is an impressive figure and indicates something which is in a way not reflected in the figures.

The revenues in 2013 of $326 million compared to $270 million a year before are even more impressive and indicate growth which is the result of long term preparation for this year, 2014. The current picture indicates a historical transformation. A small cash position of $10 Million with a book value of $425 Million enabled management to launch a $125 Million Convertible Debenture expanding the capital base substantially. In fact with the large liquid base Cowen Group can engage in large transactions and would enable Cowen to reach a large investment bank status. The market has not yet digested the significance of the current bond offering. With the successful and eventual completion of the Bond Offering which with the overallotment tops $150 Million would enable Cowen Group to become a large player.

In fact, Cowen and Company was headed by Peter Cowen during 3 difficult years. As the company said, they have come a long way. In 3 years, revenues climbed from f $150 million in 2010 to $326 million in 2013 which was a 120% growth. Behind these numbers Cowen and Company is a brokerage company which was built on investment banking and underwriting and which has performed remarkably. The company had 27 publishing analysts covering 400 companies in 2010. In 2013 there were 42 publishing analysts covering 700 companies. The underwriting business has grown even more rapidly. In 2013 underwriting and investment banking revenues were $105 million vs $39 million in 2010. In March 2013, the company acquired Dahlman Rose, a well-known international Canadian research and underwriting firm with great growth potential.

In 2013 Cowen and Company completed 29 equity transactions and closed 102 transactions compared to 72 transactions in 2012. The company managed 9 out of a total 23 IPOs of which 3 were in 2012 and which were substantially less in 2010.

In fact, Cowen & Company is participating in a new era. Between 1982 and 2008 the junk bond market dominated the investment banking scene. Drexel brought in the junk bond market. It created all the cable companies, Colombia Pictures and Metromedia . They financed not only companies , but individuals. Saul Steinberg and Nelson Peltz were born in this period. That deal business ended in 2008.

Basically speaking Cowen became an investment banking firm of growing importance in New York City and positioned itself for further growth.

The capital structure of the company is enabling Cowen to be a much bigger company. It has a book value of $4.20 and has 110 million shares and has allocated $10 million to repurchase 11.4 million shares.

BALANCE SHEET

 

  Total Cash

1,328

  Total Cash Per Share

11.33

  Total Debt

904.77M

  Total Debt/Equity

150.42

  Current Ratio

1:17

  Book Value Per Share

4.37

CASH FLOW STATEMENT

 

  Operating Cash Flow

121.55M

 

 

The above corporate structure needed liquidity. The above mentioned $125 Million Convertible Bond seems to be the beginning. 

The corporate profile is important to analyze. The company basically is growing in the investment banking and management fee business, combined revenue of $160 million which is about half of the total corporate profile.

Furthermore, the Ramius division which has $10 billion under management is growing at the rate of 15% with surplus cash it could be ascertained that in 2014/15 the money management business could grow to $15 billion and the corresponding income is a great strength for corporate income. Ramius had a very productive 2013. At the start of the year, the company established 4 objectives that will be critical to moving their business forward. First, increasing AUM in revenues within their existing investment capabilities; second, realigning their expense base; third, reorganizing their sales and distribution efforts, and fourth, creating bolt-on products for existing capabilities and recruiting to their platform. They have achieved each of these objectives.

Ramius is a very important part of the corporate future. Almost every day a new hedge fund , a new ETF is born. Furthermore, these investment vehicles multiply in hundred countries. Powerful investment holding companies can acquire a series of investment vehicles and the $10 Billion Ramius will not only grow internally, but through acquisitions. There is a theoretical possibility that Ramius in the current decade will have AUM of $100 Billion and in fact approach $100 Billion.

We can also postulate that the underwriting investment banking business both in quantity and in size would have a growth of 20/30% which has very high margins and changes the medium sized Cowen into a more important factor in the national picture. In a sense Cowen can be breaking up is a medium sized research underwriting firm which was born after the crash or after September 11th. 

   

12 Months Ended December 31, 2013

REVENUES

 

GAAP

 

Economic Income

         

Investment Banking

$

105,333

$

105,333

Brokerage

 

114,593

 

121,085

Management fees

 

37,303

 

56,984

Incentive Income

 

12,585

 

21,933

Investment Income

 

-

 

36,660

Interest and dividends

 

39,494

 

-

Reimbursement from affiliates

 

9,161

 

-

Other revenue

 

5,418

 

2,534

Consolidated funds

 

3,398

   
         

Total Revenues

$

327,246

$

344,509

This is the base of a potential , highly successful operation.

The companies that have been created in the last 10 to 15 years are like Evercore and Stifel Nicholas a level below, the major companies like Morgan Stanley and they have managed to create a niche for themselves in terms of net income and importance which resulted in their growth.

It should be noted that in the whole domestic field there is a place for Cowen and Company because of the niche in investment banking and related activities. Cowen could become a billion dollar company in 3 or 4 years’ time without any substantial dilution in the number of shares it could raise meaningful amount of cash in an undiluted basis and become a factor in the field of choosing.

If you go back to the past, the American scene has large companies such as Leucadia National which owns Jeffreys and Company, Morgan Stanley which owns several companies, and on a smaller scale but profitable scale, Piper Jaffrey which is an active investment banking firm. The interesting issue is that in the last 25 years the individuals as players and companies as players, haven’t changed too much and the few companies we mentioned have broken out and play an important part in our national scene.

We list a whole number of companies where we believe that revenue and earnings growth will correspond to the performance and leadership of the companies. The leadership in these companies quite often has new faces. The actual performance is not tied to the experience of past leaders.

  1. Stifel Nicolaus leadership by founding member , Mr.Walker, a cousin of former President Bush, now has a new face. 
  2. Legg Mason, which has been reorganized by Nelson Peltz who replaced management ,is now working itself up from $30 per share stock price back to $130 per share price which it enjoyed 30 years ago.
  3. Piper Jaffrey had moderate changes in management and is now enjoying a profitable prospect of having a very small number of shares outstanding.
  4. Leucadia National is an old timer with very big record which acquired Jeffreys and is now heading towards becoming the second largest brokerage firm in New York City.
  5. Cowen and Company is a classical complex story. Peter Cowen merged his company into Cowen at the price of $2 ½ or $70 million market cap and then created a $500 million market cap.

Peter Cohen had a very turbulent and almost totally unique past. He was originally second in command to the legendary Sandy Weil of Shearson then assistant to the world’s perhaps most famous banker, Edmond Safra of the Republic National Bank.

Subsequently Peter Cohen became Chairman of the Board of Shearson when it owned Lehman Brothers which ran into big trouble at the time of the Crash.

Actually, the Shearson situation when he replaced Sandy Weil under the American Express ownership was a failure. Peter Cohen disappeared from the scene until 5 years ago when he reestablished himself in the combination of Rambius Mutual and a small brokerage company.

In 3 years he revealed Cowen Group into a viable entity.

The question is now whether at the age of 67 with his experience which is unique to this size of a brokerage company, he can duplicate the success of Sandy Weil who built Shearson into Citicorp. People who do not disappear; people who take up the challenges not only have that experience but they also have contacts and vision which is perhaps the best part of human nature.

I often quote President Nixon’s remark that “You are not defeated when you are beaten. You are defeated when you give in.” It seems that Peter Cohen hasn’t given in. He has a company of $500 million in size; net income of let’s say $10 million – 110 million shares – a money management business which is a respectable $10 billion and he is already one of the leaders in the medium sized underwriting business which is likely to be the big investment banking business in the United States of America.

History has a number of eminent people with a story of comebacks. In politics it was President Nixon. In England – Winston Churchill. The world of finance has less notable people with comeback stories.

Where is Cowen and Company heading? This is a company which is expected to grow from a revenue base of $350 million in 2013 to perhaps $500 million in 2 years. Net income could grow to $30 million which is equivalent to 30 cents per share. The growing liquidity and contacts will probably enable Cowen and Company to double its size in three years.

In the world of finance in the last 15 years there has been very impressive growth of companies like Evercore, Lazar, and Stifel Nicolaus.

If Mr. Cohen will lead his company among these growing new faces, we may witness the emergence of a company over $1 billion – a leading position among these medium sized underwriting, moderately cash rich firms. Cowen and Company may attract the right people.

PRESENT AT THE CREATION

Disclaimer

Information contained herein is based on data obtained from recognized statistical services, issuers reports or communications or other sources believed to be reliable. However, such information has not been verified by us and we do not make any representation to its accuracy or completeness. Any statement non-factual in nature constitutes only current opinions which are subject to change. BERAL INC. or their officers, directors, analysts or employees may have positions in the securities or commodities referred to herein, and may as principal or agent buy and sell such securities or commodities. An employee, analyst, officer or a director of BERAL INC. may serve as a director for companies mentioned in this report. Neither the information nor any comment expressed shall constitute an offer to sell or a solicitation of an offer to buy any securities or commodities mentioned herein. There may be instances when fundamental, technical and competitive opinions may not be in concert. This firm may from time to time perform investment banking or other services for or which investment banking or other businesses from any company mentioned in this report.

 

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Andrew Racz. 300 East 54 Street, Suite 26C, New York, NY 10022
Phone: (212) 319-6949 Fax: (212) 753-1944. E-mail: mlikar@aol.com

Copyright © 2011 Andrew Racz. All Rights Reserved.

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