In 1965, a small business got going in Birmingham, Alabama. After a few decades of local success, the company went public in the mid-1990s, raising $13 million.
John Holcomb became the public face of this company – the chairman and CEO – in 1996. Since he took control, the market value has grown to $1.6 billion. Specifically, the company has grown its earnings and book value at roughly 25% per year... an extraordinary compound annual rate of growth.
You might think that growing his business at a 25% compound annual growth rate for a decade would take some sort of extraordinary product or some exceptional management wizardry from John Holcolmb. It didn't.
In his latest annual report, John Holcomb outlined his dazzling, highly technical strategy:
"We believe we should be able to lend money, and get paid back all of the principal with interest."
Wait a minute... What's so dazzling and technical about that?
John, as you might have guessed, runs a bank. The name of the bank isn't dazzling either: It's Alabama National. And John's not-so-technical strategy is to lend money and not lose it. Complicated, eh? It obviously works... Alabama National is a moneymaking machine, and it only gives out a tiny number of bad loans each year.
Alabama National earns close to a 4% interest margin. The interest margin is the difference between what it earns on loans and what it pays out on deposits. The 4% "spread" and John's simple strategy have helped the business grow like a weed with remarkable consistency.
You'd think that a company putting up these extraordinary numbers, with this kind of consistency, would be overpriced. Instead, thanks to the credit crunch, shares of Alabama National recently fell to just about their lowest value in history. As recently as two months ago, shares of Alabama National traded at just 1.2 times book value.
Looking back, that was a tremendous bargain. We're talking about a family business really – with the same guys behind it for decades. It makes simple loans. This business was not at risk in the credit crunch.
Two months ago, Alabama National was your typical regional bank. It was trading at 13 times earnings and paying a 3% dividend. That was quite a decent value for a regional bank...
Then, boom! The Royal Bank of Canada jumped in and bought Alabama National. RBC paid 45% more per share than the stock price was the day before RBC bought it. That means that RBC paid about 20 times earnings and about two times book value. Shareholders of Alabama National walked away with a one-day windfall of 45%.
I would love to own a pile of Alabama Nationals... at pre-takeover values, of course. The great thing is, after this summer's credit crunch, plenty of 'em are out there...
So we will start to look for these bargains.