Like everyone else on this thread, I was at first focused on ATMs – the industry, the payouts, the costs, the traffic, the locations, whether or not leasebacks are securities as defined by the different regulatory agencies and so on. Trying to sort out the intricacies of the ATM business is challenging. I was scratching my head about this until I watched a particular Bloomberg interview that explored ATMs as an investment. There were two interviewees – one was a man whose company sold ATM franchises and the other was the CEO of an investment firm that specializes in ATM investments of all kinds. You can watch that interview on this page: http://www.tremontcapitalgroup.com/
The investment firm’s CEO is Sam Ditzion and you can find his bio here: http://www.tremontcapitalgroup.com/leadership/
This man is clearly an expert in the ATM industry. In the interview he breaks down the ATM business in broad strokes and shows the primary expense categories. But what leapt out at me was his statement that on average, independent ATM providers earn a 7% return on their investment. Independent, in this case, means private operators rather than banks.
The obvious question is this: How can a company pay 25% for money year after year and invest it in an industry that yields just 7%. In 35 years of analyzing business plans I have never encountered such a proposition. Yes, companies in trouble or who are temporarily cash flow constrained may borrow at a high rate for a short period to cover the expenses of expansion or just a rough patch – but as an ongoing proposition? In my experience, debt financing works the other way. One borrows at a lower rate than he sells. The business must return enough money to pay all expenses plus interest on the debt and return a reasonable profit. Over time, to do otherwise would be a sure road to ruin.
Realizing I had become lost in the details (an occupational hazard) and theorizing that if you cut out all the middlemen and operated the machines yourself, the usual return you could expect was 7%, I had to ask myself the question – What business is this company really in? And, should I be analyzing the company as an ATM business at all? That’s when I realized I’d been looking at the business all wrong.
If we look at the investment in a different way much of the confusion of the program falls away. It answers questions like these:How can the company take different amounts of money for the initial purchase of an ATM machine?
How can we evaluate the risk of such an investment?
How can we be sure that we have true ownership of the machines we have purchased?
How can we compare ATM leasebacks with competitive investment vehicles?
So, let’s do that and take this deal apart so we may analyze it dispassionately.What is the Real Product?
First, let's talk about what NAS is actually selling. I suggest that the ATMs are irrelevant and I’ll show you why I think so. We start, as we always should, by looking at their market. Initially, I looked at NASI’s market as being the users of ATM services and that’s where I started down the same rabbit trails as most on this thread. After all, isn’t this the firms primary business and like virtually all businesses the financing of the enterprise is secondary? Perhaps not.
What if its market is not ATM users at all - but instead the investors themselves? So I forgot about the ATM business for a while and looked at NASI as an investment company.
What interests investors is the offer of a 10 year guaranteed monthly payment of a certain amount, depending on the size of their initial investment, that results in a 20% annual return on that investment.
That is, by definition, an annuity. If you think about it this way, it doesn't matter if an investor puts up $11k, $12k, $19.8k, or $24.5k all of which I have heard from actual investors or on this thread. 20% is 20% regardless of the amount you deposit. Think of the ATM investment as any other interest paying deposit. With some exceptions, it doesn’t matter how much you deposit, your savings return the same percentage amount.
Or think about it as I have where you are just purchasing annuities of differing size. Looking at the business as a seller of annuities gets rid of the entire issue of how much one pays for an ATM machine. In fact, it makes the ATM issues including the differing amounts you pay up front completely irrelevant. Stick with me here and let’s take a look at how we can evaluate this investment in a way that makes sense.Analyzing an annuity – what is the investment worth?
I began this exercise because a client asked me to evaluate his portfolio. This client had 40% of his investable funds with NAS, had been involved for about 17 years and was currently living off the interest income spun off by the investment and was re-investing to accumulate more ATM machines.
(As an aside, a person may certainly have the majority of his capital tied up in a business. And, that assumes the person understands his business. But the investors in this scheme know nothing about the ATM business. For them it is a passive investment. And having such a large percentage of one’s money in a single passive investment is asking to take a large draw down, even an insurmountable loss.)
So, in the case of my client who pays $19,800 per contract, what is that annuity worth?
Let’s calculate the present value of that 10 year stream of payments. First, you have to use a "hurdle rate" as a baseline for comparison. Traditionally, that is the risk free rate of return on government bonds. Treasury reports that the yield on a 10 year note is currently 2.7%. Since that’s the period of the NAS annuity, let’s use that interest rate for comparison.
Given those parameters and using NAS guaranteed payments of $330 per month for 10 years we get a present value of that annuity of $34,619. Yet my client pays only $19,800. Now, that's a bargain. But, that's using the risk free rate for comparison. What about the opportunity cost? That is the amount you would get from a competitive investment which is riskier than a government bond.
Let's say the average return from the stock market is currently 4.5% which is being generous. If we use that interest rate the value of the annuity is $31,766. The stock market is riskier than the government, it is widely believed, so the annuity purchase should cost less - since the risk of not getting any, or all, of your annuity is higher.
The difference is the risk premium. If you divide the target return 20% by the risk free rate of return or the opportunity cost we can estimate the comparative risk of the NAS offering. Simplistic, yes, but useful. By this measure, the 20% annuity is four and a half times more risky than a diversified portfolio of stocks and seven and a half times more risky than the 10 year US Treasury note.
NAS investor's pay about $20k for the same stream of income. Why? Because the risk of getting repaid is way, way higher than the government or an annuity backed by stocks (which no one actually does.)
People generally purchase annuities because they generate periodic income. They are buying a stream of guaranteed income payments. And, the safety of that income stream is paramount. Annuities are an insurance product and the safest ones are backed by some of the largest and most stable companies there are. The insurance industry is heavily regulated and their annuities rated by independent rating agencies.
The annuity we are examining is guaranteed not by a huge, stable, regulated insurance company backed by the profitable business of selling insurance, but by a couple of guys in a small office in Calabasas running an ATM business that according to the ATM Council returns an average of 7%. If it were backed by a Swiss bank, a major insurance company or a large diversified financial firm the price of that annuity would be well north of $30k as we have demonstrated.
That investors pay a third less than that to NAS for the same stream of payments shows what a huge risk premium is attached to the investment offered by NAS. In plain words, NAS is telling investors that an investment in their product carries considerable risk.
I would agree with that assessment. Yet, those who would bring us into the scheme tell us that it is risk free.
And, all we are evaluating is business risk. What is the probability that borrowing at 20% for a business that yields 7% is unlikely and may indicate fraud? If we think it is even money, then we double the risk.
It is puzzling that the firm is willing to extend the period of that annuity without requesting additional investment as I have verified occurs. I don’t believe any legitimate company would do that without requiring additional investment. I can think of no motivation that makes business sense.Summary:
I believe the actual product marketed by NASI is a 10 year (or beyond) monthly annuity whose price is infinitely adjustable and returns a 20% per annum return. We have explained why the price of the ATM machine doesn’t matter.
That annuity is not backed by a large secure institution, but by the small business of placing and servicing ATM machines. But the business could be anything. It could be a dry cleaning chain, a string of restaurants or anything at all. Or, as some on this thread have suggested, nothing at all. That it is an ATM business is irrelevant and serves to misdirect the investor from the true nature of the business.
The business pays a much higher rate of return than virtually all mainstream investments. To put this in perspective, with this rate of return, Warren Buffett should sell his other investments and buy NASI leaseback contracts. He won’t. Neither will I.
Perhaps, those of you who are invested in this scheme might want to consider if you should.
In the next post I’ll address the nature of risk in a portfolio, identify the risks that investors face in this particular investment and summarize my investigation into the issue of whether or not this annuity is a security that should be regulated under the Securities Exchange Act of 1934 including highlights of conversations with regulatory agencies.
I hope that analyzing the NAS offering in this different way has been illuminating. I run the risk of confusing the issue further, I know. But it has clarified the issue for me and focused my attention on the risk of this scheme. My hope is that potential investors may also be made aware of the level of risk implied by the pricing of this offering.
The old saying that "If it sounds too good to be true ... it is too good to be true" is a good thing to keep in mind. All I've tried to do in this post is illustrate through more detailed analysis just how much too good to be true this offer is.