GIII Apparel: Trading below Net Current Asset Value
We've been off on a real estate tangent, but some of you have been asking for more research on the 5 NCAV companies we wrote about on December 10th. Here is the first of those reports.
GIII Apparel
Ticker: GIII
Current Price: $7.82
Market Cap: $56.47 million
Net Current Asset Value: $61.9
2004 sales: $224 million
2004 net income: $8.4 million
P/E: 78
Book value per share: $9.59
The Company
G-III Apparel Group Ltd, is a small, New York based manufacturer, importer and marketer of outerwear and sportswear. The company has licenses to produce products under several well-known fashion labels, including Kenneth Cole New York, Jones New York, Timberland, and Blass to name a few. The company also has a license with the National Football League. There are two business segments, licensed apparel, and non-licensed apparel. In 2004, licensed products represented 78 percent of revenue.
The Industry
The apparel business is highly competitive, and is affected by fashion trends, style, price and quality. The company itself is subject to the expiration of licensing agreements. This company is a small fish in a big sea.
Recent Financial Results
The company earned $8.38 million in fiscal year 2004 (ended in Jan, 2004), or $1.14 per share, on sales of $224 million, for a net profit margin of 3.7 percent. Third quarter 2005 sales, (ended 10/04) were down 9.2 percent to $114.9 million, from $125.5 million from the same period last year. Sales of licensed apparel fell $25 million to $71.4 million, while sales of non-licensed apparel increased $14.3 million to $43.5 million. Net income fell 15 percent to $9.9 million or $1.33 per share, from $11.38 million, and $1.50.
The stock currently trades at 78 times trailing 12 month earnings. The company has been lowering earnings guidance, expecting anywhere from $.18-$.23 for the year ended January, 2005. At the low end of guidance, this implies a P/E of 43, or 34 at the high end. There is no analyst coverage for this company, but some institutional ownership.
What is interesting about this company is that it currently trades below its net current asset value. Finding a profitable company these days that does is a rarity.
The NCAV story (mkt cap as of tk, all other data as of latest reported quarter)
Market Cap
Current Assets: 130.2
Current liab: 67.9
Long term liab: .4
NCAV: 61.9
Market Cap 56.5
Mkt Cap/NCAV: .91
Quality of Assets
The company has $3 million in cash, but the bulk of current assets is comprised of accounts receivable ($81.7) and inventories ($37.1). The quality of current assets is not great, however, given the companies business, that’s to be expected. When we speak of quality in the context of NCAV companies, we are not judging the actual assets themselves, but rather the composition of current assets. For NCAV companies, cash and marketable securities are preferable to inventories and receivables. The former has a fixed value, the latter accounts don’t. Inventories may be worth cents on the dollar, and are expensive to store, while receivables need to be collected in order to be converted into cash, and there are no guarantees that can be done.
Liabilities
The company has no long-term debt, but $36.2 million in short term debt (in the form of a working capital line of credit), which is how the company funds operations. There are no other material long term liabilities.
Insiders
As of 9/30/04, insiders controlled 3.805 million, or 52.7 percent of shares. Co-Chairman/CEO Morris Goldfarb owned nearly 38 percent of shares, while Co-Chairman Aron Goldfarb owned about 13 percent. The most recently reported insider transactions were acquisitions, the result of option exercises.
Conclusion
While the company has been lowering guidance, and operates in a tremendously competitive marketplace where the majority of sales(and profit)is booked in one quarter, the fact remains that shares are cheap. The company is trading well below its NCAV, and trades at less than 5 times cashflow. On an earnings basis, the story is much less compelling. This company would make an interesting acquisition candidate, and perhaps that is how shareholder value will eventually be unlocked. Of course, given their relative stakes in the company, that decision is up to the Goldfarb’s.
*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Wednesday, January 12, 2005
Saturday, January 08, 2005
Real Estate part 2
The Pink Sheets:
Searching For Value In No-Man’s Land
JG Boswell Company (Ticker:BWEL)
Ever considered buying real estate exposure on the pink sheets? Me either. I never really considered buying anything on the pink sheets. That’s as “over the counter” as over the counter gets. A virtual dumping ground for has-been companies, right? Not necessarily. My second investment in the wonderful world of publicly traded real estate was in a tiny pink sheet company that I’d never heard of (this will be a recurring theme as we explore my real estate adventures), JG Boswell Co (Ticker: BWEL). Boswell, headquartered in Pasadena, CA, is primarily a cotton grower, with other agricultural operations, but we’ll get into that later.
I found out about this company at the New Orleans Investment Conference , in November, 2002. I was attending the conference as a presenter, representing the personal finance magazine I wrote and edited for at the time. (I f you have never attended this annual conference, I highly recommend it.) I attended several of the breakout sessions at the conference, and one of the best was given by Rick Rule, of Global Resource Investments.
Rule’s presentation highlighted several, unheard of, pink sheet companies, sitting on undervalued assets. These companies had few shareholders, traded very infrequently, and all traded at high ($300 and above) stock prices. One of Rule’s points was that you can find tremendous value in essentially semi-private pink sheet companies. You just have to do a lot of digging, because most are not required file financial statements with the SEC (having so few shareholders), so information is hard to find. Furthermore, trading is extremely infrequent.
Among the companies Rule discussed: Crowley Maritime (CWLM, last traded at $1160), a marine transportation company (they do file with the SEC), Laaco Ltd, (LAACZ, $534.25) owner of the Los Angeles Athletic Club, California Yacht club, self storage facilities and other real estate, Farmer’s Merchant Bank of Long Beach CA (FMBL, $5600) a commercial bank, and, of course Boswell (BWEL, $600).
I was intrigued most by the JG Boswell story. Here was a semi-private company, sitting on thousands of acres of California land, some of which had water sitting under it. Ah, land and water. It does not get any better than that.
JG Boswell was interesting, but I started my research efforts with one hand tied behind my back. There simply was little information available. What little I could find was numerous mentions in newspapers. Then I stumbled upon Standard Investment Chartered Inc., a small investment house that specializes in these situations: semi-private, but asset rich pink sheet companies. There were several research reports on the site; the one for Boswell was a few years old, but with that, and a more recent update, I had at least something to add to Rick Rule’s analysis.
What I found was a profitable, albeit mysterious little company. The company founder JG Boswell, being somewhat of a legend. (In fact, there is now a biography available about him: The King of California: J. G. Boswell and the Making of a Secret American Empire by Mark Arax, Rick Wartzman, you can find it on Amazon.) In any event, based on the mosaic of information I was able to generate, I purchased a handful of shares in early 2003. The stock was trading at $300 per share at the time, and based on the extremely low trading volume (71 shares per day in 2004, for example), I was lucky to get my hands on any.
A few months later, I tried to buy more, placing a limit order, but there were no sellers. In a situation like this you never want to place a market order because you are liable to get hammered on price. The stock traded sideways for many months, and I collected the nice 3 plus percent dividend.
The stock started to move in February 2004, when the company initiated a tender offer to purchase up to 150,000 shares at $325 per share. I was initially tempted by the offer, afterall, I had held the shares a year, and the price had barely moved. I was getting impatient, as a beginner in the world of thinly traded pink sheet companies.
The tender offer documentation and financial statements I received in the mail changed my mind. This was my first look at somewhat recent financial statements, and the numbers I saw were impressive.
For instance, in 2003, the company had net revenue of $395 million, and net income of $35 million, or $36.11 per diluted share. Based on the tender offer price, that was a P/E of just 9, and a very healthy net profit margin of 8.9 percent. Book Value per share was $343.83 based on stockholders equity of $321 million, and 933,855 shares outstanding. That translated to a price to book ratio of .94. I know, book values can be misleading, based on the quality (or lack thereof) of the underlying assets. But that’s where it got better.
Total land holdings for the company were approximately 172,000 acres, 142,000 in California, and 30,000 in Australia. Current use of the land along with acreage figures, was as follows:
California:
Use Acres
Pima Cotton 79856
Tomatoes 17938
Alfalfa 20109
Wheat 12101
Garbanzo Beans 3397
Other Crops 3703
Fallow 5000
Eastlake real estate ?
development
Australia:
Cotton 30000
Colorado:
Office park 52
(As for water, company documents mentioned a supply of groundwater under owned land, used to water the crops. But there were no specifics about the supply.)
As I mentioned in my last piece, one metric I like to calculate for companies with land holdings is Enterprise Value Per Acre. In Boswell’s case, Enterprise value at the time was calculated as follows: (in millions)
Market Cap $303.5
Total Debt $170.8
Min Int. .6
Cash(subtract)2.6
EV: $472.3 million
Acres: 172 thousand
EV/Acre: $2745.9
The above figures were as of the tender offer. It is difficult to calculate the current EV per acre, because much of the data is not available. However, based on the doubling of share price, a perceived reduction in shares because of the tender offer and assuming levels of debt and cash are similar:
Current EV/Acre: Estimate: $4000-5000
Boswell is a nice story. Good, profitable operating business perhaps undervalued land, and a growing dividend ($3.25 per share quarterly, up from $3 last year and $2.75 the year before). The stock most recently traded at $600 per share. The downside to a story like this is the lack of information. The company is not required to file with the SEC, so even for shareholders, financial statements are scarce. The only ones I’ve seen since becoming a shareholder were those pertaining to the tender offer. Still, I’ve doubled my money, and will continue to hang on to these shares. It’s all about the land for me….
The Pink Sheets:
Searching For Value In No-Man’s Land
JG Boswell Company (Ticker:BWEL)
Ever considered buying real estate exposure on the pink sheets? Me either. I never really considered buying anything on the pink sheets. That’s as “over the counter” as over the counter gets. A virtual dumping ground for has-been companies, right? Not necessarily. My second investment in the wonderful world of publicly traded real estate was in a tiny pink sheet company that I’d never heard of (this will be a recurring theme as we explore my real estate adventures), JG Boswell Co (Ticker: BWEL). Boswell, headquartered in Pasadena, CA, is primarily a cotton grower, with other agricultural operations, but we’ll get into that later.
I found out about this company at the New Orleans Investment Conference , in November, 2002. I was attending the conference as a presenter, representing the personal finance magazine I wrote and edited for at the time. (I f you have never attended this annual conference, I highly recommend it.) I attended several of the breakout sessions at the conference, and one of the best was given by Rick Rule, of Global Resource Investments.
Rule’s presentation highlighted several, unheard of, pink sheet companies, sitting on undervalued assets. These companies had few shareholders, traded very infrequently, and all traded at high ($300 and above) stock prices. One of Rule’s points was that you can find tremendous value in essentially semi-private pink sheet companies. You just have to do a lot of digging, because most are not required file financial statements with the SEC (having so few shareholders), so information is hard to find. Furthermore, trading is extremely infrequent.
Among the companies Rule discussed: Crowley Maritime (CWLM, last traded at $1160), a marine transportation company (they do file with the SEC), Laaco Ltd, (LAACZ, $534.25) owner of the Los Angeles Athletic Club, California Yacht club, self storage facilities and other real estate, Farmer’s Merchant Bank of Long Beach CA (FMBL, $5600) a commercial bank, and, of course Boswell (BWEL, $600).
I was intrigued most by the JG Boswell story. Here was a semi-private company, sitting on thousands of acres of California land, some of which had water sitting under it. Ah, land and water. It does not get any better than that.
JG Boswell was interesting, but I started my research efforts with one hand tied behind my back. There simply was little information available. What little I could find was numerous mentions in newspapers. Then I stumbled upon Standard Investment Chartered Inc., a small investment house that specializes in these situations: semi-private, but asset rich pink sheet companies. There were several research reports on the site; the one for Boswell was a few years old, but with that, and a more recent update, I had at least something to add to Rick Rule’s analysis.
What I found was a profitable, albeit mysterious little company. The company founder JG Boswell, being somewhat of a legend. (In fact, there is now a biography available about him: The King of California: J. G. Boswell and the Making of a Secret American Empire by Mark Arax, Rick Wartzman, you can find it on Amazon.) In any event, based on the mosaic of information I was able to generate, I purchased a handful of shares in early 2003. The stock was trading at $300 per share at the time, and based on the extremely low trading volume (71 shares per day in 2004, for example), I was lucky to get my hands on any.
A few months later, I tried to buy more, placing a limit order, but there were no sellers. In a situation like this you never want to place a market order because you are liable to get hammered on price. The stock traded sideways for many months, and I collected the nice 3 plus percent dividend.
The stock started to move in February 2004, when the company initiated a tender offer to purchase up to 150,000 shares at $325 per share. I was initially tempted by the offer, afterall, I had held the shares a year, and the price had barely moved. I was getting impatient, as a beginner in the world of thinly traded pink sheet companies.
The tender offer documentation and financial statements I received in the mail changed my mind. This was my first look at somewhat recent financial statements, and the numbers I saw were impressive.
For instance, in 2003, the company had net revenue of $395 million, and net income of $35 million, or $36.11 per diluted share. Based on the tender offer price, that was a P/E of just 9, and a very healthy net profit margin of 8.9 percent. Book Value per share was $343.83 based on stockholders equity of $321 million, and 933,855 shares outstanding. That translated to a price to book ratio of .94. I know, book values can be misleading, based on the quality (or lack thereof) of the underlying assets. But that’s where it got better.
Total land holdings for the company were approximately 172,000 acres, 142,000 in California, and 30,000 in Australia. Current use of the land along with acreage figures, was as follows:
California:
Use Acres
Pima Cotton 79856
Tomatoes 17938
Alfalfa 20109
Wheat 12101
Garbanzo Beans 3397
Other Crops 3703
Fallow 5000
Eastlake real estate ?
development
Australia:
Cotton 30000
Colorado:
Office park 52
(As for water, company documents mentioned a supply of groundwater under owned land, used to water the crops. But there were no specifics about the supply.)
As I mentioned in my last piece, one metric I like to calculate for companies with land holdings is Enterprise Value Per Acre. In Boswell’s case, Enterprise value at the time was calculated as follows: (in millions)
Market Cap $303.5
Total Debt $170.8
Min Int. .6
Cash(subtract)2.6
EV: $472.3 million
Acres: 172 thousand
EV/Acre: $2745.9
The above figures were as of the tender offer. It is difficult to calculate the current EV per acre, because much of the data is not available. However, based on the doubling of share price, a perceived reduction in shares because of the tender offer and assuming levels of debt and cash are similar:
Current EV/Acre: Estimate: $4000-5000
Boswell is a nice story. Good, profitable operating business perhaps undervalued land, and a growing dividend ($3.25 per share quarterly, up from $3 last year and $2.75 the year before). The stock most recently traded at $600 per share. The downside to a story like this is the lack of information. The company is not required to file with the SEC, so even for shareholders, financial statements are scarce. The only ones I’ve seen since becoming a shareholder were those pertaining to the tender offer. Still, I’ve doubled my money, and will continue to hang on to these shares. It’s all about the land for me….
Wednesday, December 29, 2004
Real Estate Value Strategy:
Looking For Acreage
My current portfolio and many of the recent additions to it bear witness to the fact that I am enamored with real estate. Now, I am not talking about REIT’s, although I believe they can play an important role in a portfolio, but just plain old fashioned land. There are a lot of publicly traded companies out there, some real estate operating companies, many others not, that have vast land holdings, carried on their balance sheets at cost. Much of this land was acquired many years ago, and is now worth significantly more than its carrying value. I like nothing more than to discover these companies, how much land they hold, and where the tracts are located.
It’s no secret that in the past few years, land values have skyrocketed. I don’t need to look any further than the small patch of Long Beach Island (New Jersey) my wife and I purchased in 1998. It’s actually a standard (47 X 100) lot, with a small, original cape cod, built in 1949. A small, cozy cottage, equidistant (250 steps, yes, I actually counted) to the bay and beach, on a beautiful, fairly quiet island.
It was a scary purchase at the time. One Hundred Sixty Thousand dollars, another mortgage, these were heady times. But when the little old lady who owned it approached us, we couldn’t say no. One sixty for our own piece of paradise seemed a no-brainer. And so far, aside from some frozen pipes, it’s been the best purchase we ever made. That little slice of heaven that is part of our family, a refuge, a place where memories have been built, is now worth more than three times what we paid for it less than seven years ago.
That’s just ridiculous. True, we bought it under market value, and demand for second homes is rising, but to me, this still smacks of the 1999 era tech bubble. It really hit home the day I was standing on my property line; a line which had been wrongly surveyed as we were buying it. The surveyors incorrectly placed the stakes five feet closer to our house than they should have. It looked natural at the time. But the seller of the house was nice enough to tell us that the surveyors got it wrong. When they re-surveyed, it showed that our actual property line was less than two feet from the neighbor’s house. I guess the zoning laws were different in the late 1940’s. Since then, it’s always bothered me how close our line is to their house. Just does not give them much room. So I decided to calculate how much that little strip of land would be worth, just in case they wanted to buy it. The answer shocked me. Based on a $475,000 value on the property (excluding the house), that little 5 x 100 strip of sand and gravel is worth: $50,531.91! That, my friends, is $10,106.38 for a 1 X 100 foot strip. Or, if you like, $842.29 for a 1 inch by 100 foot sliver. Per acre you ask? $4 million. That’s insane.
If you think I’m jumping for joy over this, I’m not. Our little cottage, on a quiet street, with the worlds greatest neighbors, people we love, is filled with the laughter of 3 children, memories of sun-soaked summer days, and the hope that, God willing, there will be many more to come. It may look nice on a balance sheet, but it’s not for sale.
What is for sale though, on a daily basis, are the dozens of publicly traded companies sitting on acres and acres of land. Most you have probably never heard of. Some are not even in the real estate business.
My first venture into publicly traded real estate was about 3 years ago, when I bought shares in The St. Joe Company (NYSE, ticker: JOE, $63.85). At the time, shares traded in the $25 range, and I remember being blown away by a presentation given by the company at the Third Avenue Funds conference in New York, back in October, 2001. (Rule # 1 is never be blown away by a companies own presentation, they are always positive, but in this case, my optimism was warranted, after all, if Marty Whitman of Third Avenue is bullish……)
The company, whose main revenue source is from community development, owns approximately 850,000 acres, mostly in Northwest Florida. A substantial portion of this land is gulf, lake, or riverfront. One fact that impressed me at the time was that they have timber operations, a good business in itself, that clears the land until it is designated for development. Still, in the scheme of things, timber is a small part ($36.6 million in 2003, or about 5 percent of revenue).
More impressive to a real estate junkie, such as myself, is the shear size and location of their land holdings. The following is from the company’s 2003 10K:
To put the 850,000 acres into perspective, 640 acres is a full section, or 1 square mile. JOE’s holdings are 1328 square miles, or an area of roughly 36 by 36 miles! And nearly half within ten miles of the coast!
Valuation wise, St. Joe’s looks expensive, based on its price earnings ratio, which is currently 55. But, P/E’s are not the be all and end all for a company sitting on a huge and valuable portfolio of land.
One way I value companies with land holdings is to calculate their enterprise value per acre. Enterprise value is simply a company’s equity market cap plus their total debt, preferred stock and minority interests if applicable, minus cash. It’s simply a more accurate way to view a company’s perceived value in the marketplace, then just considering equity. In St. Joe’s case, using a recent enterprise value of $5.089 billion, we get an EV/acre of $5,608. In theory, purchasing St. Joes at the current price is like buying Florida real estate for about $5,600 an acre. Compare that to $4 million for an acre on Long Beach Island. (This is not a recommendation to buy or sell the stock, merely an illustration.)
Now, the stock has been on quite a run recently, up nearly 70 percent in 2004. Whenever I start thinking about taking profits, I look at the EV/acre calculation, and the Long Beach Island calculation. I am still holding the stock. But, again, I am a real estate junkie. I am addicted to acreage. I can’t help myself. Stay tuned for more…
Looking For Acreage
My current portfolio and many of the recent additions to it bear witness to the fact that I am enamored with real estate. Now, I am not talking about REIT’s, although I believe they can play an important role in a portfolio, but just plain old fashioned land. There are a lot of publicly traded companies out there, some real estate operating companies, many others not, that have vast land holdings, carried on their balance sheets at cost. Much of this land was acquired many years ago, and is now worth significantly more than its carrying value. I like nothing more than to discover these companies, how much land they hold, and where the tracts are located.
It’s no secret that in the past few years, land values have skyrocketed. I don’t need to look any further than the small patch of Long Beach Island (New Jersey) my wife and I purchased in 1998. It’s actually a standard (47 X 100) lot, with a small, original cape cod, built in 1949. A small, cozy cottage, equidistant (250 steps, yes, I actually counted) to the bay and beach, on a beautiful, fairly quiet island.
It was a scary purchase at the time. One Hundred Sixty Thousand dollars, another mortgage, these were heady times. But when the little old lady who owned it approached us, we couldn’t say no. One sixty for our own piece of paradise seemed a no-brainer. And so far, aside from some frozen pipes, it’s been the best purchase we ever made. That little slice of heaven that is part of our family, a refuge, a place where memories have been built, is now worth more than three times what we paid for it less than seven years ago.
That’s just ridiculous. True, we bought it under market value, and demand for second homes is rising, but to me, this still smacks of the 1999 era tech bubble. It really hit home the day I was standing on my property line; a line which had been wrongly surveyed as we were buying it. The surveyors incorrectly placed the stakes five feet closer to our house than they should have. It looked natural at the time. But the seller of the house was nice enough to tell us that the surveyors got it wrong. When they re-surveyed, it showed that our actual property line was less than two feet from the neighbor’s house. I guess the zoning laws were different in the late 1940’s. Since then, it’s always bothered me how close our line is to their house. Just does not give them much room. So I decided to calculate how much that little strip of land would be worth, just in case they wanted to buy it. The answer shocked me. Based on a $475,000 value on the property (excluding the house), that little 5 x 100 strip of sand and gravel is worth: $50,531.91! That, my friends, is $10,106.38 for a 1 X 100 foot strip. Or, if you like, $842.29 for a 1 inch by 100 foot sliver. Per acre you ask? $4 million. That’s insane.
If you think I’m jumping for joy over this, I’m not. Our little cottage, on a quiet street, with the worlds greatest neighbors, people we love, is filled with the laughter of 3 children, memories of sun-soaked summer days, and the hope that, God willing, there will be many more to come. It may look nice on a balance sheet, but it’s not for sale.
What is for sale though, on a daily basis, are the dozens of publicly traded companies sitting on acres and acres of land. Most you have probably never heard of. Some are not even in the real estate business.
My first venture into publicly traded real estate was about 3 years ago, when I bought shares in The St. Joe Company (NYSE, ticker: JOE, $63.85). At the time, shares traded in the $25 range, and I remember being blown away by a presentation given by the company at the Third Avenue Funds conference in New York, back in October, 2001. (Rule # 1 is never be blown away by a companies own presentation, they are always positive, but in this case, my optimism was warranted, after all, if Marty Whitman of Third Avenue is bullish……)
The company, whose main revenue source is from community development, owns approximately 850,000 acres, mostly in Northwest Florida. A substantial portion of this land is gulf, lake, or riverfront. One fact that impressed me at the time was that they have timber operations, a good business in itself, that clears the land until it is designated for development. Still, in the scheme of things, timber is a small part ($36.6 million in 2003, or about 5 percent of revenue).
More impressive to a real estate junkie, such as myself, is the shear size and location of their land holdings. The following is from the company’s 2003 10K:
JOE is one of Florida’s largest real estate operating companies and the largest private landowner in the State of Florida. The majority of our land is located in Northwest Florida. We own approximately 850,000 acres, which is approximately 2.4% of the land area of the State of Florida. Our acreage includes hundreds of miles of frontage on the Gulf of Mexico, bays, rivers and waterways, with nearly 40 miles of Gulf of Mexico coastline, including 5 miles of beachfront. Approximately 387,000 acres of our land are within ten miles of the coast.
To put the 850,000 acres into perspective, 640 acres is a full section, or 1 square mile. JOE’s holdings are 1328 square miles, or an area of roughly 36 by 36 miles! And nearly half within ten miles of the coast!
Valuation wise, St. Joe’s looks expensive, based on its price earnings ratio, which is currently 55. But, P/E’s are not the be all and end all for a company sitting on a huge and valuable portfolio of land.
One way I value companies with land holdings is to calculate their enterprise value per acre. Enterprise value is simply a company’s equity market cap plus their total debt, preferred stock and minority interests if applicable, minus cash. It’s simply a more accurate way to view a company’s perceived value in the marketplace, then just considering equity. In St. Joe’s case, using a recent enterprise value of $5.089 billion, we get an EV/acre of $5,608. In theory, purchasing St. Joes at the current price is like buying Florida real estate for about $5,600 an acre. Compare that to $4 million for an acre on Long Beach Island. (This is not a recommendation to buy or sell the stock, merely an illustration.)
Now, the stock has been on quite a run recently, up nearly 70 percent in 2004. Whenever I start thinking about taking profits, I look at the EV/acre calculation, and the Long Beach Island calculation. I am still holding the stock. But, again, I am a real estate junkie. I am addicted to acreage. I can’t help myself. Stay tuned for more…
Wednesday, December 22, 2004
12/22/04
As this newest research report indicates, we are expanding our scope here at Cheap Stocks. We'll continue publishing our research on companies trading below their NCAV's, but we'll also report on other value investing techniques, and topics.
feeback to:cheapstocks@earthlink.net
Off The Beaten Path
Micro-Cap Value Strategy
Going Private: Getting Around Filing with the SEC and Avoiding Sarbanes-Oxley in the Process
There is an interesting phenomenon happening in the markets these days in the micro-cap arena. Many of these tiny companies, which tend to have a small number of shareholders, are recognizing the growing costs of being publicly traded. It is relatively expensive for smaller companies to follow the reporting requirements under the Securities Exchange Act of 1934: add to that the additional costs associated with Sarbanes-Oxley. For some of these companies, $100,000 in expenses related to filing, mailing shareholders reports and proxy’s, and paying accountants to help them comply with Sarbanes, may be the difference between a profitable and unprofitable year. And now some are opting out.
How is that possible? Well, the Securities Exchange Act of 1934 allows companies with fewer than 300 shareholders to terminate reporting obligations. This also effectively ends their need to pay up for Sarbanes-Oxley. The trick is to get below the magic 300 level. That takes effort, but may not be as hard as you might think.
One way to get below the proverbial shareholder “Mendoza Line” is to initiate a reverse stock split, say 1 for 100, where shareholders owning less than 100 shares receive cash, in lieu of fractional shares. In essence, these odd-lot shareholders are paid in cash for surrendering their shares, thus reducing shareholder rolls. Everyone else gets 1 share for every 100 held, and the price of the stock adjusts accordingly. For a variety of reasons many of the companies who are candidates for this action have a large number of odd-lot shareholders, so it’s not difficult to dramatically reduce the number of shareholders.
Typically, reverse stock splits are undertaken by companies that are near death; their stock price having fallen below the magic $1.00 mark. It usually is not time to celebrate in this situation: the reverse split may be the last breath of a former high flying company seeking to stay exchange listed. The phenomenon of companies utilizing a reverse split solely to reduce the number of registered shareholders puts the notion of a reverse split in an entirely new light.
There may be as additional motivation, aside from cost-cutting, for companies to go this route: the company itself may be sitting on some valuable assets, and reducing the number of shareholders essentially is a step toward taking the company private, or at least giving large insiders a bigger piece of the pie, and more control. The act of buying back shares from odd lot holders requires company cash, but in return, remaining shareholders own a proportionately larger stake.
Such a transaction, however, will lower a company’s liquidity in the trading markets, liquidity which was probably already on the low side. Volume which was light on a daily basis before the reverse stock split, will now be light on a weekly, monthly, or even quarterly basis. It is not inconceivable that the stock will trade just a few times a year. Bid/Ask spreads will be huge, so new investors wanting to get in will have to pay dearly, assuming they can even find a seller. Furthermore, not having to file with the SEC will lower a company’s profile, so access to capital markets will be limited. This all sounds negative, but, from the perspective of current owners, who may realize their company’s true value, this is not so bad.
How do you tell the difference between motivations for initiating a reverse split? You can first identify those splitting because their stock price needs to meet a minimum in order to stay listed. While this information can be inferred from a very low stock price (typically below $1.00), companies will also disclose (in their proxy statements) their reasons for splitting. (Reverse splits typically need shareholder approval.) Likewise, companies wishing to initiate a reverse seemingly to cut costs and avoid Sarbanes-Oxley, will also state this in their proxy, often in great detail.
Recent Examples: Splitting to Reduce Number of shareholders
This was the approach taken this past May by Winter Sports Inc (ticker WSPO, market cap $20 million), operator of a ski resort in Whitefish, Montana. The company initiated a 1 for 150 reverse stock split, where shareholders owning less than 150 pre-split shares were paid in cash. The purpose of and reasons for the split were best described in the company’s 2004 proxy statement: (Schedule 14A)
To put Winter Sports estimated cost savings ($200,000, before tax) into perspective, the company reported a net loss of $570,000 in 2003, and net income of $1,600,000 in 2002, so $200,000 is material. Once shareholders approved the reverse split, the company’s next move was to file a Form 15-12G, which essentially serves as notice to the SEC that they will no longer file reports, having met the number of shareholders criteria. In Winter Sports case, the number of shareholders was reduced to 167, as stated in this filing.
Since the Split
The company now has less than 7000 shares outstanding, shares which rarely trade. The last trade (12/1/04) priced the shares at $3000, up nearly 15 percent since the reverse split. The most recent bid/ask however, was 2000/3200, representing a huge spread. Any potential buyers of this stock will pay handsomely (if they are fortunate to even find a seller); while sellers risk getting crushed if they place a market order. For holders, this situation represents the ultimate long-term play. The value may be in the 900 acres the company owns near and around the base of the ski-resort it operates. Only time will tell.
Avoca Inc
The latest example, Avoca Inc , a royalty trust, (ticker AVOA, $23 million market cap) owns and manages 16,000 acres, which comprise the bulk of Avoca island, situated 90 miles west of New Orleans. The company’s main source of income is royalties from oil and gas leases. Avoca currently yields about 10.3 percent, based on the 2004 annual dividend.
The company’s story is very similar to Winter Sport’s. Avoca declared a 1 for 100 reverse split on 12/1/04, and filed its 15-12G on 12/16/04. The company has yet to trade since the split, but traded in the $28.00 range prior to the split, and odd lot shareholders were paid $28.00 for their shares.
Besides estimated cost savings of $50,000 from no longer having to file, why would management have made such a move? Could it be that the natural gas reserves under the island are not adequately valued? Does the land (16000 acres, of which 2/3 are actually under water) have some potential future use not yet disclosed? Or, is it that the current yield will increase once the 2005 dividend is declared, pushing the valuation higher? Maybe a combination of all three?
Whatever the story, it was compelling enough for the author to purchase 100 pre split shares. I now own 1 of 8000 or fewer shares outstanding (exact figures are unavailable). This strategy is not without great risk. There is virtually no liquidity in the stock, but I believe the assets are far undervalued, which may ultimately lead to the company going private. In the meantime, I am happy to collect a nice fat dividend.
Finding other candidates
First, find out which companies have declared, or are seeking shareholder approval for a reverse stock split. For those with very low stock prices, look no further, they are probably splitting because they want to stay listed. If there’s any doubt, read the company’s Proxy statement (DEF 14A) to determine whether the split is an attempt to reduce the number of shareholders. Once you find an interesting candidate, find out all you can about the company. Proceed with caution: once you get in, it will be tough to get out. If you find a company you want to buy, purchase shares before the reverse split, and buy enough (in Avoca’s case it was 100, Winter Sports, 150) so that you are not one of the shareholders whose shares are converted into cash.
To find out which companies have filed form 15-12G (companies who will no longer file reports with the SEC), check the SEC
website.
Final Thought
It may be a coincidence that both example companies main assets are real estate related…but don’t bet on it.
Postcript
Avoca Inc. finally declared their annual dividend on 12/16 (that was the declared date, but was not disclosed until 12/22), payable on 1/31/05.....the amount? $350.00 per share. That raises the current yield based on the last trade to 12.5 percent. Stay tuned.
feedback to:cheapstocks@earthlink.net
As this newest research report indicates, we are expanding our scope here at Cheap Stocks. We'll continue publishing our research on companies trading below their NCAV's, but we'll also report on other value investing techniques, and topics.
feeback to:cheapstocks@earthlink.net
Off The Beaten Path
Micro-Cap Value Strategy
Going Private: Getting Around Filing with the SEC and Avoiding Sarbanes-Oxley in the Process
There is an interesting phenomenon happening in the markets these days in the micro-cap arena. Many of these tiny companies, which tend to have a small number of shareholders, are recognizing the growing costs of being publicly traded. It is relatively expensive for smaller companies to follow the reporting requirements under the Securities Exchange Act of 1934: add to that the additional costs associated with Sarbanes-Oxley. For some of these companies, $100,000 in expenses related to filing, mailing shareholders reports and proxy’s, and paying accountants to help them comply with Sarbanes, may be the difference between a profitable and unprofitable year. And now some are opting out.
How is that possible? Well, the Securities Exchange Act of 1934 allows companies with fewer than 300 shareholders to terminate reporting obligations. This also effectively ends their need to pay up for Sarbanes-Oxley. The trick is to get below the magic 300 level. That takes effort, but may not be as hard as you might think.
One way to get below the proverbial shareholder “Mendoza Line” is to initiate a reverse stock split, say 1 for 100, where shareholders owning less than 100 shares receive cash, in lieu of fractional shares. In essence, these odd-lot shareholders are paid in cash for surrendering their shares, thus reducing shareholder rolls. Everyone else gets 1 share for every 100 held, and the price of the stock adjusts accordingly. For a variety of reasons many of the companies who are candidates for this action have a large number of odd-lot shareholders, so it’s not difficult to dramatically reduce the number of shareholders.
Typically, reverse stock splits are undertaken by companies that are near death; their stock price having fallen below the magic $1.00 mark. It usually is not time to celebrate in this situation: the reverse split may be the last breath of a former high flying company seeking to stay exchange listed. The phenomenon of companies utilizing a reverse split solely to reduce the number of registered shareholders puts the notion of a reverse split in an entirely new light.
There may be as additional motivation, aside from cost-cutting, for companies to go this route: the company itself may be sitting on some valuable assets, and reducing the number of shareholders essentially is a step toward taking the company private, or at least giving large insiders a bigger piece of the pie, and more control. The act of buying back shares from odd lot holders requires company cash, but in return, remaining shareholders own a proportionately larger stake.
Such a transaction, however, will lower a company’s liquidity in the trading markets, liquidity which was probably already on the low side. Volume which was light on a daily basis before the reverse stock split, will now be light on a weekly, monthly, or even quarterly basis. It is not inconceivable that the stock will trade just a few times a year. Bid/Ask spreads will be huge, so new investors wanting to get in will have to pay dearly, assuming they can even find a seller. Furthermore, not having to file with the SEC will lower a company’s profile, so access to capital markets will be limited. This all sounds negative, but, from the perspective of current owners, who may realize their company’s true value, this is not so bad.
How do you tell the difference between motivations for initiating a reverse split? You can first identify those splitting because their stock price needs to meet a minimum in order to stay listed. While this information can be inferred from a very low stock price (typically below $1.00), companies will also disclose (in their proxy statements) their reasons for splitting. (Reverse splits typically need shareholder approval.) Likewise, companies wishing to initiate a reverse seemingly to cut costs and avoid Sarbanes-Oxley, will also state this in their proxy, often in great detail.
Recent Examples: Splitting to Reduce Number of shareholders
This was the approach taken this past May by Winter Sports Inc (ticker WSPO, market cap $20 million), operator of a ski resort in Whitefish, Montana. The company initiated a 1 for 150 reverse stock split, where shareholders owning less than 150 pre-split shares were paid in cash. The purpose of and reasons for the split were best described in the company’s 2004 proxy statement: (Schedule 14A)
Purpose. The primary purpose of the Reverse Split is to reduce our number of shareholders of record to fewer than 300, thereby allowing us to terminate our reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Sarbanes-Oxley Act of 2002. In the event that there are fewer than 300 shareholders following the transaction and Winter Sports is eligible to file to deregister its common stock, Winter Sports intends to file a notice of termination of registration with the Securities and Exchange Commission to deregister its common stock under federal securities laws. As a result, Winter Sports would no longer be subject to the costly and time-intensive annual and periodic reporting and related requirements under the federal securities laws that are applicable to public companies…
Reasons. We are considering the Reverse Split, and the board of directors has recommended that you approve the Reverse Split, as a means to eliminate various expenses associated with remaining a “public company,” by which we mean a company whose stock is registered under, and which files reports in accordance with, the Exchange Act. In addition to direct financial savings, we expect that the going private transaction will free substantial management time and attention that currently is devoted to Exchange Act compliance, allowing management to focus more closely on Winter Sports’ core business operations. An ancillary benefit is that the Reverse Split would allow us to reduce costs by reducing the number of shareholders with whom we communicate. Because administrative and mailing costs accrue on a per-shareholder basis, those costs are disproportionately high for shareholders who hold only a limited number of our shares when considering their stake in Winter Sports. In the aggregate, we expect these cost reductions to reach approximately $200,000 in the first full fiscal year following the Reverse Split. We also believe the Reverse Split will provide liquidity to shareholders who hold fewer than 150 pre-split.
To put Winter Sports estimated cost savings ($200,000, before tax) into perspective, the company reported a net loss of $570,000 in 2003, and net income of $1,600,000 in 2002, so $200,000 is material. Once shareholders approved the reverse split, the company’s next move was to file a Form 15-12G, which essentially serves as notice to the SEC that they will no longer file reports, having met the number of shareholders criteria. In Winter Sports case, the number of shareholders was reduced to 167, as stated in this filing.
Since the Split
The company now has less than 7000 shares outstanding, shares which rarely trade. The last trade (12/1/04) priced the shares at $3000, up nearly 15 percent since the reverse split. The most recent bid/ask however, was 2000/3200, representing a huge spread. Any potential buyers of this stock will pay handsomely (if they are fortunate to even find a seller); while sellers risk getting crushed if they place a market order. For holders, this situation represents the ultimate long-term play. The value may be in the 900 acres the company owns near and around the base of the ski-resort it operates. Only time will tell.
Avoca Inc
The latest example, Avoca Inc , a royalty trust, (ticker AVOA, $23 million market cap) owns and manages 16,000 acres, which comprise the bulk of Avoca island, situated 90 miles west of New Orleans. The company’s main source of income is royalties from oil and gas leases. Avoca currently yields about 10.3 percent, based on the 2004 annual dividend.
The company’s story is very similar to Winter Sport’s. Avoca declared a 1 for 100 reverse split on 12/1/04, and filed its 15-12G on 12/16/04. The company has yet to trade since the split, but traded in the $28.00 range prior to the split, and odd lot shareholders were paid $28.00 for their shares.
Besides estimated cost savings of $50,000 from no longer having to file, why would management have made such a move? Could it be that the natural gas reserves under the island are not adequately valued? Does the land (16000 acres, of which 2/3 are actually under water) have some potential future use not yet disclosed? Or, is it that the current yield will increase once the 2005 dividend is declared, pushing the valuation higher? Maybe a combination of all three?
Whatever the story, it was compelling enough for the author to purchase 100 pre split shares. I now own 1 of 8000 or fewer shares outstanding (exact figures are unavailable). This strategy is not without great risk. There is virtually no liquidity in the stock, but I believe the assets are far undervalued, which may ultimately lead to the company going private. In the meantime, I am happy to collect a nice fat dividend.
Finding other candidates
First, find out which companies have declared, or are seeking shareholder approval for a reverse stock split. For those with very low stock prices, look no further, they are probably splitting because they want to stay listed. If there’s any doubt, read the company’s Proxy statement (DEF 14A) to determine whether the split is an attempt to reduce the number of shareholders. Once you find an interesting candidate, find out all you can about the company. Proceed with caution: once you get in, it will be tough to get out. If you find a company you want to buy, purchase shares before the reverse split, and buy enough (in Avoca’s case it was 100, Winter Sports, 150) so that you are not one of the shareholders whose shares are converted into cash.
To find out which companies have filed form 15-12G (companies who will no longer file reports with the SEC), check the SEC
website.
Final Thought
It may be a coincidence that both example companies main assets are real estate related…but don’t bet on it.
Postcript
Avoca Inc. finally declared their annual dividend on 12/16 (that was the declared date, but was not disclosed until 12/22), payable on 1/31/05.....the amount? $350.00 per share. That raises the current yield based on the last trade to 12.5 percent. Stay tuned.
feedback to:cheapstocks@earthlink.net
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