Wednesday, May 11, 2005

Valuing Zapata Corp:
A different way to play “Oil”

Ticker: ZAP
Price: $8.42
Market Cap: $161.1 million
Shares Outstanding: 19,132,520
Average Daily Volume: 24000

Zapata, a small Rochester NY based holding company, was co-founded by former President George Bush in the 1950’s, as a traditional oil and gas company. Bush was out of the business by the mid 1960’s, and by the 1990’s the company was out of the oil and gas business. Well, technically they were still in the oil business. Just not the type of oil we are dependent on to heat our homes, and propel our cars. Zapata, you see, got into the fish oil business. That’s right, fish oil. Oh, and they are also in the airbag fabric business. They also own the majority of a failed internet business. What a combination.

Your editor stumbled onto Zapata a few years back when the company was trading below its net current asset value; even had occasion to talk about the company on WBBR radios “The Money Show”, in a segment I did on the NCAV concept. What piqued my interest at the time (besides the NCAV story) was the company’s ownership interest in Omega Protein, an interesting little company that had a solid balance sheet, nice earnings prospects, and happened to be the market leader in it’s business. Omega has been on my watch list for years, but it was only recently that I pulled the trigger, and took a position in the stock. But I didn’t buy it the conventional way. I found a cheaper way (in my mind, anyway). I bought Zapata, and now own Omega Protein indirectly. More on why, later.

Omega Protein-Fish Oil Titan
Zapata’s exposure to fish oil is through it’s 58 percent stake in Omega Protein(Ticker:OME). Omega harvests menhaden, (an oily fish found on the gulf and mid-atlantic coasts in the US) and turns it into fish oil (a dietary supplement), fish meal, animal feed, and other products. Fiscal year 2004 net income was $3.2 million (down from $5.8 million in 2003) on sales of $119.65 million (up from $117.93 million in 2003). Of note is the fact that at year end 2004, Omega’s assets included 66 fishing vessels and 32 aircraft. Currently trading at $6.34, the value of Omega shares held by Zapata is $97.3 million.

Safety Components International (Ticker: SAFY)
In September, 2003, Zapata acquired a 54 percent stake (2.6 million shares)in airbag fabric manufacturer Safety Components, for $58 million. Less than a month later, Zapata acquired another 1.5 million shares for $16.9 million, and currently owns 79 percent of the company. Safety earned $10.25 million in 2004 (up from 2003’s $8.2 million) on sales of $247.9 million (flat versus 2003’s $247.1 million). Currently trading at $15.05, the current value of Zapata’s stake is $43.4 million.

ZAP.COM-Shell company
Although barely worth mentioning, Zapata also owns 98 percent of, Zapata’s failed internet venture, which currently has no business operations. Still trading for $.10 a share, the company’s stake is worth $5 million, based on recent trading. The company’s only major asset is the $1.79 million in cash on it’s balance sheet.

Sum of the parts valuation
Zapata currently has 19,132,520 shares outstanding.
Omega Protein: 24,964,609
Safety Components: 5,370,147

Zapata’s share of each company:
Omega: 58 percent (or approx 14,500,000 shares)
Safety Components: 79 percent (or 4,242,000 shares)

Each share of Zapata represents:
.76 shares of Omega
.22 shares of Safety Components

Cash Hoard
Zapata also has $65.4 million in cash on its balance sheet (as of 3/31/05). Since the financials of both Omega and Safety are consolidated into Zapata’s financial, we adjust that cash balance by subtracting out both company’s cash, to avoid double counting:

Zapata: $65.4
Omega: $27.7
Safety: $8.3

Net: $29.4 million

Putting it all together:
Each share of Zapata represents:
$1.54 in cash ($29.4 million/19.1325 million shares out)
$4.78 in Omega shares (Omega price of $6.29*.76)
$3.29 in Safety Shares (Safety price of $14.95 *.22)

Total: $9.61
Current price of Zapata: $8.42

Discount to calculated value: 14 percent

The caveats/the risks
First off the 14 percent “discount”(based on my calculations) may not be as compelling as it seems. Since Zapata owns such a large chunk of each company, a discount to market value might apply. That’s how a private valuation firm might view it, anyway. I don’t see it that way for Omega Protein. Safety Components is a different story though. There is little trading in the stock, and a lack of marketability discount might apply.

As I stated earlier, my main reason for buying Zapata was because it was the cheapest way that I could have exposure to Omega Protein. While I am a big believer in the company, Omega has its own measure of risk. The company is dependent on a successful fishing season, and if company harvests of menhaden are low, the stock will suffer, as it has in the past year (the stock was trading as high as $11.80 in mid 2004). This, following is from the companies 3/31/2005 10Q:

During 2004 and 2003, the Company experienced a poor fish catch (approximately 18% and 11%, respectively, below expectations and a similar reduction from 2002), combined with poor oil yields. The reduced fish catch was primarily attributable to adverse weather conditions and the poor oil yields due to the reduced fat content of the fish. As a result of the poor fish catch and reduced yields, the Company experienced significantly higher per unit product costs (approximately 15% increase) during 2004 compared to 2003. The impact of higher cost inventories and fewer volumes available for sale will be carried forward and will adversely affect the Company’s earnings through the first and second quarters of 2005.

Your editor believes this news is already priced into the stock. Only time will tell.

Last Words
While there is some institutional ownership in Zapata, Malcolm Glazer controls more than 51 percent of the company. So basically, shareholders are only as good as the decisions Malcolm makes. One bright note, the company recently underwent an 8 for 1 stock split in April. Liquidity was an issue in the past, we’ll see if this helps.

*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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