Wednesday, September 28, 2005

Zapata Corp
Ticker: ZAP

You may recall our May 11 report on tiny Zapata Corp, a holding company which owns significant stakes in two publicly traded companies, Omega Protein, (ticker:OME)and Safety Components Inc, (Ticker :SAFY)and has a nice amount of cash on it's balance sheet. The main reason we liked the company was because in our minds, (however small they may be) buying Zapata shares was the cheapest way to gain exposure to Omega Protein, whose fish oil business we like.

On September 26th, Zapata announced that it has sold, subject to shareholder approval, its 77 percent stake in Safety Components to a private equity investor, Wilbur Ross, for $51.2 million, or $12.30 per share( by our calculation, but we don't yet have all the details.) At the time of our May research piece, Safety was trading at $14.95 per share, and most recently traded on the OTC Bulletin Board at $14.00. While we are disappointed with the sale price, it reflects a discount because Zapata's stake is large, and Safety Components has little liquidity. Such discounts are somewhat customary, and in some cases, quite larger. We don't know all the details of the deal yet, but will update the sum of the parts valuation summary we produced in May, once they become clear.

In any event, the news has had little effect on Zapata, which is down 20 percent since our May report. We still hold Zapata shares, and will be quite interested to find out how Mr. Glazer, as in Malcolm Glazer, 51 percent owner of Zapata, will utilize the proceeds.

*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.

Saturday, September 24, 2005

Where Have all the Stocks Trading Below Net Current Asset Value Gone

When we started this site, the focus was primarily on Ben Graham's concept of investigating companies trading below their NCAV. (Actually, Graham was more stringent than we are, preferring stocks trading at 2/3 or less of their NCAV.)If you hadn't noticed, it's been quite a while since we featured an NCAV company. The truth is, your editor is not finding that many of interest these days, and I'd rather focus on other areas of value (at least what we here at Cheap Stocks consider to be value), than fill space with the lastest NCAV company that is nothing more than a cigar butt with no puffs left.

When I started researching and writing about NCAV companies in the late 90's, early 2000, there were many promising examples. In 2001/2002, there were literally hundreds of examples, some that ultimately rewarded shareholders well. But during certain periods, there just aren't many worth mentioning. But that can change very quickly. We'll keep looking.....

What are we working on now?
One fascinating area (to us anyway)is trying to identify creative real estate plays. You know we have an affinity for companies with land holdings, but this is a little different. Remember the Sears/K-mart story? It was all about retail locations owned by Sears. The same with Toys R Us. McDonald's also had a nice run-up a few months back when it was suggested that the company's owned restaurant sites might be worth a great deal more than the market price reflected.

We started the research a few months back, trying to identify similars situations. Our research, which is still in the initial phase, is focusing on the retail restaurant sector. At this point, we have identified one restaurant chain, a small cap, of course, that happens to own most of its locations. You've no doubt heard of this company. We hope to publish our initial piece on this company (which we don't own) next week.

Saturday, September 17, 2005

Plum Creek TimberTicker: PCL
Price: $38.83
Market Cap: $7.14billion
Enterprise Value: $8.7 billion
Dividend Yield: 3.9%
P/E: 23.5

As I sit writing this week’s column, it’s a beautiful day in western Pennslvania, where we are visiting this weekend. As I gaze out over my in-laws beautifully treed property, I am reminded of something my father-in law told me a few years back. It seems that a tree cutter stopped by one day, walked the property (4 acres), and promptly offered him in the neighborhood of $3 thousand for 5 or 6 trees on his property. Funny, I thought, don’t they usually charge you to remove trees from your property? This sounded like a beautiful arrangement. But these weren’t just any trees, they were red oak and ash, more highly sought after than your run of the mill pine trees. But that certainly got me thinking.

Demand for lumber has been strong in this country, thanks to a housing and building boom. Will that trend continue into the near future? Maybe, maybe not. We are guessing that it will slow down, but then again, we are not economists. But timber happens to be Plum Creek’s business, and the company owns a whole lot of land.

You might think that Plum Creek Timber is a little too much on the beaten path for our tastes. Afterall, much of the research we do here at Cheap Stocks is on tiny companies most people have never heard of. But we felt compelled to put in our two cents about Plum Creek. You know how much we love land.

Plum Creek owns a vast amount of timberland in the US, 7.756 million acres, to be exact, according to the company's website. Here's the breakdown by state/acre:

South Carolina-210,000
West Virginia-115,000
North Carolina-76,000
New Hampshire-33,000


How Much land is 7.8 million acres?
I'm glad you asked. If you recall from past postings, one square mile is 640 acres. So 7.8 million acres is 12,188 square miles, or an area 110 miles by 110 miles. Thats a lot of acres, trees, and ultimately, lumber. Don't get me wrong, I'm not suggesting Plum Creek's lumber is worth anywhere near the handful of red oak and ash trees on my father-in laws property I mentioned earlier. But, having some exposure to lumber in your portfolio is not a bad idea.

More than timber
The company estimates that out of its 7.8 million acres, 1.3 million are "higher and better use timberlands" which may have residential or recreational uses.

Enterprise Value per Acre
Based on an EV of $8.7 billion
Acreage of 7.756 million

EV/Acre= $1,121

Other Businesses
Timber accounted for $694 million of the company's 2004 revenue of 1.528 billion

Other revenue was from:
Real estate:$303 million
Manufacturing(wood products):$518 million
Other(natural resources):$13 million

The bottom line
In 2004, the company earned $339 million, up from 2003's $192 million. The company's tax burden is light (just 7.4 % of income in 2004) because part of the company has REIT status. This is a very profitable company.

This company is not a high flyer. Your editor purchased some shares several weeks ago in the $35 range, not expecting rapid price expansion, but the stock is up 10 percent, mainly because of Katrina, and growing demand for lumber. Don't expect that to continue. What you can expect though, is a nice, 4 percent dividend, exposure to timber, a solidly profitable business, and some nice acreage.

*The author has 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, September 07, 2005

A Pineapple Company? Clyde, are you crazy?

Maui Land & Pineapple Co
Ticker: MLP
Price: $33.16
Market Cap: $244 million
Enterprise Value: $255 million
Shares Out: 7.23 million
2004 Revenue: $153 million
2004 Net Loss: $.383 million

So, your editor is not crazy after all. There’s more to this company than the $80 million in pineapples they sold in 2004. Actually, pineapples don’t seem to be a very lucrative business for this Hawaii based micro cap-the segment produced an operating loss of $11.3 million in 2004-and sales were down sharply from 2003’s $100.5 million.

Maui Land operates in two other significant segments, besides the yellow fruit: Resort, and Development. Avid Cheap Stocks readers didn’t have to read past the company’s name in order to understand our interest in this company. You’ve already read past postings about Tejon Ranch (California), St. Joes (Florida), PICO Holdings (Nevada), Avoca (Louisiana), JG Boswell (California), and know our fascination with companies holding land. We’ve been building a portfolio of these over the past few years, and Maui Land is the latest addition.

Resort segment: Kapalua Land Company
Nine Miles of Hawaii Beachfront

Part of Maui Land’s 28,200 acres include 22,800 in West Maui, including Kapalua Resort a golf community, which borders the ocean, and boasts 3 beaches, 2 hotels, 3 championship golf courses, 10 restaurants, and 700+ single family homes and condominiums. Oh, did I mention the 9 miles of beachfront property? This segment had operating revenue of $49 million in 2004, and an operating loss of $1.6 million

Development segment
This segment is responsible for the company’s construction, sales and development activities. Revenue for 2004 was $24 million, operating income was $12.7 million

The Land
Of the company’s 28,200 acres, about 5000 (as best we can tell, this is an estimate) are used in the pineapple business. While it’s difficult to estimate what that land and business are worth, we’ll assume the pineapple business is worth .5 times sales. Based on $80 million in 2004 sales, that would value that segment at $40 million. (Keep in mind, this is a guesstimate, as much as we love eating pineapples, we’ve never attempted to value a pineapple operation before.)


Backing out $40 million from the company’s current enterprise value:
Enterprise Value: $255
Pineapple Business: $40

Rest of company: $215

EV/Acre calculation
This is a calculation we’ve grown fond of here at Cheap Stocks. In this case we’ll calculate the EV/acre for the non-pineapple land first:

Rest of Company EV: $215
West Maui Acreage: 22,800 acres

EV/Acre: $9429 (actual)

Alternatively, if we use the entire amount of company acreage, not stripping out the pineapple business, we get the following:

Enterprise Value: $255
Total Acreage: 28,200

EV/acre: $9042 (actual)

Buying Hawaii Property Sight Unseen.
We’ve never even been to Hawaii, let alone seen Maui Land and Pineapple’s property or operation. Nonetheless, we were impressed by the numbers. Nine thousand and change per acre for Hawaii land seems like a no-brainer (Did we mention 9 miles of beachfront property?). But, you need to consider the source. We are crazy about land (in certain cases that is) here at Cheap Stocks. That being said, please consider the following: Maui Land’s sales have been relatively flat for years, and earnings are inconsistent at best:

Revenue/Net income (loss) in millions
2004: 153/ (.383)
2003: 151/ 6
2002: 148/ (5.7)
2001: 166/ 7.6
2000: 141/ .452
1999: 147/ 4.7

We encourage you to do your own research. There is other exposure available to Hawaii land in the form of a publicly traded company, namely Alexander and Baldwin (NASDAQ: ALEX). That’s another company we’ve been interested in over the years, they have some nice land holdings, and a profitable shipping business. But we missed the boat (no pun intended) on that one. Now trading in the $50 range, we passed on it in the teens a few years back. Certainly a more high profile name than Maui Land & Pineapple, and worthy of further research. Keep eating pineapples!

*The author has 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.

Thursday, September 01, 2005

Most Importantly
Our hearts go out to all of the hurricane victims. We pray for those who have lost loved ones, their homes, and at least temporarily, their everday lives. We've had far too many reminders in the past several years just how fragile life is.

Gas Price Optimism
Your Cheap Stocks editor was surprised to see regular gas selling for $3.29 this morning on his way to work,(yes, I do have a real full-time job, as much as I'd like to give Cheap Stocks my full-time attention, but so far no one has offered to pay for the content, and I have several mouths to feed!) at the same station, that just 12 hours earlier was selling it for $2.79. Unbelievable.

But unlike many other pundits I've heard waxing eloquently on the subject, I believe this is a very short-term phenomenon. The longer term outlook (next 20 years) may be a different story as far as oil is concerned, but this is not time to panic. Tell that to Ed Rendell, our esteemed governor, who apparently has mentioned gas rationing in our great state of Pennsylvania. Way to go Ed. Want to create a panic? A run on gas stations? Hoarding? Keep talking.