Friday, July 28, 2006

Advanced Nutraceuticals Ups the Ante

Ticker: ANII
Price: $3.40
Mkt Cap: $16.1 million
Ent Val: $19.7 million
P/E: 9.66

When we reported on Advanced Nutraceuticals last month, the story revolved around the company opting to effectively go private, but retain its ability to trade on the pink sheets. We've written about this concept ad nauseum here at Cheap Stocks, but we see these situations as potential unique sources of excess return. In ANII's case, as you may recall, the company intends to reduce shareholder roles below the magic 300 level via a 1 for 500 reverse split. Those with fractional shares after the split will be paid in cash. Nothing new here.

New Price For Fractional Shareholders
What is new, however, is the price the company will pay fractional shareholders. When we wrote the last report, the company had stated in its June 8, 2006 proxy that it would pay fractional shareholders $3.20 per pre split share. The company recently revised its proxy, dated July 25th, and has raised that to $4.00 per share. This change went unreported in the media, but that's no surprise due to this company's small size.

The revised proxy states the following:

Based upon the board’s considerations taking into account the above factors, for purposes of the re-purchase of fractional shares, it was determined that the reverse split re-purchase would be based upon $4.00 per fractional share. This value was established based upon the past 30 days’ average closing prices of the common shares which equaled $3.06 increased by a premium of 30% to reflect the board’s estimate of the current fair value of the company. This value was unanimously agreed to by all board members.

The board of directors considered the fact that in mid 2005 a self-tender offer was conducted to re-purchase approximately 19% of the then outstanding common shares at a price of $4.25 per share. A significant motivating factor in the 2005 offer was to attempt to persuade large numbers of smaller shareholders to tender their shares. In addition, under the circumstances, such smaller sellers had no costs to sell their shares. The board of directors determined to re-purchase shares at a 6% premium to the market price of the stock in a further attempt to entice shareholders to sell. Nevertheless, as discussed above, only approximately 2% of the company’s shareholders participated, leaving approximately 4,200 smaller beneficial shareholders holding shares.

The board of directors believes that the reduction in the public market value of its shares in 2006 to the current level as compared to the approximate $4.10 level in 2005 when the self-tender offer was conducted, is due to the following factors, among other market conditions:

1. Erosion in product margins due to significantly higher quality costs to comply with the recently secured National Nutritional Foods Association quality manufacturer certifications and higher raw material costs.
2. Continued price competition as competitive manufacturers attempt to gain and retain market share.
3. Continued increases in interest rates causing higher borrowing costs and lower profits, as well as more investment dollars moving out of the stock market and into interest sensitive funds.
4. The Company’s borrowing of over $4.5 million debt to fund the 2005 self-tender offer.

The company popped slightly last week, trading in the $3.50 range. While the new offer may not mean a whole to those investors who plan on remaining shareholders after the split, it does show that the company is serious about enticing smaller shareholders to get off the books, paving the way for the company to reach the sub 300 shareholder level. This could be an interesting ride.

*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.

Saturday, July 22, 2006

PICO Holdings: The Poor Man's Berkshire Hathaway?
Company Update

Ticker: PICO
Price: $29.72
Market Cap: $394 million
P/E: 12.9
Price/Book: 1.35
Enterprise Value: $369 million

We last wrote about PICO a couple years ago, we owned it then, and still do. This company is typically not on anyone's radar, but is an interesting combination of businesses and investments.

Graham and Dodd: In Management's Own Words
We acquire businesses which we identify as undervalued based on Graham and Dodd-style fundamental analysis, and our assessment of what the business is worth based on the private market value of its assets, earnings, and cash flow. We favor long-established businesses in basic industries, with a history of operating successfully through industry cycles, recessions, and geo-political disruptions. We also acquire interests in companies where there is significant additional unrecognized value in land and other tangible assets. Our objective is to generate superior long-term growth in book value per share.

When we purchased PICO a few years back, the primary reason was the company's vast Nevada land holding-the company was the largest private landowner in the state-at the time nearly 1.2 million acres. This was old railroad land, certainly not the same quality as some of the other companies we've researched, but it included water rights, a very compelling package at just $13 per share.

Not Just Land and Water
PICO also owns two insurance companies in "runoff" Physicians Insurance Company of Ohio and Citation Insurance Company. Insurance companies in runoff no longer write new business, just service existing policies, and claims on those policies. PICO makes money by managing the investment portfolios associated with these companies, essentially booking the difference between claims and investment income.

European Investment Portfolio
As of 12/31/05, PICO also listed the following holdings:

Jungfraubahn Holding AG: 1.3 million shares or 22.5 % of this Swiss railroad company
Raetia Energie AG: 70,556 shares in this producer of hydro electricity
Accu Holding AG:29,294 shares of this Swiss battery manufacturer

Hyperfeed Technologies
PICO also owns more than 6 million shares, or 80% of Hyperfeed (Ticker:HYPR) which provdes financial market data and data-delivery solutions to the financial services industry. Truth be told, we are not sure why PICO invested in this company in the first place, but it represents is a very small portion of company interests.

First Quarter Results
The company reported first quarter net income of $7.2 million, primarily due to a gain on the sale of investments. The company ended the quarter with $243 million in investments, $54 million in cash, and $12 million in debt.

Stock Offering
In May 2006, PICO completed a private placement of 2.6 million shares of newly issued PICO common stock with two institutional investors, for $30 per share. The offering generated $71.4 million. It is believed that FMR corp, parent company of Fidelity family of mutual funds, was one of the institutions. FMR recently reported that it owns a 15.3 percent stake in PICO.

If you are looking for a steady ride in terms of earnings, this is not the company for you. Management is focused primarily on increasing shareholder equity, and due to the structure of the company, reported earnings will be choppy. That being said, management has done an excellent job of increasing shareholder equity, and the stock price has followed. We can't but help think of PICO as the poor man's Berkshire Hathaway.

*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.

Saturday, July 15, 2006

My Island Part 2:
Looks Cheap Relative to Hansen Natural (HANS)

Hansen Natural
Ticker: HANS
Price: $45.83
Mkt Cap:$4.17 billion
Enterprise Value: $4.08 billion
P/E: 60

Your Cheap Stocks Editor is the first to admit that we sometimes stretch the limits of sensibility in some of the comparisons we draw here at Cheap Stocks. Last week, we compared the "market value" of a small piece of our little vacation island to St. Joes Corp. We think St Joes looks more attractive in that comparison. This week, we take a look at beverage company Hansen Natural (HANS). This time, our little island wins out.

Sour Grapes
Back in 2003, we had a position in Hansens. We wrote about our experiences in a previous post in March of 2005. In our sob story, we described purchasing Hansen's, at the time a stock no one cared about, riding it sideways, and finally selling it after tripling our money. At the time of the post, the stock had gone from a $40 million market cap company, to a $500 million company. We felt bad. Fast forward to now, and Hansens is now a $4 billion company. That's right, a 100 bagger since we initially purchased shares. We are astonished at this company's metoric rise. Maybe we are also disappointed for not hanging onto the shares.

Sales Explosion
Hansen's 2005 sales were nearly $350 million; double 2004's, and nearly triple 2004's. Net income rose from $20.3 million in 2004 to $63.8 million in 2005. The latest reported quarterly sales were $120 million, with net income of $21 million. This company is on fire, and it's expansion into energy drinks has truly paid off. The balance sheet also looks good: $100 million in cash and marketable securities and no debt.

After a recent 4 for 1 stock split, the company now has more than 90 million shares outstanding, and we are wondering how much room this company has left. Sure, sales may continue to grow, but we don't believe Hansen is worth 60 times earnings. The forward P/E is half that, but one small slip in sales and earnings growth, and watch out. We just don't believe Hansen's can continue to grow at such a rapid pace.

If you are looking for your Cheap Stocks editor this weekend, I'll be on the beach of my beloved (albeit overpriced island), sipping a Hansens, reading St. Joes annual report.

*The author does not have a position in this stock (HANS). 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, July 08, 2006

My Island Looks Expensive; St. Joes (JOE) Looks Cheap
A View of the Real Estate Bubble
From Your Vacationing Cheap Stocks Editor

St Joes Corp
Ticker: JOE
Market Cap: $3.63 billion
Price: $48.65
P/E: 32
Dvd Yield: 1.4%
Enterprise Value: $3.98 billion
Acres: 800000
EV/acre: $4975

We've been enjoying some rest and relaxation on a small island strip of NJ coast we call our summer home. I've not been completely on vacation, however. As I ride up and down this island, and see the ridiculous property prices, I can't help but to wonder...

And wonder I have, which has given rise to a few calculations. You see, on our little island, I'd estimate there are about 40 properties on each street from bay to ocean. This includes 4 beachfronts, and 2 bayfronts. Based on recent prices, I'd estimate that an entire street worth of property would sell for about $30 million based on the following:

Beachfront home(4 per block): $1.5 million each
Bayfront(2 per block): $1 million
Oceanside(14 per block): $750 thousand
Bayside (20 per block: $ 600 thousand

Total Value/Street: $30.5 million

This is actually a very conservative estimate, and does not include streets, or infrastructure, just private property and homes.

So, theoretically, 130 streets worth of property, or an area of approximately 5 miles by 1/4 mile, or about 800 acres, about 1.25 square miles, would be worth about $4 billion. We know this calculation is a bit ridiculous; if every homeowner on 130 streets put their house on the market, property values would plummet. Still, it is food for thought.

We know of a company that is also worth about $4 billion based on Enterprise Value, St. Joes Corp, which we've written about in the past and have a position in. The company owns about 800,000 Florida acres, more than 300,000 acres of which is within ten miles of the Gulf of Mexico.

St. Joes has had quite a run-up over the past few years, hit $85 in 2005, but now trades for less than $50. This profitable company has no doubt been stung by a pullback and slower growth in Florida real estate. We see tremendous value in these shares for investors with a little patience.

So does Third Avenue Funds, led by the legendary Marty Whitman. Third Avenue owns a huge stake in St. Joes, about 14 percent, and has been adding to positions. We were pleased to note Michael Winer's (Portfolio Manager of the Third Avenue Real Estate Value Fund--while we don't own this fund, we do own Third Avenue Small Cap Value, which also has a position in St. Joes) column much of which focuses on St. Joes in the latest letter to shareholders. This letter is typically fantastic, and I'd urge you to see for yourself. Winer's explaination of why St. Joe's is still safe and cheap is outstanding.

Back to our little NJ island. A real estate agent friend of mine told me the other day that there are hundreds more homes for sale this summer compared to last. Sales are down as much as 50 percent. This should surprise no one.

Finally, I've been thinking. What's more valuable, 800,000 acres of prime Florida land, or 800 acres of a NJ barrier island? I guess value is truly in the eye of the beholder.

*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.