Friday, August 04, 2006

PICO Holdings:
A Reader Strikes Back--
Berkshire Backlash

Ticker: PICO
Price: $35.46
Market Cap: $470 million
P/E: 15.4
Price/Book: 1.56
Enterprise Value: $429 million

We rarely print feedback from our readers, but an e-mail from this past week caught our attention, and we are compelled to print it (with the readers permission of course.) In reaction to our recent posting that dared to label PICO Holdings the "poor man's" Berkshire Hathaway, "Jim" let us have it:

Dear Mr. Milton:
I read your blog and admire your perspicacity. That was why I was surprised when you described PICO as a poor man's Berkshire.

I owned PICO for years. I agree with you that PICO has an interesting smorgasbord of holdings that appear to represent value. I got disgusted with seeing the top managers pull gargantuan salaries year after year while us poor John Q. Public shareholders sat around sucking our thumbs, so I bailed out.

The problem with PICO is that its top brass is grossly overpaid. At the same time as owning a significant percentage of its shares, these men pull enormous salaries relative to PICO's net worth. At PICO, service of self trumps service to shareholders. That kind of double dipping-- significant share ownership coupled with outsized executive compensation-- is anything but Berkshire Hathaway like.



The Numbers
Point taken, Jim. Relative to earnings, PICO execs are overcompensated. In 2005, CEO John Hart and COB Ronald Langley both took home $932,988 in salary, and $3,013,326 in bonus. They were also awarded 838,356 options, or 77.4% of the total options granted, at a strike price of $33.76. The same year, Langley exercised 752,395 options, realizing $15,625,170. Hart exercised 838,356, realizing $17,851,842. In 2005, PICO reported net income of $16.2 million. Hart and Langley's 2005 salary and bonus was nearly half of net income. Seems outrageous. By comparison, Warren and Charlie each took $100,000 in salary last year from Berkshire Hathaway.

Poor Man's Berkshire Revisited
Still, when we had the audacity to put PICO and Berkshire in the same sentence, it was in terms of the ability to build a portfolio of undervalued assets, and the ability to increase shareholder wealth. PICO has come through on both fronts since we've been shareholders. Shareholder equity increased from $221 million year end 2002 to $301 million year end 2005. In terms of book value per share, it rose from $17.86 to $22.67 during the same period. The share price tripled.

Are Hart and Langley overpaid? Maybe. But that depends on your vantage point as a shareholder, namely when you became a shareholder. If the duo is successful in continuing to purchase undervalued assets in turn to creating wealth for shareholders, they should be paid accordingly. If their strategy begins to fail, they should not be paid. We realize it is just not that simple.

As shareholders, we do have the option of voting with our feet, which is what Jim did. We don't blame him. While we don't know exactly when he held shares, we suspect it was during a period when the company was trending downward--PICO was a $50+ stock in the early 1990's, and a sub $10 stock in 2002.

Finally, one of the downsides of owning a stock with a high level of management/inside ownership is that they call the shots. That situation can be good, or, it can be devastating. We've had a positive experience with PICO so far, but as Jim points out, there are shareholders who gave up. We are hopeful that FMR Corp's (parent of Fidelity)recent purchase--they now have a 14.4% stake--brings an outside voice to the table.

Please read the company proxy for more on the compensation/ownership structure.

*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.

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