Tuesday, October 31, 2006

Update: Tootsie Roll Industries(TR), 3rd Quarter Results, the Gordon’s are Hanging Tough
Tootsie Roll Industries recently reported a decent 3rd quarter. Net sales of $186.4 million were up 7% year over year, while net income of $28.97 million was up 5%. Net profit margin was a healthy 15.54%, but down from last year’s 15.93%.

Our original research on Tootsie Roll focused on the company’s high level of profitability, with admittedly flat sales, in conjunction with our theory that the company would make a great takeover target. This was based not only on the attractive brand name, strong balance sheet, and relatively high profit margins, but also that the majority owners, the Gordon’s (Ellen, President, COO, and Director and Melvin, Chairman of the Board and CEO), who own 40% of the company, are aged 74 and 86 respectively. We surmised that they’d be looking for an exit strategy, and companies such as Hershey’s (HSY) and Wrigley’s (WWY) would be potential suitors.

Fast forward 2 years, and not only are the Gordon’s still in control, they’ve made a major acquisition (Concord Confections), and if Sifel Nicolaus analyst George Askew (who has a hold rating on the shares) is correct, the company may be in the market for the New England Confectionary Company (NECCO), maker of NECCO wafers, Clark Bars, and one of your editor’s old-time favorites, the Sky Bar. Askew suggests that NECCO owner UIS Corp may have the company on the block, in the $150-$200 million range. NECCO 2005 sales were $80 million.

Looks like the Gordon’s are not slowing down, but rather trying to build their brand. More power to them. We’ve been wrong before. We continue to hold Tootsie Roll shares, and still believe that ultimately, the company will be acquired. While the valuation from a p/e perspective does not seem compelling at 23 times earnings, this is a high profit margin business, which should trade at a premium. Healthy amounts of cash, ST and LT marketable securities in excess of $100 million, and little debt complete the picture.

Previous Tootsie Roll Research:

*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, October 28, 2006

Stretching the Net/Net Definition II: Leapfrog Enterprises (LF)

Those of you who are not familiar with this company may not be thinking hard enough, especially if you are parents of small children. California based Leapfrog makes technology based educational products, aimed at sharpening children's skills, but in a fun and entertaining way. (If you have a LeapPad lying around your house as we do, you'll know what I mean).

Leapfrog has had its share of challenges in recent years, evident by it's stock price, and also by the fact that most analysts don't like it, which may be music to our Cheap Stocks ears.

The Fundamentals
There's been no topline growth for Leapfrog, and earnings have not been anything to write home about either. Fiscal 2005 sales of $649.8 million were flat with 2004 ($640.3), and down from 2003 ($680.0). The company earned $17.5 million in 2005, following a loss of $6.5 million in 2004, and income of $72.7 million in 2004. Costs, particularly SG&A, have also been increasing as a percentage of sales.

Leapfrog's business is seasonal; the company books the bulk of sales and earnings in the third (back to school season) and fourth (holiday) quarters. For the first two quarters of 2006, sales are off year ago levels.

Where are the Positives?
While operating results have not been stellar, Leapfrog has two things (in our minds, anyway) going for it: A fairly strong brand name, which we can't quantify in terms of value, and a strong balance sheet, which we can attempt to quantify. As of 6/30/06, the company had $181 million in cash and s/t investments, or $2.87 per share, in cash and no debt.

The company also currently trades at just 1.73 times market cap/net current asset. Not a net/net, we know, but a compelling valuation that bears further scrutiny.

We'll admit, we are at the beginning of our dance with Leapfrog. We don't currently own it, but are at the very least, intrigued. We know that this could be somewhat of a value trap, a company with a nice balance sheet, that can't get its act together in order to profitably move product. It's difficult being at the whims of young consumers, tastes change quickly, and competition is fierce. Still, its interesting to find a brand name company, in the $500 million market cap range, trading at less than twice NCAV.

The Numbers
Price: $9.33
Market Cap: $588 million
Cash and s/t inv: $181
Enterprise Value: $407
Current Assets: $454.1
Current Liab: $94.7
Other Liab: $19.6
NCAV: $339.8
MktCap/NCAV: 1.73

Top Institutional Ownership
Third Avenue Management LLC: 14%
Ironbridge Capital Managemet: 4%
Prentice Capital Management: 2%
Brandywine Global Invt Mgmt: 2%

*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, October 25, 2006

Tweedy Browne American Value Broadens its Mandate: Not Enough Value in the U.S.

There was an interesting but unsurprising announcement this week from Tweedy Browne Company LLC, legendary value investors who’ve been very outspoken the past few years regarding the lack of attractively priced value oriented shares in U.S. markets. Not only are they changing the name of their flagship Tweedy Browne American Value Fund, they are also expanding the Fund’s mandate.

As of December 11, 2006, the Fund will be known as the Tweedy Browne Value Fund; “American” will be dropped. So will the Fund’s former mandate to invest “no less than 80% of its assets in US securities”. The newly named Tweedy Browne Value Fund will have the ability to invest up to 50% of the portfolio in non-US investments.

The gentlemen at Tweedy have never been shy about relaying their frustrations when their stringent investment process is unable to uncover value. We reported on a similar theme (Is Value Dead, Again?) in April 2005.

We’ve always believed in Tweedy Browne’s investment philosophy and process, and have been invested in this particular fund for years. That’s through years of good relative performance to go along with some challenging ones as well: years of low turnover, and relatively large cash positions (they are currently 12 % in cash) because their process told them pickings were slim.

Above all, we’ve always appreciated Tweedy’s management team’s honesty, and still believe in the merits of their investment philosophy, whether or not they feel the need to go outside US borders to find attractive opportunities.

As for the research staff at Cheap Stocks, we still believe that the markets we cover are inefficient, and there’s still value to be found for those willing to do some heavy lifting.

*The author has a position in the Tweedy Browne American Value Fund. 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, October 21, 2006

Lazare Kaplan International (LKI): Still a Net/Net

Diamond company Lazare Kaplan recently reported lackluster results for the first quarter, losing $1.8 million on sales of $139.8 million. Sales were flat with same quarter last year, but the company earned $900K during that period. Lazare blamed the loss on flat sales, and margin pressure from increasing costs. Not surprisingly in an economy where consumers are wratcheting back spending, sales of polished diamonds suffered, while sales of rough diamonds increased.

Still trading Below Net Current Asset Value
In terms of operating performance, this company is nothing to write home about. Despite $538 million in fiscal 2006 sales, the company earned just $1.5 million, for a sub .3% net profit margin. However, Lazare still trades below its NCAV, as it did when we initiated research this past January, and ultimately took a position in March.

With a net current asset value of $76.9 million, and market cap of $67.2 million, Lazare currently trades at 1.14 times NCAV/Mkt cap. We'll admit though, the capital structure of this company is of concern: short term debt of $69 million, long term debt of $64 million, with just $6 million in cash.

Its the Inventory
What is compelling about Lazare is the company's inventory of $15 million in rough diamonds, and $111 million in polished diamonds. These are carried at the lower of cost or market, and are the reason we comtinue to own LKI. This is another asset play, where we believe the value of inventory is potentially worth a great deal more than carrying cost. A risky strategy? You bet.

Price Action
Shares of LKI are up about 6 percent since we initiated our position, despite pulling back from a high of about $10 a few months back.

The Numbers
Current Assets: $262.7
Current Liab: $122.1
Long Term Liab: $ 63.7
NCAV: $ 67.2
Market Cap: $ 76.9
NCAV/Mkt Cap 1.14
Book Value: $ 11.45
Price: $ 7.75
Pr/Bk: 1.48

Lazare Kaplan Research: 1/07/06

*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.

Friday, October 13, 2006

Avalon Holdings (AWX): Value in the Sum of the Parts? Trading at Twice NCAV
This marks the first in a series of research pieces on companies trading at twice net current asset value.

Tiny Ohio based Avalon Holdings hit our radar again the other day. We were intrigued by Avalon’s interesting combination of assets and cash a few years back, but lost track of the company. So many companies, so little time. Upon taking a recent look, we believe that there may be unrecognized value within.

Even with a market cap just north of $26 million, institutions own about 1/3 of Avalon. However, you won’t find any analysts covering the company. There simply isn’t enough Avalon to go around in order to generate interest from the analyst ranks. (Yet another recurring theme with the companies we cover here at Cheapstocks.)

Garbage and Golf
Avalon’s primary revenue source is its waste management business, which generated $29 million of the company’s $34 million in revenue for 2005. Waste management has two segments, disposal (American Waste Management Services), and landfill management (American Landfill Management).

The company also manages two 18 hole golf courses, through its Avalon Lakes Golf Inc subsidiary. One of which, a championship course in Warren, Ohio, the company owns. The other, Squaw Creek Country Club, is operated but not owned by Avalon. In 2005, the golf segment generated $5 million in revenue.

The Fundamentals
Revenue for 2005 was $34 million, up 13% from 2004’s $30 million. Net income was $541,000 up from a loss of $845,000 in 2004. In fact, 2005 was the first positive year on the earnings front since 1999. For the first six months of 2006, revenue has been $18 million and net income $500,000. However, a closer look at these numbers shows that operating income is actually negative, and what is aiding the bottom line is the interest income generated from a relatively large amount of cash and short term investments. Buyer beware, it’s typically not a good sign when your operating businesses need an assist from your cash position in order to put you in the black.

The Balance Sheet
Lets cut to the chase. As of 6/30/06, Avalon had $14.2 million in cash and short-term investments, and less than $250,000 in debt. That’s the equivalent of nearly $3.75 in cash per share, while the stock hovers around $7.00. We recognize that cash is meaningless if a company is burning through it rapidly, but that does not appear to be the case at Avalon.

The Burning Question: What’s an Ohio Golf Course Worth?
We are intrigued by the company ownership of a 200 acre golf course. We don’t purport to know what it might be worth, but believe it may be a potentially valuable asset. We also can’t begin to value the waste management businesses. That leaves us with one question. Are Avalon’s non-cash assets the waste management business, and golf course worth more than $12 million (market cap less cash)? We’ll continue to try and find that answer. We don’t currently hold Avalon shares.

NCAV: $12 million
Mkt Cap: $26.3 million
NCAV/Mkt cap: 2.19
Enterprise Value : $12 million
Book Value Per Share: $9.76
Price/Book : 1.41

Recent Price Action
Avalon has been on a bit of a tear lately. We are not sure what is driving this, but it is important to be aware that tiny companies such as this can be very volatile. When we started writing this column, the stock traded below $6.00, and in one day on volume of less than 40,000 shares, rose above $7.00 intraday. This type of price action could occur on the downside as well. Also, low liquidity stocks such as Avalon may have wide bid/ask spreads.

Postscript: With current shareholder roles hovering at 534 for Class A shares, and 11 for Class B, this company may be a candidate to shrink sharteholder roles below 300, delist, and avoid SarbOx.

*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, October 04, 2006

Biloxi Marsh Lands Corp (BLMC) in Forbes, Declares $2.00 Dividend

Tiny pink sheet company Biloxi Marsh Lands hit the big time recently with a mention in Forbes Magazine. Pink sheet companies rarely get that kind of coverage, especially in such financial media giants such as Forbes.

Louisiana based Biloxi, owner of 90000 acres of marshland in St. Bernard Parish, which it leases to natural gas companies, is up 20 percent since we purchased shares back in late June. It’s been no steady ride, though we’ll admit. Such companies tend to trade in a very choppy fashion, up $3.00 one day, down $2.00 the next, followed by flat prices for weeks, and also tend to trade at relatively high bid/ask spreads.


The company also recently declared a $2.00 dividend, payable October 12th. This puts the trailing 12 month yield for Biloxi at 10.8 percent percent based on $4.00 in dividends, and a current market price of $34.50

For more on Biloxi, please see our 5/29 report.

*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.