Friday, April 27, 2007

A Rich Man's Game and a Tejon Ranch (TRC) Update

Ted Turner has been on a buying spree. He now owns 2 million. Archie Aldis "Red" Emmerson is not far behind, at 1.72 million, while the Irving family has 1.2 million. We are not talking about shares of AOL, but rather something much more valuable. Acres of land. There was an excellent article in this past Wednesday's Wall Street Journal entitled "It's the Only Thing That Lasts", which discussed the growing trend of the wealthy accumulating open space across the country. Included was a list of the top ten land owning families, of which we mentioned the top three.

If you think land acquisition is a rich man's game (Ted Turner's latest was 65000 Nebraska acres he bought for $19 million in 2005), you'd be right. However, if you are not in Ted Turner's league, there are other ways to gain exposure to land, a topic we frequently write about here at Cheap Stocks.

Tejon Ranch Continues in Anonymity
Tejon Ranch, owner of 270,000 of contiguous California land 60 miles north of Los Angeles, continues to prosper in relative silence. The company, whose revenue is
from a mix of farming and real estate operations, is beginning to lean more toward the latter.

And a beautiful 270,000 acres it is. That's the equivalent to 400 square miles, or an area 20 by 20 miles, which includes parts of the San Joaquin Valley, Tehachapi Mountains, and Antelope Valley. About 90 percent or 247,000 acres are located in Kern County, the balance in Los Angeles County, where Tejon is currently making plans for a master planned community on 11,700 acres.

As Tejon moves forward to develop some of the land, it is important to note that the company plans on preserving as many as 100,000 acres through a partnership with The Trust for Public Land. While the company will pursue funds in order to preserve this land, it remains to be seen exactly what that will translate to financially.

The Financials
Revenue for 2006 was $28.4 million, up 8 percent from 2005s $26.4 million. Net loss was $2.7 million in 2006, down from 2005s net income of $1.5 million. It bears noting that investment income was significant in both years relative to the bottom line ($3 million in 2006, $2.6 million in 2005). Revenue from real estate operations was $16 million in 2006, up from $13 million the prior year, and represented more than half of revenue for the first time, a trend the company expects to continue, and grow, as TRC focuses more on land development.

The Balance Sheet
Tejon ended the year with $78 million in cash and short term marketable securities (or about $5 per share), and just $417 thousand in long term debt. The balance sheet remains extremely strong with $159 million in total assets and just $10 million in total liabilities.

Enterprise Value/Acre
Long time readers know that any Cheap Stocks posting regarding real estate holdings is not complete without the EV/acre calculation we are fond of. With a current EV of $729 million, and 270,000 acres, that equates to an EV/acre of $2700. We don't believe that $2700/acre is a reasonable assumption for the land that will be preserved, but that not withstanding, Tejon still appears reasonably cheap.

Major Holders
Legendary value investor Marty Whitman's Third Avenue Management continues it's love affair with Tejon Ranch, and now owns 26.5% of the company. Michael Winer of Third Avenue also has a seat on the Board of Directors. Rounding out the list of institutions with large stakes, Wesley Capital Management owns 13.3%, and FMR Corp, parent of Fidelity, owns 5.85%.

A Candidate to go Private?
Last but not least, we'll end with this interesting fact. Tejon Ranch has just 444 shareholders of record. That's not all that far from the magic 300 required to delist, and essentially go private, a topic we've covered before in our Cheap Stocks research. While we can't imagine Third Avenue being a proponent of the GPT transaction that allows companies to continue trading on the pink sheets after delisting, stranger things have happened. Given Tejon Ranch's low profile, and relatively small public float, we're not sure of the advantages to remaining public.

Company; Tejon Ranch
Ticker: TRC
Price: $49.51
Mkt Cap: $831 million
Shares Out: 16.79 million

*The author has a position in TRC. 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, April 21, 2007

Discovering the Chocolate Fountain of Youth: Tootsie Roll (TR) Update

A few years have passed since we first suggested that legendary confectioner Tootsie Roll Industries was ripe for a takeover. Strong brand name, solid balance sheet, rock solid profit margins, and aging owners all dovetailed into our analysis and theory that ultimately, one of the bigger fish such as Wrigley (WWY) or Hershey (HSY) would acquire Tootsie Roll.

Even a stopped clock is right twice a day, but so far, we’ve come up short on this one. The reminder of our unrealized hypothesis was clear and smiling back at your Cheapstocks Editor a few days ago when Tootsie Roll’s latest annual report graced our afternoon mail.

There, on page 2, in full color, I was greeted by those smiling faces. The faces of the Gordon’s, Melvin (age 85) and Ellen (age 77), looking youthful and happy, as if to say, “we are not going anywhere”. It is unbelievable just how good they look given their ages. Maybe excessive Tootsie Roll consumption is the secret to staying young. At a time in there lives when most have long since retired, Melvin and Ellen still sit at the top of the Tootsie Roll empire, Mel as Chairman and CEO, and Ellen as President and Chief Operating Officer.

Not only do the Gordon's sit at the top, they also own a huge part of the company. As of the latest proxy statement, the couple controlled more than 80 percent of Tootsie Roll's class B shares (TROLB), and more than 40 percent of the common shares. The Class B shares have most of the voting rights: with 10 votes per share, while the common shares have one vote per share. If nothing else, its very clear that nothing happens at Tootsie Roll without the Gordon's approval.

Plodding Along
Tootsie Roll's recent results have been mediocre. 2006 sales were up just 1% to $496 million. Net income was $65.9 million, for a solid 13.3% net profit margin, but both figures were down from 2005s net income of $77.2 million, and 15.8% net margin. The company cited rising ingredient costs and energy prices for the margin pressure.

Coming off the Concord Confectioners acquisition in 2004, (which surprised us, we thought TR was on autopilot) which drove much of the 16% sales growth from 2004 to 2005, it appears that Tootsie Roll is back in status quo land. Not necessarily great news for shareholders.

Solid Balance Sheet
As of 12/31/06, the company had $55.7 million in cash, $23.5 million in short-term investments, $51.6 million in long-term investments. If you add in the $73.4 million in split dollar life insurance, thats a total of $204.2 million, or $3.80 per share in cash and securities. Most notable on the liability side, there's just $7.5 million in long term debt, and postretirement healthcare liability of $12.6 million.

When Will True Value be Realized?
Tootsie Roll is a solid company, with great (albeit declining) margins, strong brand names, and a strong balance sheet. Yet, shareholders have not reaped the benefits in recent years. Share prices have essentially been flat since 2001, and the only returns have been via dividends. The ball is in the Gordon's court. They are in control, and have the power to enhance shareholder value through the sale of this company, whether through a private equity deal, or sale to one of the other major players (Hershey, Wrigley, Cadbury Schweppes).

Giving credit where credit is due, Ellen Gordon has been an excellent spokesperson for the company in her frequent appearances on various Food Network shows. But its time to take this company to the next level. Shareholders are growing impatient. The problem is, there aren't enough non-Gordon shareholders to make a difference. Buyer beware, you get what you pay for, and herein is the downside to being a shareholder in a company largely controlled by one or two individuals. Its their company, you are just along for the ride, and can only hope they will do what's in the best interest of shareholders.

Tootsie Roll Industries
Ticker: TR
Market Cap : $1.69 billion
P/E: 26
Fwd P/E: 22.4
Dvd Yield: 1.1 %
Shares Out: 55.4 million (Common & B shares)

*The author has a position in TR. 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, April 14, 2007

Biloxi Marsh Lands (BLMC) Reports 11th Consecutive Profitable Year

Biloxi Marsh Lands Corp (BLMC,pink sheets) which owns 90,000 acres in St. Bernard Parish, Louisiana, recently sent shareholders 2006 Financial Statements. Although the company is not required to file with the SEC, you can add BLMC to the list of such companies (BTCP, AVOA) that continue to keep shareholders well informed.

The majority of BLMC's revenue is from oil and gas exploration and production taking place on company land. Fiscal year 2006 revenue of $14.04 million was down from 2005s $21.26 million, primarily due to falling natural gas prices. Net income fell to $9.13 million, or $3.31 per share, from $16.31 million, or $5.04 per share.

Biloxi also reported the following developments:
On December 15, 2006 we announced the formation of B & L Exploration, LLC (BLX) of which the company owns 75%. We also announced the placement of our first five well drilling package with the Manti Group. The Manti Group is obligated to drill at least three of the five prospects and hopes to commence drilling the first well located on company property by the end of March 2007. The agreement between the company and the Manti Group and the execution of two accompanying 400 acre oil, gas and mineral leases evidences the initial success of our marketing efforts. It should be noted the establishment of BLX signifies our more active management strategy employed in an effort to seek opportunities outside of the confines of our property’s physical boundaries. Our goal is to use all of our available assets to obtain revenue interests in newly drilled wells with minimal related cash expenditures.

On January 25, 2007 we announced the company’s and BLX’s participation in the NAPE Expo in Houston, Texas. We presented our acreage position showing deep regional Tuscaloosa exploration opportunities developed over the past 12 to 18 months using existing geological well control and 3D seismic data. We also presented additional prospects targeting the Tex W, Big Hum and Cris I sand intervals. We are pleased with the interest expressed during the NAPE Expo and are hopeful that our ongoing efforts will result in future oil, gas and mineral agreements.

The company also completed a proven reserve study (conducted by TJ Smith and Company)with the following results:

Developed Producing Proven Reserves of Natural Gas: 1.5221 billion cubic feet
Developed Non Producing proven Reserves: .643 billion cubic feet Proven Un-Developed Reserves: .337 billion cubic feet

The Balance Sheet
As of 12/31/2006, the company had $1.23 million in cash,$4.73 million in short term marketable securities and $8.95 million in LT marketable securities, and other investments, along with no debt. With 2.85 million shares outstanding, that equates to about $5.23 per share in cash and securities. The land itself is carried at cost, a paltry $234,939, or $2.61 per acre. We don’t know its true value, but granted, the oil and gas beneath are worth significantly more than carrying value.

The Dividend

During 2006, the company paid 2 dividends, totaling of $4.00 per share, but warns that unless there is a substantial increase in the price of natural gas, the dividend will likely fall in 2007

Perhaps the most remarkable part of the compny report was a detailed listing of all the marketable securities the company owns, along with cost basis and current market value. We've never seen this level of detail offered before, and may disclose the portfolio in a future piece.

The Risks
Biloxi Marsh Lands will go the way natural gas prices go, it's about as simple as that, in terms of operating performance. Still, we believe there is additional value in the underlying assets, and continue to hold shares.

*The author has a position in BLMC. 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, April 06, 2007

Why we Closed our Jones Soda Position(JSDA)

We felt as though there was a mini revolt among some of our readers when we first mentioned Jones on this sight. Afterall, we are deep value investors by nature, and Jones may be the antithesis of deep value. Still, we thought it was important to stretch ourselves a bit, and we ultimately took a position in the $7.75 range about 6 months ago.

"Why On Earth Did You Buy Jones? Has Clyde Gone to the Dark Side"

This feels a bit like confession, well, at least the Presbyterian equivalent, but here goes. We admit, the fundamentals weren't there, there were no hidden assets, no stockpile of cash, it was the intangibles. Intangibles typically mean goodwill, patents, copyrights, etc, but thats not what we mean. What we saw and valued was an innovative company making headway into becoming a true brand, developing an audience, developing a following. We figured sales would follow, and margins would improve, but we never expected a three bagger in six months.

As value investors, we don't know how to handle quick success. We are used to slow and steady, not meteoric growth. Truth is, we were itchy and even perplexed when Jones hit $12, following a JIm Cramer induced rally. It was not supposed to happen that quickly. Valuations seemed even more out of whack. But we told ourselves, hang on. Don't make the same mistake you made with Hansen(HANS)!(If you are interested, search our earlier posts for that story). But when Jones hit 20, trading at 15 times sales, and with a triple digit P/E, we thought it was time to get the heck out of Dodge. And that's what we did.

The Aftermath

We should be happy, having tripled our money in 6 months in a stock we never should have looked at in the first place. (By the way, Hansen was a value stock when we took a position years ago) But Jones continues to move skyward, now trading at more than $25. We left money on the table. There is such a Jones frenzy in the market right now, that it certainly can go higher. All the chatter is related to national distribution in major retailers, and the prospect that this will drive Hansen-like growth. Will it? We don't know. We do think Jones is priced for perfection at this point, which leaves little room for error. Truth is, we were very tempted to short it the other day, but came to our senses. We just don't understand this growth thing.

*The author does not have a position in any of the stocks mentioned in this report. 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, April 04, 2007

Cheap Stocks Editor Interview

Geoff Gannon of the excellent Gannon On Investing site recently conducted an interview with yours truly. This is the tenth "20 Questions" piece Geoff has published, and the previous ones have given great insight into the minds of some excellent value investors/bloggers. (I'm hoping that my interview doesen't spoil this great run!) Many thanks to Geoff for taking the time to put this together.