Tuesday, February 27, 2007

If the Number of Net/Nets is a Contrary Indicator, We're in Trouble!

We don't sensationalize here at Cheapstocks, so take this week's title with a grain of salt. Unfortunately, one of the areas we find value is not offering many choices these days. We feel a little like our friends at Tweedy Browne, who have expressed the same sentiments the past couple of years.

Top Ten Net/Nets by Market Cap
It's slim pickings among the ranks, and we have not seen it this "bad" since our research began in this area several years ago. Case and point, the average market cap of the current top ten is just $55 miilion! Furthermore, we are not exactly enamored with any of these companies...at this point, anyway.

Trans World Entertainment (TWMC)
Escala Group (ESCL)
Selectica (SLTC)
Inhibitex (INHX)
Kaiser Group Holdings (KGHI)
Peak Intl (PEAK)
Bexil (BXL)
Strategic Distribution (STRD)
Pharmos Corp (PARS)
Concord Camera (LENS)

Why so Few?
The main reason is that the markets have been very strong, and as we've said before, a rising tide lifts all boats. But there may be another reason, and this one is completely related to company financial data.

Companies issue financials four times a year, and typically, the smaller the company, the later the filing. So newer data--in this case, all of which comes from the balance sheet--may not yet be available. (Companies whose balance sheets have improved (remember, the NCAV formula: Current Assets - Current Liabilities-Other Long Term Obligations) relative to their market caps may make the list, but we first need the data to make that determination) This situation can be more extreme at year-end, as companies typically take longer to produce their 10K's, than 10Q's. We'll see how this plays out over the next several weeks.

Meanwhile, there are other ways to find value.

The author does not have a position in any of the stocks mentioned this report. This is neither a recommendation to buy or sell any of these securities. All information provided believed to be reliable and presented for information purposes only.

Thursday, February 15, 2007

2000 Square Miles of Argentina Land, $400 million: Cresud Inc(CRESY)

We seldom, if ever, research international companies, not because we don't believe there isn't value outside the good old USA, but because we find plenty of domestic research opportunities to keep us busy.

This week, however, we feature an interesting Argentine company, Cresud (CRESY, ADR) which in US terms, is a microcap. This despite the fact that the company owns 1.28 million acres of land.

Cresud is an agricultutal company whose major businessses include grain production (soybeans, wheat, sunflowers, corn), beef and milk production, forestry, and to a lesser degree, real estate.

The Fundamentals
The company reported 2006 sales of $36.4 million (the company reports in the Argentine Peso), earning $8.9 million. That was up from 2005's sales of $27 million, but down from net income of $30 million (you read that correctly, 2005 net income reflects some large one time gains relative to sales). With a current market cap of $420 million, this company is not cheap on a price/earnings basis.

The Land
What attracted us was the 516,000 "hectares" (a hectare is the equivalent of 2.471 acres) or 1.276 million acres of land the company owns. Cresud leases some additional acreage, which we ignore in our calculations. On an Enterprise Value per acre basis, that works out to just $365 per acre.
If you've been following farmland at all in recent years, it is now considered by some to be an asset class. Cresud may be an interesting way for the small investor to gain non US exposure to farmland.

The Risks
This is Argentine land, and historically, Argentina has had some severe boughts with inflation. The economy seems to be in decent shape now. The company also reports in Pesos, so their is currency risk (the current exchange rate is about 3 pesos to thre US dollar).

The Annual Report
Cresud's Annual Report, available on the company's website is required reading for potential investors. It does an excellent job of dissecting Cresud's businesses, land uses, acreage by region and business, as well as providing data about the increasing prices of Argentine farmland.

*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.

Friday, February 09, 2007

A Mainstream Water Play: Aqua America (WTR)

At Cheap Stocks, our research is sometimes esoteric, and often way off the beaten path, but this week, we go mainstream in our never-ending quest for value. We are big believers that investors should have some exposure to water in their portfolios, but our typical ideas are not for everyone. So today, we highlight a very liquid way (no pun intended) to gain exposure to the sector.

There’s been no shortage of attention given to the growing demand for water. Theoretically, there’s the same amount of water on the earth now as there was 1000 years ago, not a drop more, or a drop less (global warming advocates: when we say water, we also include water equivalents such as ice). Yet populations continue to grow, while supplies of fresh water do not.

In the US, water distribution, supply, and treatment is typically handled at the local level. The ranks of publicly traded water utilities have continued to shrink, leaving the following list as the only publicly traded water utility plays in the US.

data as of 2/6/07
PE: 33.57
Yield: 2.51
Market Cap: 3016

PE: 38.12
Yield: 0.98
Market Cap: 355

Price: 39.98
PE: 31.73
Yield: 3.11
Market Cap: 826

Price: 38.45
PE: 31.78
Yield: 1.45
Market Cap: 703

Price: 42.4
PE: 21.47
Yield: No Dvd
Market Cap: 672

Price: 38.99
PE: 29.32
Yield: 2.35
Market Cap: 664

Price: 13.14
PE: 32.85
Yield: 1.71
Market Cap: 310

Price: 18.69
PE: 21.99
Yield: 3.54
Market Cap: 218

Price: 24.8
PE: 32.63
Yield: 3.86
Market Cap: 204

Price: 17.97
PE: 31.9
Yield: 2.36
Market Cap: 1.99

Price: 19.372
PE: 22.44
Yield: 3.18
Market Cap: 127

Price: 21.25
PE: 47.22
Yield: 3.56
Market Cap: 90

Price: 15.75
PE: 121.15
Yield: 4.23
Market Cap: 26

Price: 130
PE: unknown
Yield: 2.5
Market Cap: unknown

Price: 41.5
PE: unknown
Yield: unknown
Market Cap: unknown

On a price/earnings basis, most of these companies are not exactly cheap, due in part to the growing interest the sector has received from investors. Furthermore, most of the remaining publicly traded water companies are tiny in size, and have little liquidity (see BDDD and NESW). Some are not traditional water utilities (PICO, for instance, which has several other operations and CWCO, a Cayman Islands based desalination player).

Aqua America serves nearly 2.8 milliom customers in 13 states:

2005 Operating

Pennsylvania $279,691
Ohio 39,839
Texas 37,953
Illinois 35,300
North Carolina 29,840
New Jersey 22,588
Indiana 16,867
Florida 15,286
Maine 9,418
Virginia 8,337
Other states 1,660
Source: 2005 10K ========

The company is always on the acquisiton trail, and spent $250 million in 2005 on cap ex ($195 million for the 9 months ended 9/30/06). In fact the company made 123 acquisitions in the 5 year period ended 12/31/05.

Below is WTR's acquisition philosphy:

We believe that acquisitions will continue to be an important source of growth for us. We intend to continue to pursue acquisitions of municipally-owned and
investor-owned water and wastewater systems of all sizes that provide services
in areas adjacent to our existing service territories or in new service areas.
We engage in continuing activities with respect to potential acquisitions,
including calling on prospective sellers, performing analyses and investigations
of acquisition candidates, making preliminary acquisition proposals and
negotiating the terms of potential acquisitions.

Source: 2005 10K

The Fundamentals
Fiscal 2005 sales were $497 million, up 12% from 2005s $442 million. For the 9 months ended 9/30/06, sales were $397 million, so full year 2006 results should break previous annual sales records. Net income for 2005 was $91 million, representing a solid net profit margin of 18.3%. This was up from 2004s $80 miillion, and 18.1%. For the 9 months ended 9/30/06, net margins are lower, at 16.7%.

If you want to add water to your portfolio, and are not crazy about our method of doing so (PICO Holdings (PICO), JG Boswell(BWEL), we also have a position in small player Southwest Water (SWWC)), take a look at Aqua America. We stongly urge that you read through the companies 10K (always a worthwhile exercise)>

*The author has a position in the following stocks listed in this report: PICO, BWEL, SWWC. The author does not have a position in the primary focus of this report, WTR. 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, February 03, 2007

Watch out Exxon, Washington has an Eye on You
Is Wrigley’s Next?

$39.5 Billion. Bigger than the market caps of most publicly traded US companies. That’s what Exxon Mobil bottom lined in 2006. Many call it obscene. Others shake their fist in disgust that one corporation can earn so much taking advantage of the little guy, dependent on the company’s product for survival. Politicos in Washington use this in order to win votes, raising the ire of the grass roots with one-sided and often blind rhetoric.

Even USA Today, “McPaper”, put it this way in an article by Matt Krantz:
Consumers who wondered where some of the $3 a gallon they paid for gasoline this summer ended up might want to take a look at ExxonMobil’s bottom line.
That’s how these stories typically start. This one in particular goes on to break down ExxonMobil’s profit per day ($108.2 million), per hour ($4.5 million), per minute ($75,150) and per second ($1250). I can see the senators salivating upon seeing that data. I for one am embarrassed to have a small position in USA Today parent company Gannett (GCI).

The talk in Washington has started already, so has the legislation. One Senator from New York (we will not name her) suggested in the fall that big oil should be forced to pay a portion of their profits into a fund that would seek renewable sources of energy. Wow, what a great idea. Lets punish big oil, how dare they make 50 cents in net profit per dollar of sales. What’s that? Their net margins aren’t 50%; well surely 30% is still reflective of price gouging, and not fair to the consumer. Wait, they don’t earn 30% per dollar of sales? Well, doesn’t matter, 25% is still unfair. We could go on with this drivel, but we’ll stop here. Exxon Mobil’s 2006 net profit margin was 10.46%.

Yes, 10.46%. Thats about 1/3 of Microsoft’s profit margin. Less than chewing gum giant Wrigley’s 2005 net margin of 12.43%. Hey senator from New York, why don’t you go after Wrigley’s? That’s an obscene amount of profit relative to sales, and it’s to the detriment of gum chewers everywhere. Why not force Wrigley’s to pay into a fund that would seek alternative sources of stuff people can chew? We know, were getting ridiculous here. Gum isn’t imperative for survival, is not a huge cost to consumers, but hopefully you see our point.

We know that energy is a huge issue. But let’s not bite the hand that finds the energy for us. The hand that is taking all of the risk, the hand that has expended billions and billions in what is a highly capital intensive industry. We want them to find more oil; we want the technology to get better, to drill deeper, to extract oil from places where it was not possible 30 years ago. And yes, we want them to earn a profit.

Is it important to identify renewable sources of energy? To be less dependent on foreign oil? Absolutely. But Uncle Sam can’t do it, and should not even try. Sorry, Unc, your track record just is not that great in these matters. You have never shown the ability to effectively deploy capital. Leave it to the private sector. Through technology, companies can now efficiently extract oil from the Athabasca oil sands in Alberta. And our neighbors to the north have a lot of oil sands. Perhaps technology will get to the point that the vast amount of oil shale in Colorado and Utah can one day be utilized. Renewable sources? No, but may buy us some time to develop scalable, efficient renewables. We’re not sure corn is the answer.

In conclusion, we understand the ire this issue creates. We don’t like paying $3.00 a gallon either. But big oil is not the villain here.

*The author does not have a position in ExxonMobil (XOM), but does have a position in Gannett(GCI) and Wrigley (WWY). This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.