Thursday, March 29, 2007

Maui Land and Pineapple’s Big Day (MLP)

Without a doubt MLP has been one of the most boring additions to our portfolio in recent years, and if you know anything about the companies we own and research, that says a great deal.

But, MLP, which owns 28,200 acres of land in Hawaii, which includes a master planned community, 9 miles of beachfront and a pineapple operation, was up 11 percent today on volume of 63000 shares, which believe it or not is five times normal volume. The catalyst for this move was the company’s sale of land it formerly leased to the Ritz Carlton Kapalua, for $25 million in cash, and 21.43 percent ownership interest in the hotel. The cash part of the deal is significant, representing 10% of MLP’s current market cap, or more than $3.00 per share. As near as we can tell, the Ritz Carlton property covers about 50 acres, so we are assuming the cash part of the sale values the land at $500,000 per acre, plus the value of the hotel stake.

This potentially good news for MLP prompted your Cheap Stocks editor, on the hunt for a family vacation, to check out rates at the Kapalua Ritz. Sorry, Cheap Stocks editor wife and children, $785 to $942 a night is a bit rich. Maybe next year.

*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, March 24, 2007

Vermont Pure Holdings (VPS): A Candidate to go Private?
Watertown CT based Vermont Pure Holdings is in the bottled water production, distribution, and marketing business. If that sounds like a great business, the truth is, being a VPS shareholder the past few years has been downright painful. Our shares, for one, are under water (no pun intended). Yet we've held on, suspecting there may be brighter days ahead for this tiny $40 million market cap company.

The company built the business over the years on a series of acquisitions, which have resulted in a relatively large amount of long term debt, $33.875 million as of 10/31/06. Yet, this is down from 2005s $37.975 million, so the company is headed in the right direction here. Still, interest expense is an anchor to VPS, and in profitable years such as 2004 and 2005 this represented between 4 and 6 times net income. For instance, in 2005, net income was $871 thousand, and interest expense was $3.4 million. In 2004, it was $660 thousand and $3.5 million. Not a pretty sight.

The top line is headed in the right direction. 2006 sales were $62.7 million, up from 2005's $59.8 million. While the company bottom lined a loss of $20.6 million in 2006, that was after a goodwill impairment charge of $22.95 million, and not reflective of 2006 operations.

The picture we've painted thus far is probably not appealing to many investors. Yet we've begun to believe that there may be a new story emerging here, that being the possibility of VPS being acquired (probably less likely), or effecting the GPT (Going Private Transaction), which allows smaller companies to de-list, avoid SEC filing, and compliance with Sarbanes Oxley, yet still trade on the pink sheets. The main reason for going this route is cost savings, it is simply relatively expensive for small companies to comply with SarbOx, and file with the SEC.

Why GPT?
We see two major attributes that make a GPT possible. First, VPS is primarily owned and controlled by the Baker family (3 Bakers are active in the company), who own about 49%. If large owner/stakeholders wish to keep their company out of the public eye, a GPT is one method to essentially go dark, yet continue to trade. Furthermore, a GPT would be fairly easily accomplished; a company needs to have 300 or fewer shareholders of record in order to be eligible, and VPS currently has 427.

We'll continue to monitor this story, if their indeed is a story here.

*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, March 17, 2007

Pink Sheet Companies and Sarbanes Oxley Avoiders Avoca Inc (AVOA) and Bactolac Pharmaceuticals (BTCP) Report 2006 Results

Despite the fact that both of these companies are no longer required to file with the SEC, after effectively "going private", both still send shareholders either full (Avoca) or summarical (Bactolac) results.

Avoca, owner of 16,000 acre Avoca Island, reported 2006 net income of $7.998 million, and earnings per share of $992.43 on revenue $12.2 million. The company also paid a $720 dividend. With a current bid price of $6000, the companies current price earnings ratio is 6, and the dividend yield is 12%. While both measures price Avoca at extremely cheap valuations, this is not all that surprising given Avoca's uncertain future revenue stream(primarily royalties from gas wells on Avoca Island), and lack of trading liquidity.

Avoca's balance sheet is strong with cash and securities (both long and short term)of $11.2 million, or $5.36 million ($555 per share) after subtracting out dividends payable, which represent nearly all of the company's liabilities.

Bactolac Pharmaceuticals
Bactolac (formerly Advanced Nutraceuticals), which effected it's GPT (going private transaction) this past fall, reported its first results since the transaction.

Bactolac's 2006 sales rose 22.6% TO $28.1 million, while earnings fell 14% to $1.62 million, or $169,55 per share. Based on a recent bid price of $1300, that equates to a P/E ratio of 7.7.

Bactolac's current book value of $1515 per share is quite impressive, but after backing out goodwill ($7.6 million) tangible book value is $723 per share.

We continue to hold shares in both companies, believing that they will benefit from being outside the purview of Sarbanes Oxley, which is very cost prohibitive for smaller companies.

Keep in mind the liquidity issues inherrent in the companies discussed in this report: Avoca has just 8059 shares outstanding, while Bactolac has 9554.

*The author has a position in both companies 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.

Friday, March 09, 2007

Disappointing Offer for Topps(TOPP): Why This Deal is $7.55 Per Share, not $9.75
Remember the good old days, when a pack of baseball card cost $.25? I’ll never shake the memory of that day in 1973 when as a 7 year old, I had the good fortune of getting two Willie Mays cards in one day. That memory is part of why the news that Baseball card pioneer Topps recently agreed to a $385 million buyout by former Disney CEO Michael Eisner’s private equity firm, Madison Dearborn Partners LLC, is difficult to swallow. The other reason is that the price is simply too low.

While Topps stock jumped on the news of the $9.75 per share offer, representing a 9.4% premium, this offer was simply not representative of the company's value, in our humble Cheap Stocks opinion. In fact, three out of 10 Topps directors voted against the buyout, and there is growing resentment within the ranks of the larger institutional shareholders.

We've owned Topps several times. Overall, the company has been disappointing to a lot of shareholders, save for the late 90's, when shares could be had for a buck and change--that's less than a pack of Topps baseball cards sells for these days. Here's where the true deep value devotees swooped in, and those who held on, were rewarded with a six bagger in two years.

Topps, unfortunately, has never lived up to its potential. The Topps brand name is synonymous with baseball cards, but the company has not been able to recapture the magic it once had with young collectors. Time was, you could go into almost any store, put a buck on the counter and walk away with a few packs of cards. The industry went "premium" several years ago, and now you can't find a pack for less than two bucks--many go for much more. Thats if you can find them at all. The company had a golden opportunity to turn back the clock, and deliver a basic product that would bring kids back into the fold. But instead of providing a "Chevy", cheap for all, abundant, and easy to find, Topps went with a "Cadillac".

Topps also owns Bazooka, another formidable brand name. They have attempted to update the image of this product with today's youth, but the jury is still out on this one.

The Numbers
Here is what bothers us most about this deal. Historically, Topps has always carried a relatively large amount of cash and short term marketable securities on its balance sheet. (This was one of the reasons we've owned shares in the past.) As of the the third quarter (ended 11/25/06) Topps had $85 million in cash and short term marketable securities, and no debt. With 38.7 million shares outstanding, thats the equivalent of $2.20 net cash and ms (net of debt, that is). So, in our value oriented minds, the real price of this deal is $300 million ($385 - $85 cash and ms), or $7.55 per share. Why? Because theoretically, the acquiring company can do whatever they want with this cash. They are paying $385 million for Topps, but immediately (theoretically) being handed $85 million, along with the other assets of the company. Hats off to Eisner. If you can pull this one off, you are getting quite the deal.

We also happen to believe that there is still plenty of value in the Topps and Bazooka brand names. The right management team/owner could reinvent and reinvigorate this company. Maybe we're just jealous that we couldn't come up with the $300 (oops, I mean $385 million) to acquire Topps ourselves.

*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.

Saturday, March 03, 2007

Determining the Truth in a Media-Crazed Financial World; PICO Holdings (PICO) Update

It didn't matter who or where you were this past week, when the markets took a "breather" on Tuesday, you heard about it. And not just once. While it's "great" that there's so much information available through so many mediums, we at Cheap Stocks believe that it's dangerous as well, often leading to investor confusion, and ultimately, poor or ill informed decision making.

We are not making a judgement as to whether last week's actions in the market were over or underblown, we believe that markets are naturally volatile, and as an investor, you have to expect that there will be ups and downs. You can't forget the past.

We've said it before, we are not finding a great deal of value these days-- but that does not necessarily mean that the markets are ripe for a "correction", just means that we're coming up short where we turn over the rocks.

The most interesting story for us was the price action in PICO Holdings this past week. The company hit a several year high recently at $47.75, but pulled back to $38.00: thats a 20% drop in one week. The stock was recently touted in an Oxford Club research piece, and this we believe was a driver of the recent run-up. Don't get us wrong, we love it when our stocks rise, we just prefer that it happen more gradually, for reasons other than what the newsletter of the day said.

Although the initial pullback reflected falling markets, the ulimate 20% drop had little to do with this. The reason for PICO's fall was because the company announced the private placement sale of 2.8 million new PICO shares for $104.5 million, or $37 per share, an amount well under current market price. Seeing that as the current value of the stock, investors quickly pushed shares south toward that level.

Is PICO's current fair value $37 because of the private placement? We believe the private placement does not represent the full value of PICO shares. The size of the deal is quite large, increasing PICO's shares outstanding by 18%, and we believe the $37 price represents a discount to the true value, not uncommon for such a large placement of new shares.

Perhaps the recent run-up to the $48 range put the stock ahead of itself in the short-term, while the pullback was an overreaction to the private placement price. Perhaps the truth is somewhere in the middle

*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.