Company Update:
Avoca Inc: AVOA
Price: $4150/$5000
Current Yield: 8.43%
Shares Out: 8,057 (actual)
Market Cap: $33.4 million
Avid CHEAP STOCKS readers may recall our piece on Avoca Inc, a tiny New Orleans based company which owns 16,000 acre Avoca Island. Our 12/20/04 report Off The Beaten Path:Micro-Cap Value Strategy
Going Private: Getting Around Filing with the SEC and Avoiding Sarbanes- Oxley in the Process referred to this royalty trust, and the company's decision to initiate a reverse stock split, in order to reduce shareholder roles, and avoid filing with the SEC. Your editor went onto explain his rationale for buying a pre-split stake in this seldom traded company.
Fast forward 6 months and I am still holding Avoca. The bid ask has risen to 4150/5000, and that excludes the $350 dividend mentioned in the original report....no gloating here, mind you, this is a tiny company, which rarely trades. If I wanted to sell tomorrow, I'd have trouble finding a buyer. But still, I like this company, which derives most of it's revenue from gas leases.
My point in revisiting Avoca is because of the company's first quarter financial statements that I received in the mail last week. Hats off to Avoca. Remember, they no longer have to file with the SEC, and don't have to send shareholder's reports either. Now if only JG Boswell (ticker BWEL) would afford me, a shareholder, the same luxury. JG Boswell, which now trades at $640 per share, is a $500 million company. It is not required to file either, but getting information as a shareholder is next to impossible. But, thats my problem. I knew what I was buying into.
In case you are wondering about Avoca's results, the company generated $1.09 million in revenue, and had net income of $680 thousand, or $84.46 per share in the first quarter, down from $1.29 million, $771 thousand, and $95.63 for the same quarter last year. The shortfall was due primarily to a major gas well being offline from December until May(31 percent decrease in production). An increase in gas prices (33 percent)helped close the gap. You editor is hanging on to this one.
Thursday, June 16, 2005
Friday, June 10, 2005
Silverleaf(SVLF): Part II
First of all, let’s get one thing straight. We here at Cheap Stocks are not seers, we can’t see into the future, and we don’t believe in short-term trading (or maybe we’re just not good at it). The fact that Silverleaf is up 13 percent (to $1.50) since last weeks report is a coincidence. Now that we have that out of the way, here is Part II of last weeks report.
Recent Events
• In June, 2004, the company exchanged nearly $25 million of its 6% senior subordinated debt maturing in 2007, for the same amount of 8% senior subordinated debt due in 2010, and a cash payment of $271 thousand. Conceivably, this buys the company some time to get its house in order, but if it does not, it simply delays bankruptcy.
• In July 2004, the company purchased 500 acres of land on route 7 in Berkshire County, Massachusetts. This land was formerly the Brodie Mountain ski resort, and is within 25 miles of the company’s Oak N’Spruce resort in South Lee Mass. The company estimated future development of the site would allow for up to 324 units, or the equivalent of 16,848 one-week vacations.
• Restructured loan facility in July, 2004, reducing amount from $35 million to $25 million, while extending due date to March, 2009. In same transaction, paid off $5.4 million term loan, and added $10 million revolving loan.
• In October 2004, acquired 48 two and three bedroom units on 4.8 acres in Davenport, Florida, (near Orlando, Disney World) for $6 million. Received approval from the state to sell 16 of those units.
• In March, 2005, sold the water distribution rights and waste water treatment facilities for eight of their resorts for $13.2 million.
The company has obviously been very aggressive in its efforts to restructure debt, divest of some assets, while attempting to further the core business.
The NCAV Story (in millions)
Current Assets: $324.8
Current Liabilities:$11.5
Long Term Liabilities: $230
NCAV: 83.3
Market Cap: 55
NCAV/Mkt cap:1.5x
Balance Sheet Quality
While the company currently has $8.3 million in cash, the bulk of current assets is comprised of accounts receivable ($194 million) and inventory ($113 million). On the liability, side notes payable ($195 million) and Senior subordinated notes ($35 million) represent the majority. This is not a great balance sheet. In fact, in some respects, its downright scary. Why? As we’ve stated before, we prefer current assets of NCAV companies to have relatively large components of cash, and to be a little lighter on the receivable and inventory side. Receivables need to be collected in order to have true value, and inventories need to be sold. There are no guarantees either of this can be done, so we discount the stated value. On the liability side, the company is carrying a lot of debt, and as well all know, debt eventually needs to be repaid. One interesting feature of Silverleaf’s debt, however is that is “backed” by receivables from customers.
That’s right, the company offers financing to buyers of its timeshares. As of 12/31/04, the company held promissory notes from more than 34,000 customers, in the principal amount of $250 million. That portfolio of notes had an average yield of 15.1 percent, and a weighted average cost of 6.8 percent. Hence, the company makes money by borrowing money, then loaning it to customers. In 2004, the company generated $37.8 million in interest income and $17.6 million in interest expense. The company essentially backs its loans with receivables from customers. This can be risky business. Despite the fact that there is a large spread between what the company pays its lenders, and what it’s customers pay the company in terms of interest rates, this situation can go awry. Lenders have covenants on loans that companies must adhere to, and loans to customers are virtually worthless if customers can’t or won’t pay.
In 2004, the company had an allowance for doubtful accounts of 21.1 percent of the amount receivable (up from 20 percent in 2003). Essentially, that means the company expects to collect only 4 out 5 dollars it loans to customers. There is a lot of risk here, much of it driven by the fact that Silverleaf does not verify customer credit history. This explains why the average yield on the portfolio notes is 15.1 percent.
Off Balance Sheet
Silverleaf also has a wholly owned, off balance sheet subsidiary Silverleaf Finance, which had notes receivable of $84.5 million at year end 2004.
Conclusions
No doubt there is a great deal of risk here. Silverleaf is highly leveraged, and dependent on the ability to keep its lenders happy, while collecting loan payments from customers who may have terrible credit. On the positive side, the company has taken strides improve its balance sheet by restructuring debt, continues to build its core business through the acquisition of additional properties, and has been profitable for five straight quarters. First quarter 2005 sales were up 30 percent to $42.1 million from the same quarter last year, while net income was up slightly to $2.52 million from $2.34 million. I would caution readers to read the company’s most recent 10K and 10Q reports before buying shares in this company. We at Cheap Stocks are cautious on this one, but intrigued just the same. We’ll continue to follow this story.
First of all, let’s get one thing straight. We here at Cheap Stocks are not seers, we can’t see into the future, and we don’t believe in short-term trading (or maybe we’re just not good at it). The fact that Silverleaf is up 13 percent (to $1.50) since last weeks report is a coincidence. Now that we have that out of the way, here is Part II of last weeks report.
Recent Events
• In June, 2004, the company exchanged nearly $25 million of its 6% senior subordinated debt maturing in 2007, for the same amount of 8% senior subordinated debt due in 2010, and a cash payment of $271 thousand. Conceivably, this buys the company some time to get its house in order, but if it does not, it simply delays bankruptcy.
• In July 2004, the company purchased 500 acres of land on route 7 in Berkshire County, Massachusetts. This land was formerly the Brodie Mountain ski resort, and is within 25 miles of the company’s Oak N’Spruce resort in South Lee Mass. The company estimated future development of the site would allow for up to 324 units, or the equivalent of 16,848 one-week vacations.
• Restructured loan facility in July, 2004, reducing amount from $35 million to $25 million, while extending due date to March, 2009. In same transaction, paid off $5.4 million term loan, and added $10 million revolving loan.
• In October 2004, acquired 48 two and three bedroom units on 4.8 acres in Davenport, Florida, (near Orlando, Disney World) for $6 million. Received approval from the state to sell 16 of those units.
• In March, 2005, sold the water distribution rights and waste water treatment facilities for eight of their resorts for $13.2 million.
The company has obviously been very aggressive in its efforts to restructure debt, divest of some assets, while attempting to further the core business.
The NCAV Story (in millions)
Current Assets: $324.8
Current Liabilities:$11.5
Long Term Liabilities: $230
NCAV: 83.3
Market Cap: 55
NCAV/Mkt cap:1.5x
Balance Sheet Quality
While the company currently has $8.3 million in cash, the bulk of current assets is comprised of accounts receivable ($194 million) and inventory ($113 million). On the liability, side notes payable ($195 million) and Senior subordinated notes ($35 million) represent the majority. This is not a great balance sheet. In fact, in some respects, its downright scary. Why? As we’ve stated before, we prefer current assets of NCAV companies to have relatively large components of cash, and to be a little lighter on the receivable and inventory side. Receivables need to be collected in order to have true value, and inventories need to be sold. There are no guarantees either of this can be done, so we discount the stated value. On the liability side, the company is carrying a lot of debt, and as well all know, debt eventually needs to be repaid. One interesting feature of Silverleaf’s debt, however is that is “backed” by receivables from customers.
That’s right, the company offers financing to buyers of its timeshares. As of 12/31/04, the company held promissory notes from more than 34,000 customers, in the principal amount of $250 million. That portfolio of notes had an average yield of 15.1 percent, and a weighted average cost of 6.8 percent. Hence, the company makes money by borrowing money, then loaning it to customers. In 2004, the company generated $37.8 million in interest income and $17.6 million in interest expense. The company essentially backs its loans with receivables from customers. This can be risky business. Despite the fact that there is a large spread between what the company pays its lenders, and what it’s customers pay the company in terms of interest rates, this situation can go awry. Lenders have covenants on loans that companies must adhere to, and loans to customers are virtually worthless if customers can’t or won’t pay.
In 2004, the company had an allowance for doubtful accounts of 21.1 percent of the amount receivable (up from 20 percent in 2003). Essentially, that means the company expects to collect only 4 out 5 dollars it loans to customers. There is a lot of risk here, much of it driven by the fact that Silverleaf does not verify customer credit history. This explains why the average yield on the portfolio notes is 15.1 percent.
Off Balance Sheet
Silverleaf also has a wholly owned, off balance sheet subsidiary Silverleaf Finance, which had notes receivable of $84.5 million at year end 2004.
Conclusions
No doubt there is a great deal of risk here. Silverleaf is highly leveraged, and dependent on the ability to keep its lenders happy, while collecting loan payments from customers who may have terrible credit. On the positive side, the company has taken strides improve its balance sheet by restructuring debt, continues to build its core business through the acquisition of additional properties, and has been profitable for five straight quarters. First quarter 2005 sales were up 30 percent to $42.1 million from the same quarter last year, while net income was up slightly to $2.52 million from $2.34 million. I would caution readers to read the company’s most recent 10K and 10Q reports before buying shares in this company. We at Cheap Stocks are cautious on this one, but intrigued just the same. We’ll continue to follow this story.
Friday, June 03, 2005
Trading Below Net Current Asset Value, and real estate related? A CHEAP STOCKS Dream (Or Nightmare)?
Part I of II
Silverleaf Resorts
Ticker: SVLF
Price: $1.30
Market Cap: $48 million
Average Daily Volume: 52000
P/E: 4
NCAV: $77.2 million
It sounds too good to be true. A company trading below its net current asset value, with real estate exposure. Avid readers of our research know from past postings that if there’s one thing we like better than NCAV companies, it’s companies with exposure to land. Here at Cheap Stocks, we were excited upon discovering this tiny timeshare developer. But the more research we did, the more wary we became. Caution is the name of the game with this company we decided….But isn’t it always with NCAV companies?
Silverleaf, a Dallas Texas based company, owns 12 timeshare resorts in Texas, Missouri, Illionos, Georgia, Massachusetts, and Florida. This company has seen it’s share of tough times in recent years; at one point, it had more than 20 timeshare resorts.(More on that later)
For an overview of the company, the following is taken directly from the company’s 2004 10K report:
Silverleaf traded as high as $29 1/8 back in 1998, but has since fallen on hard times. In 2000, losses started mounting, and the company’s credit rating was slashed. In 2001 the company cut back sales and marketing efforts, and had to negotiate extensions of its credit facilities. Amid a cash crunch, there were doubts that the company could continue as a going concern. In June 2001, Silverleaf's common stock was delisted from the NYSE and it began trading on the OTC market. In May, 2002, the company exchanged nearly $57 million of its 10 ½ percent senior subordinated notes for $28.5 million in 6 percent senior subordinated notes, and 65 percent of the company’s outstanding stock. Clearly, a company in deep trouble. In May, 2004 Silverleaf was off the OTC, and onto the OTC Bulletin Board. This does not sound like a great story; sounds more like a company on the road to bankruptcy.
Fast forward to 2005, and Silverleaf is showing signs of life, having turned a profit for 5 straight quarters (note the current P/E ratio of 4). Silverleaf has shed some assets, but picked up some new ones as well (mainly land). Stay tuned for Part II of this report which we’ll run next week. We'll explore some of the more recent events, go into detail about the risks inherrent in this company, as well as get into the NCAV components and calculation.
*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.
Part I of II
Silverleaf Resorts
Ticker: SVLF
Price: $1.30
Market Cap: $48 million
Average Daily Volume: 52000
P/E: 4
NCAV: $77.2 million
It sounds too good to be true. A company trading below its net current asset value, with real estate exposure. Avid readers of our research know from past postings that if there’s one thing we like better than NCAV companies, it’s companies with exposure to land. Here at Cheap Stocks, we were excited upon discovering this tiny timeshare developer. But the more research we did, the more wary we became. Caution is the name of the game with this company we decided….But isn’t it always with NCAV companies?
Silverleaf, a Dallas Texas based company, owns 12 timeshare resorts in Texas, Missouri, Illionos, Georgia, Massachusetts, and Florida. This company has seen it’s share of tough times in recent years; at one point, it had more than 20 timeshare resorts.(More on that later)
For an overview of the company, the following is taken directly from the company’s 2004 10K report:
The principal business of Silverleaf Resorts, Inc. (“Silverleaf,” the “Company,” or “we”) is the development, marketing, and operation of “drive-to” and “destination” timeshare resorts. As of December 31, 2004, we own eight “drive-to resorts” in Texas, Missouri, Illinois, and Georgia (the “Drive-to Resorts”). We also own four “destination resorts” in Texas, Missouri, and Massachusetts (the “Destination Resorts”). In February 2005, we obtained approval to operate a fifth destination resort in Florida, which was acquired in October 2004. Also in 2005, we reclassified one of our Drive-to Resorts in Texas to a Destination Resort.
The Drive-to Resorts are designed to appeal to vacationers seeking comfortable and affordable accommodations in locations convenient to their residences and are located near major metropolitan areas. Our Drive-to Resorts are located close to principal market areas to facilitate more frequent “short-stay” getaways. We believe such short-stay getaways are growing in popularity as a vacation trend. Our Destination Resorts are located in or near areas with national tourist appeal and offer our customers the opportunity to upgrade into a more upscale resort area as their lifestyles and travel budgets permit. Both the Drive-to Resorts and the Destination Resorts (collectively, the “Existing Resorts”) provide a quiet, relaxing vacation environment. We believe our resorts offer our customers an economical alternative to commercial vacation lodging. The average price for an annual one-week vacation ownership (“Vacation Interval”) for a two-bedroom unit at the Existing Resorts was $9,671 for 2004 and $9,510 for 2003.
Owners of Silverleaf Vacation Intervals at the Existing Resorts (“Silverleaf Owners”) enjoy certain distinct benefits. These benefits include (i) use of vacant lodging facilities at the Existing Resorts through our “Bonus Time” Program; (ii) year-round access to the Existing Resorts’ non-lodging amenities such as fishing, boating, horseback riding, tennis, or golf on a daily basis for little or no additional charge; and (iii) the right to exchange a Vacation Interval for a different time period at a different Existing Resort through our internal exchange program. These benefits are subject to availability and other limitations. Most Silverleaf Owners may also enroll in the Vacation Interval exchange network operated by Resort Condominiums International (“RCI”). Our new destination resort in Florida is not under contract with RCI; however it is under contract with Interval International, Inc., a competitor of RCI.
Silverleaf traded as high as $29 1/8 back in 1998, but has since fallen on hard times. In 2000, losses started mounting, and the company’s credit rating was slashed. In 2001 the company cut back sales and marketing efforts, and had to negotiate extensions of its credit facilities. Amid a cash crunch, there were doubts that the company could continue as a going concern. In June 2001, Silverleaf's common stock was delisted from the NYSE and it began trading on the OTC market. In May, 2002, the company exchanged nearly $57 million of its 10 ½ percent senior subordinated notes for $28.5 million in 6 percent senior subordinated notes, and 65 percent of the company’s outstanding stock. Clearly, a company in deep trouble. In May, 2004 Silverleaf was off the OTC, and onto the OTC Bulletin Board. This does not sound like a great story; sounds more like a company on the road to bankruptcy.
Fast forward to 2005, and Silverleaf is showing signs of life, having turned a profit for 5 straight quarters (note the current P/E ratio of 4). Silverleaf has shed some assets, but picked up some new ones as well (mainly land). Stay tuned for Part II of this report which we’ll run next week. We'll explore some of the more recent events, go into detail about the risks inherrent in this company, as well as get into the NCAV components and calculation.
*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, May 20, 2005
Company Update
Zapata Corp
Ticker: ZAP
Price: $6.7
Shares of Zapata, which we featured in last weeks report, are down 20 percent since then. That's right, a 20 percent drop in one week. There has been no news on the stock though, and the trading volume has been below average, so the sky is not falling. Your editor is holding his shares.
As of last weeks report, Zapata was trading at a 14 percent discount to the value of it's holdings in Omega Protein, Safety International, and cash. Today, that discount is 38 percent.
Please see last weeks report for more on this story. Volatility is sometimes the name of the game with some of the stocks we research here at Cheap Stocks. You definitely need a strong stomach. But we still believe the true value of Zapata will ultimately be unlocked. It just may be a wild ride.
Zapata Corp
Ticker: ZAP
Price: $6.7
Shares of Zapata, which we featured in last weeks report, are down 20 percent since then. That's right, a 20 percent drop in one week. There has been no news on the stock though, and the trading volume has been below average, so the sky is not falling. Your editor is holding his shares.
As of last weeks report, Zapata was trading at a 14 percent discount to the value of it's holdings in Omega Protein, Safety International, and cash. Today, that discount is 38 percent.
Please see last weeks report for more on this story. Volatility is sometimes the name of the game with some of the stocks we research here at Cheap Stocks. You definitely need a strong stomach. But we still believe the true value of Zapata will ultimately be unlocked. It just may be a wild ride.
Wednesday, May 11, 2005
Valuing Zapata Corp:
A different way to play “Oil”
Ticker: ZAP
Price: $8.42
Market Cap: $161.1 million
Shares Outstanding: 19,132,520
Average Daily Volume: 24000
Zapata, a small Rochester NY based holding company, was co-founded by former President George Bush in the 1950’s, as a traditional oil and gas company. Bush was out of the business by the mid 1960’s, and by the 1990’s the company was out of the oil and gas business. Well, technically they were still in the oil business. Just not the type of oil we are dependent on to heat our homes, and propel our cars. Zapata, you see, got into the fish oil business. That’s right, fish oil. Oh, and they are also in the airbag fabric business. They also own the majority of a failed internet business. What a combination.
Your editor stumbled onto Zapata a few years back when the company was trading below its net current asset value; even had occasion to talk about the company on WBBR radios “The Money Show”, in a segment I did on the NCAV concept. What piqued my interest at the time (besides the NCAV story) was the company’s ownership interest in Omega Protein, an interesting little company that had a solid balance sheet, nice earnings prospects, and happened to be the market leader in it’s business. Omega has been on my watch list for years, but it was only recently that I pulled the trigger, and took a position in the stock. But I didn’t buy it the conventional way. I found a cheaper way (in my mind, anyway). I bought Zapata, and now own Omega Protein indirectly. More on why, later.
Omega Protein-Fish Oil Titan
Zapata’s exposure to fish oil is through it’s 58 percent stake in Omega Protein(Ticker:OME). Omega harvests menhaden, (an oily fish found on the gulf and mid-atlantic coasts in the US) and turns it into fish oil (a dietary supplement), fish meal, animal feed, and other products. Fiscal year 2004 net income was $3.2 million (down from $5.8 million in 2003) on sales of $119.65 million (up from $117.93 million in 2003). Of note is the fact that at year end 2004, Omega’s assets included 66 fishing vessels and 32 aircraft. Currently trading at $6.34, the value of Omega shares held by Zapata is $97.3 million.
Safety Components International (Ticker: SAFY)
In September, 2003, Zapata acquired a 54 percent stake (2.6 million shares)in airbag fabric manufacturer Safety Components, for $58 million. Less than a month later, Zapata acquired another 1.5 million shares for $16.9 million, and currently owns 79 percent of the company. Safety earned $10.25 million in 2004 (up from 2003’s $8.2 million) on sales of $247.9 million (flat versus 2003’s $247.1 million). Currently trading at $15.05, the current value of Zapata’s stake is $43.4 million.
ZAP.COM-Shell company
Although barely worth mentioning, Zapata also owns 98 percent of Zap.com, Zapata’s failed internet venture, which currently has no business operations. Still trading for $.10 a share, the company’s stake is worth $5 million, based on recent trading. The company’s only major asset is the $1.79 million in cash on it’s balance sheet.
Sum of the parts valuation
Zapata currently has 19,132,520 shares outstanding.
Omega Protein: 24,964,609
Safety Components: 5,370,147
Zapata’s share of each company:
Omega: 58 percent (or approx 14,500,000 shares)
Safety Components: 79 percent (or 4,242,000 shares)
Each share of Zapata represents:
.76 shares of Omega
.22 shares of Safety Components
Cash Hoard
Zapata also has $65.4 million in cash on its balance sheet (as of 3/31/05). Since the financials of both Omega and Safety are consolidated into Zapata’s financial, we adjust that cash balance by subtracting out both company’s cash, to avoid double counting:
Zapata: $65.4
Omega: $27.7
Safety: $8.3
Net: $29.4 million
Putting it all together:
Each share of Zapata represents:
$1.54 in cash ($29.4 million/19.1325 million shares out)
$4.78 in Omega shares (Omega price of $6.29*.76)
$3.29 in Safety Shares (Safety price of $14.95 *.22)
Total: $9.61
Current price of Zapata: $8.42
Discount to calculated value: 14 percent
The caveats/the risks
First off the 14 percent “discount”(based on my calculations) may not be as compelling as it seems. Since Zapata owns such a large chunk of each company, a discount to market value might apply. That’s how a private valuation firm might view it, anyway. I don’t see it that way for Omega Protein. Safety Components is a different story though. There is little trading in the stock, and a lack of marketability discount might apply.
As I stated earlier, my main reason for buying Zapata was because it was the cheapest way that I could have exposure to Omega Protein. While I am a big believer in the company, Omega has its own measure of risk. The company is dependent on a successful fishing season, and if company harvests of menhaden are low, the stock will suffer, as it has in the past year (the stock was trading as high as $11.80 in mid 2004). This, following is from the companies 3/31/2005 10Q:
Your editor believes this news is already priced into the stock. Only time will tell.
Last Words
While there is some institutional ownership in Zapata, Malcolm Glazer controls more than 51 percent of the company. So basically, shareholders are only as good as the decisions Malcolm makes. One bright note, the company recently underwent an 8 for 1 stock split in April. Liquidity was an issue in the past, we’ll see if this helps.
*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
A different way to play “Oil”
Ticker: ZAP
Price: $8.42
Market Cap: $161.1 million
Shares Outstanding: 19,132,520
Average Daily Volume: 24000
Zapata, a small Rochester NY based holding company, was co-founded by former President George Bush in the 1950’s, as a traditional oil and gas company. Bush was out of the business by the mid 1960’s, and by the 1990’s the company was out of the oil and gas business. Well, technically they were still in the oil business. Just not the type of oil we are dependent on to heat our homes, and propel our cars. Zapata, you see, got into the fish oil business. That’s right, fish oil. Oh, and they are also in the airbag fabric business. They also own the majority of a failed internet business. What a combination.
Your editor stumbled onto Zapata a few years back when the company was trading below its net current asset value; even had occasion to talk about the company on WBBR radios “The Money Show”, in a segment I did on the NCAV concept. What piqued my interest at the time (besides the NCAV story) was the company’s ownership interest in Omega Protein, an interesting little company that had a solid balance sheet, nice earnings prospects, and happened to be the market leader in it’s business. Omega has been on my watch list for years, but it was only recently that I pulled the trigger, and took a position in the stock. But I didn’t buy it the conventional way. I found a cheaper way (in my mind, anyway). I bought Zapata, and now own Omega Protein indirectly. More on why, later.
Omega Protein-Fish Oil Titan
Zapata’s exposure to fish oil is through it’s 58 percent stake in Omega Protein(Ticker:OME). Omega harvests menhaden, (an oily fish found on the gulf and mid-atlantic coasts in the US) and turns it into fish oil (a dietary supplement), fish meal, animal feed, and other products. Fiscal year 2004 net income was $3.2 million (down from $5.8 million in 2003) on sales of $119.65 million (up from $117.93 million in 2003). Of note is the fact that at year end 2004, Omega’s assets included 66 fishing vessels and 32 aircraft. Currently trading at $6.34, the value of Omega shares held by Zapata is $97.3 million.
Safety Components International (Ticker: SAFY)
In September, 2003, Zapata acquired a 54 percent stake (2.6 million shares)in airbag fabric manufacturer Safety Components, for $58 million. Less than a month later, Zapata acquired another 1.5 million shares for $16.9 million, and currently owns 79 percent of the company. Safety earned $10.25 million in 2004 (up from 2003’s $8.2 million) on sales of $247.9 million (flat versus 2003’s $247.1 million). Currently trading at $15.05, the current value of Zapata’s stake is $43.4 million.
ZAP.COM-Shell company
Although barely worth mentioning, Zapata also owns 98 percent of Zap.com, Zapata’s failed internet venture, which currently has no business operations. Still trading for $.10 a share, the company’s stake is worth $5 million, based on recent trading. The company’s only major asset is the $1.79 million in cash on it’s balance sheet.
Sum of the parts valuation
Zapata currently has 19,132,520 shares outstanding.
Omega Protein: 24,964,609
Safety Components: 5,370,147
Zapata’s share of each company:
Omega: 58 percent (or approx 14,500,000 shares)
Safety Components: 79 percent (or 4,242,000 shares)
Each share of Zapata represents:
.76 shares of Omega
.22 shares of Safety Components
Cash Hoard
Zapata also has $65.4 million in cash on its balance sheet (as of 3/31/05). Since the financials of both Omega and Safety are consolidated into Zapata’s financial, we adjust that cash balance by subtracting out both company’s cash, to avoid double counting:
Zapata: $65.4
Omega: $27.7
Safety: $8.3
Net: $29.4 million
Putting it all together:
Each share of Zapata represents:
$1.54 in cash ($29.4 million/19.1325 million shares out)
$4.78 in Omega shares (Omega price of $6.29*.76)
$3.29 in Safety Shares (Safety price of $14.95 *.22)
Total: $9.61
Current price of Zapata: $8.42
Discount to calculated value: 14 percent
The caveats/the risks
First off the 14 percent “discount”(based on my calculations) may not be as compelling as it seems. Since Zapata owns such a large chunk of each company, a discount to market value might apply. That’s how a private valuation firm might view it, anyway. I don’t see it that way for Omega Protein. Safety Components is a different story though. There is little trading in the stock, and a lack of marketability discount might apply.
As I stated earlier, my main reason for buying Zapata was because it was the cheapest way that I could have exposure to Omega Protein. While I am a big believer in the company, Omega has its own measure of risk. The company is dependent on a successful fishing season, and if company harvests of menhaden are low, the stock will suffer, as it has in the past year (the stock was trading as high as $11.80 in mid 2004). This, following is from the companies 3/31/2005 10Q:
During 2004 and 2003, the Company experienced a poor fish catch (approximately 18% and 11%, respectively, below expectations and a similar reduction from 2002), combined with poor oil yields. The reduced fish catch was primarily attributable to adverse weather conditions and the poor oil yields due to the reduced fat content of the fish. As a result of the poor fish catch and reduced yields, the Company experienced significantly higher per unit product costs (approximately 15% increase) during 2004 compared to 2003. The impact of higher cost inventories and fewer volumes available for sale will be carried forward and will adversely affect the Company’s earnings through the first and second quarters of 2005.
Your editor believes this news is already priced into the stock. Only time will tell.
Last Words
While there is some institutional ownership in Zapata, Malcolm Glazer controls more than 51 percent of the company. So basically, shareholders are only as good as the decisions Malcolm makes. One bright note, the company recently underwent an 8 for 1 stock split in April. Liquidity was an issue in the past, we’ll see if this helps.
*The author has a position in Zapata. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.
Thursday, April 28, 2005
Is Value Dead? Again?
For the past five years, value has trounced growth. The S&P 600 Smallcap Barra Value Index, for instance, is up an average of 13.1 percent per year during the past five years, versus just 5.4 percent for the S&P 600 Smallcap Barra Growth Index. For the past year, however, the gap has narrowed, with value barely beating growth (7.68 percent versus 7.62 percent). Are the days of value outperforming growth coming to an end?
The folks at Tweedy Browne & Co. recently sent a sobering letter to shareholders, which announced that both of the company’s funds, Tweedy Browne American Value, and Tweedy Browne Global Value will close to new investors on May 4, 2005. “What’s the big deal” you may wonder? Funds close all the time, usually because there’s too much cash coming in, and not enough places to put it and maintain the funds objective, right? True as that may be, in Tweedy’s case, it’s the stated reasons for closure that have this value investor scratching his head.
The letter quotes fund manager Chris Browne saying:
The fact that Tweedy can no longer find investment ideas that fit its stringent criteria, may mean that value is dead, at least Tweedy’s definition of value. While their honesty is refreshing—and I believe these guys always tell it like it is, a rare virtue in this industry—I can’t help but question whether to cut and run. Afterall, if they can’t find any suitable investments, does that translate into lackluster returns for these funds in the next couple of years?
Chris Browne’s comments continue:
To put Browne’s comments into perspective, thirty years takes us back to the mid 70’s, not a great time for investors. Browne’s words are certainly disheartening.
For those of you who are not familiar with Tweedy Browne, this firm once served as Ben Graham’s brokerage firm. They are true dyed in the wool value investors, seeking to buy firms well below intrinsic value: companies trading at low price to cash flow, low price to book, low P/E ratios, low price to sales ratios. They like management to have a stake in the company, and that insiders are buying, not selling. The Investment Research and Reports section of their website is a must for anyone interested in value investing. One report entitled "What Has Worked In Investing" provides excellent insight into the company’s investment philosophy, and even discusses one of the topics this site is devoted to—companies trading below their net current asset value.
The author has had a position in Tweedy Browne American Value for years, and continues to add to it on a monthly basis. The fund is not a high flyer, but provides decent risk adjusted returns. For the past 5 years through March 31, the fund has averaged 5.45 percent per year versus (3.16) percent for the S&P 500. That’s a spread of more than 8 ½ percent.
I think I’m coming back to my senses. Value isn’t dead, value never dies. Maybe it’s on hiatus. When it returns, the boys at Tweedy will pounce. I’m keeping my Tweedy Browne American Value shares. Thank you (managing partners) Chris Browne, Will Browne, John Spears, Tom Shrager, and Bob Wyckoff for your honesty. We need more like you in this industry.
For the past five years, value has trounced growth. The S&P 600 Smallcap Barra Value Index, for instance, is up an average of 13.1 percent per year during the past five years, versus just 5.4 percent for the S&P 600 Smallcap Barra Growth Index. For the past year, however, the gap has narrowed, with value barely beating growth (7.68 percent versus 7.62 percent). Are the days of value outperforming growth coming to an end?
The folks at Tweedy Browne & Co. recently sent a sobering letter to shareholders, which announced that both of the company’s funds, Tweedy Browne American Value, and Tweedy Browne Global Value will close to new investors on May 4, 2005. “What’s the big deal” you may wonder? Funds close all the time, usually because there’s too much cash coming in, and not enough places to put it and maintain the funds objective, right? True as that may be, in Tweedy’s case, it’s the stated reasons for closure that have this value investor scratching his head.
The letter quotes fund manager Chris Browne saying:
“Current stock market levels worldwide present few investment opportunities selling at an attractive discount to intrinsic value. Moreover, certain holdings of both Funds have risen to levels of full value in our view, resulting in both funds being net sellers of securities”.As a long-time shareholder of Tweedy Browne American Value, and believer in the firm’s investment process, that statement is scary.
The fact that Tweedy can no longer find investment ideas that fit its stringent criteria, may mean that value is dead, at least Tweedy’s definition of value. While their honesty is refreshing—and I believe these guys always tell it like it is, a rare virtue in this industry—I can’t help but question whether to cut and run. Afterall, if they can’t find any suitable investments, does that translate into lackluster returns for these funds in the next couple of years?
Chris Browne’s comments continue:
“Since the collapse of the technology, media and telecommunications bubble in 2000 wrung out the grossly inflated excesses of the so-called growth sectors of the market, the more mundane value stocks have risen to levels at or near their private market values. The result is that the price difference between the most expensive and the least expensive stocks is narrower than we can recall in more than 30 years. Current cash levels at both funds provide more than enough “dry powder” to take advantage of buying opportunities when they present themselves. At the present time, having no limits on allowing new investors into the Funds could excessively dilute existing Funds shareholders’ investments in a limited pool of cheap stocks.”
To put Browne’s comments into perspective, thirty years takes us back to the mid 70’s, not a great time for investors. Browne’s words are certainly disheartening.
For those of you who are not familiar with Tweedy Browne, this firm once served as Ben Graham’s brokerage firm. They are true dyed in the wool value investors, seeking to buy firms well below intrinsic value: companies trading at low price to cash flow, low price to book, low P/E ratios, low price to sales ratios. They like management to have a stake in the company, and that insiders are buying, not selling. The Investment Research and Reports section of their website is a must for anyone interested in value investing. One report entitled "What Has Worked In Investing" provides excellent insight into the company’s investment philosophy, and even discusses one of the topics this site is devoted to—companies trading below their net current asset value.
The author has had a position in Tweedy Browne American Value for years, and continues to add to it on a monthly basis. The fund is not a high flyer, but provides decent risk adjusted returns. For the past 5 years through March 31, the fund has averaged 5.45 percent per year versus (3.16) percent for the S&P 500. That’s a spread of more than 8 ½ percent.
I think I’m coming back to my senses. Value isn’t dead, value never dies. Maybe it’s on hiatus. When it returns, the boys at Tweedy will pounce. I’m keeping my Tweedy Browne American Value shares. Thank you (managing partners) Chris Browne, Will Browne, John Spears, Tom Shrager, and Bob Wyckoff for your honesty. We need more like you in this industry.
Saturday, April 23, 2005
Inforte Corp: Not Quite Below NCAV, but close, and compelling
Ticker: INFT
Price: $3.33
P/E: NM
Market Cap: $37 (million)
Net Current Asset Value (estimated): $31
Average daily volume: 38,000
Inforte is a Chicago based consulting company, specializing in customer management, business intelligence and analytics and operational stratregy. In 2004, according to the company’s 10K, the top 5 clients represented 39 percent of total revenue, while the top 10 represented 56 percent. Clients include NASA, Cadbury Schweppes, Guardian Life Insurance, Sony Pictures, and Vodafone, among others.
Not Quite Below NCAV
Our initial research recently identified this company as trading below its NCAV. But after further research, we determined that the reason it appeared on our screen, is because the company recently paid a special cash dividend of $1.50 per share (or $17.3 million in total), which is reflected in the company’s price and market cap, but not in the company’s latest financial statements. Confused? There is a simple explanation. Companies file quarterly reports, so any transactions affecting the financial statements that are done between quarters don’t show up until the next quarterly filing. Meanwhile, transactions that effect price, such as a dividend, are reflected immediately. So, while Inforte’s price and market cap (an integral part of the NCAV equation) have dropped because of the dividend payment, it’s most recent balance sheet data (another integral part of the NCAV calculation) has not yet been adjusted. Feel free to e-mail us at Cheap Stocks if this still does not make sense.
The Numbers
Fiscal year 2004 sales were $50.5 million, up 35 percent from 2003’s $37.4 million. Net loss was $560 thousand in 2004, versus net income of $1.75 million in 2003. However, 2004’s net loss included an after tax loss of $1.3 million, so income from continuing operations was $.07 for 2004 versus $.16 for 2003. First quarter 2005 sales were down 21 percent to $9.5 million, from the same quarter last year ($12.1 million). Sales declines were due to the loss of a significant client, however, there was no surprise here. Management guidelines for sales were met.
The Balance Sheet
As of 3/30/05, the company had $46 million in cash and short-term marketable securities, $6.1 million in long-term marketable securities, and no debt. If we subtract the $17.3 million special dividend payment-we are assuming it was paid out of cash and short-term securities-that leaves $34.8 million in cash and securities, or $3.04 per share. Keep in mind that the stock is trading at just $3.48. All in all, this is a strong balance sheet.
The NCAV Calculation (in millions)
As we stated above, this company is not trading below it’s NCAV, but here’s the calculation, anyway
Current Market Cap: $37.1
Current Assets: $40 (estimated, after paying special dividend)
Current Liabilities: $9
Long Term Liabilities: $0
Net Current Asset Value: $31
NCAV/Market Cap: .84
The Street/Institutional Ownership
Currently, just two analysts are covering this company. There is however, some institutional ownership.
Fidelity: 9.7%
Dimensional Fund Advisors: 8.3 %
Bank of America: 8.1%
Royce & Associates: 6.8 %
Vanguard: 1.7%
Bridgeway Capital: 1.6%
(Several Others are at or below 1%)
Conclusion
2004 showed nice sales growth for this company. However, as 2005’s first quarter displayed, one of the risks here is the dependence on a handful of clients. Lose one or two, and sales will take a hit. On the positive side, Inforte’s balance sheet is rock solid, and offers a great deal of downside protection. If you purchase the stock at todays closing price of $3.33, you are theoretically buying $3.04 in cash and securities, and getting the business, and its other assets for $.29. That’s the kind of story that we like here at Cheap Stocks.
*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.
Ticker: INFT
Price: $3.33
P/E: NM
Market Cap: $37 (million)
Net Current Asset Value (estimated): $31
Average daily volume: 38,000
Inforte is a Chicago based consulting company, specializing in customer management, business intelligence and analytics and operational stratregy. In 2004, according to the company’s 10K, the top 5 clients represented 39 percent of total revenue, while the top 10 represented 56 percent. Clients include NASA, Cadbury Schweppes, Guardian Life Insurance, Sony Pictures, and Vodafone, among others.
Not Quite Below NCAV
Our initial research recently identified this company as trading below its NCAV. But after further research, we determined that the reason it appeared on our screen, is because the company recently paid a special cash dividend of $1.50 per share (or $17.3 million in total), which is reflected in the company’s price and market cap, but not in the company’s latest financial statements. Confused? There is a simple explanation. Companies file quarterly reports, so any transactions affecting the financial statements that are done between quarters don’t show up until the next quarterly filing. Meanwhile, transactions that effect price, such as a dividend, are reflected immediately. So, while Inforte’s price and market cap (an integral part of the NCAV equation) have dropped because of the dividend payment, it’s most recent balance sheet data (another integral part of the NCAV calculation) has not yet been adjusted. Feel free to e-mail us at Cheap Stocks if this still does not make sense.
The Numbers
Fiscal year 2004 sales were $50.5 million, up 35 percent from 2003’s $37.4 million. Net loss was $560 thousand in 2004, versus net income of $1.75 million in 2003. However, 2004’s net loss included an after tax loss of $1.3 million, so income from continuing operations was $.07 for 2004 versus $.16 for 2003. First quarter 2005 sales were down 21 percent to $9.5 million, from the same quarter last year ($12.1 million). Sales declines were due to the loss of a significant client, however, there was no surprise here. Management guidelines for sales were met.
The Balance Sheet
As of 3/30/05, the company had $46 million in cash and short-term marketable securities, $6.1 million in long-term marketable securities, and no debt. If we subtract the $17.3 million special dividend payment-we are assuming it was paid out of cash and short-term securities-that leaves $34.8 million in cash and securities, or $3.04 per share. Keep in mind that the stock is trading at just $3.48. All in all, this is a strong balance sheet.
The NCAV Calculation (in millions)
As we stated above, this company is not trading below it’s NCAV, but here’s the calculation, anyway
Current Market Cap: $37.1
Current Assets: $40 (estimated, after paying special dividend)
Current Liabilities: $9
Long Term Liabilities: $0
Net Current Asset Value: $31
NCAV/Market Cap: .84
The Street/Institutional Ownership
Currently, just two analysts are covering this company. There is however, some institutional ownership.
Fidelity: 9.7%
Dimensional Fund Advisors: 8.3 %
Bank of America: 8.1%
Royce & Associates: 6.8 %
Vanguard: 1.7%
Bridgeway Capital: 1.6%
(Several Others are at or below 1%)
Conclusion
2004 showed nice sales growth for this company. However, as 2005’s first quarter displayed, one of the risks here is the dependence on a handful of clients. Lose one or two, and sales will take a hit. On the positive side, Inforte’s balance sheet is rock solid, and offers a great deal of downside protection. If you purchase the stock at todays closing price of $3.33, you are theoretically buying $3.04 in cash and securities, and getting the business, and its other assets for $.29. That’s the kind of story that we like here at Cheap Stocks.
*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, April 13, 2005
What Should Warren Buffet Buy Next?
Warren Buffet’s
annual letter to shareholders is a must read. The content is both informative and entertaining. The Oracle of Omaha truly has a way with words. This is not your ordinary letter to shareholders from any ordinary Chairman. This is 24 pages of financial poetry, from the man who has led Berkshire Hathaway to an average annual gain of 21.9 percent from 1965-2004. To put that into perspective, a $100 investment in 1965 would now be worth more than $275,000!
Buffet is classic because he pulls no punches. His honesty is refreshing, his common sense approach to investing is timeless. He assigns no blame for what went “wrong” (???), other than to himself.
Perhaps the most interesting part of this years letter was a list of acquisition criteria that he and Charlie Munger (Vice Chairman) will be using in their pursuit to spend some of the Berkshire Hathaway’s massive amount cash--$43 billion at year end 2004. The following is from Berkshire Hathaway’s 2004 annual report:
We at Cheap Stocks were excited when we saw this. It presented us with a challenge; to try and identify companies meeting Buffet’s criteria. Unfortunately, there are a lot of unknowns here, and we can’t get inside Buffet’s mind. That’s where the true selection criteria live, that’s where the decisions are made. It’s not all about the numbers, it’s the gut, the experience, the intelligence that Buffet possesses. But we thought we’d take a crack at it anyway.
We narrowed our list based on the following criteria:
1. Pretax income of at least $75 million—we screened for this in both 2003 and 2004
2. High returns on equity—-we looked for at least 20% ROE in 2003 and 2004
3. Simple businesses——we eliminated any technology companies, or any others that lack simplicity, in our minds, anyway.
4. Cost of Acquisitions in the $5-20 billion range—For this, we used enterprise value (Market cap + Debt – Cash), because that is a better representation of how the market currently values a company, than market cap alone. We also assumed that the offering price would include a premium. So instead of searching between $5 and $20 billion, we set the criteria between $ 3 and $17 billion. This allows room for a premium over the current enterprise value
5. Relatively low level of debt-We eliminated companies that have a total debt to equity ratio of more than 50 percent.
6. High level of profitability-Net profit margins had to be at least 10 percent for the latest trailing twelve months, fiscal year 2003, and fiscal year 2004.
The Results
Twenty one companies made the initial cut, 12 of which we eliminated as being either too complicated, or not Buffet’s style (in our minds, anyway). Those we eliminated included the following: (Prices are as of 4/13 close)
Mcgraw Hill (MHP), $83.96
Adobe Systems (ADBE), $65.07
Electronic Arts (ERTS), $49.64
St Jude Medical (STJ), $35.25
Forest Labs (FRX), $34.77
Biomet (BMET), $37.86
Rockwell Collins (COL), $45.35
Varian Medical (VAR), $33.68
American Pharmaceutical (APPX), $56.5
Lincare Holdings (LNCR), $43.72
Eaton Vance Corp (EV), $22.45
SEI Investments (SEIC), $34.365
The Final List
That left us with nine companies. Some of these may be a stretch as well. For instance, we know WB has bought retailers in the past (See’s Candy, Nebraska Furniture Mart, Dairy Queen), but would he be interested in a clothing retailer? I’m not convinced that he would, but we’ll leave them on the list anyway. Remember, this was for fun.
Harley–Davidson (HDI) ($48.93)-Well-known motorcycle manufacturer
Wrigley (WWY)($64.7)- Extremely profitable gum powerhouse. The author has a small position in this stock)
Apollo Group (APOL)($74.89)-On-line secondary education pioneer
Coach Inc (COH) ($27.57)- Marketer of leather goods, premium handbags
Mattel (MAT)($20.69) - Toy manufacturer best known for the Barbie line, Matchbox cars, and Fisher Price products
Abercrombie & Fitch (ANF)($57.68) - Retailer of casual apparel.
Chico’s FAS (CHS)($27.71) - Retailer of casual women’s clothing
Brown & Brown (BRO)($44.30) - Insurance and reinsurance products
Paychex (PAYX)($32.16) - Payroll and recordkeeping services.
If nothing else, this exercise has done one thing: Identified a list of highly profitable companies, both in terms of net profit margins, and ROE’s, with low levels of debt. We’ll see what Warren Buffet ends up buying in the coming year, if anything.
I do have one suggestion for him. Your editor is a shareholder of a highly profitable, well-known brand name company that he could probably pick up for between $2 and $ 3 billion. It’s business is fairly simple, it’s profit margins are consistently above 15 percent, and it’s owners may be looking to get out. Sound like anything you read about in a previous Cheap Stocks post? If you guessed Tootsie Roll, you’d be correct. WB loved Dairy Queen, and ultimately bought the company. Wonder if he likes Charleston Chews, Tootsie Pops, Dubble Bubble gum, or Andes mints? We can only hope.
Warren Buffet’s
annual letter to shareholders is a must read. The content is both informative and entertaining. The Oracle of Omaha truly has a way with words. This is not your ordinary letter to shareholders from any ordinary Chairman. This is 24 pages of financial poetry, from the man who has led Berkshire Hathaway to an average annual gain of 21.9 percent from 1965-2004. To put that into perspective, a $100 investment in 1965 would now be worth more than $275,000!
Buffet is classic because he pulls no punches. His honesty is refreshing, his common sense approach to investing is timeless. He assigns no blame for what went “wrong” (???), other than to himself.
Perhaps the most interesting part of this years letter was a list of acquisition criteria that he and Charlie Munger (Vice Chairman) will be using in their pursuit to spend some of the Berkshire Hathaway’s massive amount cash--$43 billion at year end 2004. The following is from Berkshire Hathaway’s 2004 annual report:
BERKSHIRE HATHAWAY INC.
ACQUISITION CRITERIA
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units),
(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations),
(3) Businesses earning good returns on equity while employing little or no debt,
(4) Management in place (we can’t supply it),
(5) Simple businesses (if there’s lots of technology, we won’t understand it),
(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily,
about a transaction when price is unknown).
The larger the company, the greater will be our interest: We would like to make an acquisition in the $5-20 billion range.We are not interested, however, in receiving suggestions about purchases we might make in the general stock market.
We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer —customarily within five minutes — as to whether we’re interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. We don’t participate in auctions.
Charlie and I frequently get approached about acquisitions that don’t come close to meeting our tests: We’ve found that if you advertise an interest in buying collies, a lot of people will call hoping to sell you their cocker spaniels. A line from a country song expresses our feeling about new ventures, turnarounds, or auction-like sales: “When the phone don’t ring, you’ll know it’s me.”
We at Cheap Stocks were excited when we saw this. It presented us with a challenge; to try and identify companies meeting Buffet’s criteria. Unfortunately, there are a lot of unknowns here, and we can’t get inside Buffet’s mind. That’s where the true selection criteria live, that’s where the decisions are made. It’s not all about the numbers, it’s the gut, the experience, the intelligence that Buffet possesses. But we thought we’d take a crack at it anyway.
We narrowed our list based on the following criteria:
1. Pretax income of at least $75 million—we screened for this in both 2003 and 2004
2. High returns on equity—-we looked for at least 20% ROE in 2003 and 2004
3. Simple businesses——we eliminated any technology companies, or any others that lack simplicity, in our minds, anyway.
4. Cost of Acquisitions in the $5-20 billion range—For this, we used enterprise value (Market cap + Debt – Cash), because that is a better representation of how the market currently values a company, than market cap alone. We also assumed that the offering price would include a premium. So instead of searching between $5 and $20 billion, we set the criteria between $ 3 and $17 billion. This allows room for a premium over the current enterprise value
5. Relatively low level of debt-We eliminated companies that have a total debt to equity ratio of more than 50 percent.
6. High level of profitability-Net profit margins had to be at least 10 percent for the latest trailing twelve months, fiscal year 2003, and fiscal year 2004.
The Results
Twenty one companies made the initial cut, 12 of which we eliminated as being either too complicated, or not Buffet’s style (in our minds, anyway). Those we eliminated included the following: (Prices are as of 4/13 close)
Mcgraw Hill (MHP), $83.96
Adobe Systems (ADBE), $65.07
Electronic Arts (ERTS), $49.64
St Jude Medical (STJ), $35.25
Forest Labs (FRX), $34.77
Biomet (BMET), $37.86
Rockwell Collins (COL), $45.35
Varian Medical (VAR), $33.68
American Pharmaceutical (APPX), $56.5
Lincare Holdings (LNCR), $43.72
Eaton Vance Corp (EV), $22.45
SEI Investments (SEIC), $34.365
The Final List
That left us with nine companies. Some of these may be a stretch as well. For instance, we know WB has bought retailers in the past (See’s Candy, Nebraska Furniture Mart, Dairy Queen), but would he be interested in a clothing retailer? I’m not convinced that he would, but we’ll leave them on the list anyway. Remember, this was for fun.
Harley–Davidson (HDI) ($48.93)-Well-known motorcycle manufacturer
Wrigley (WWY)($64.7)- Extremely profitable gum powerhouse. The author has a small position in this stock)
Apollo Group (APOL)($74.89)-On-line secondary education pioneer
Coach Inc (COH) ($27.57)- Marketer of leather goods, premium handbags
Mattel (MAT)($20.69) - Toy manufacturer best known for the Barbie line, Matchbox cars, and Fisher Price products
Abercrombie & Fitch (ANF)($57.68) - Retailer of casual apparel.
Chico’s FAS (CHS)($27.71) - Retailer of casual women’s clothing
Brown & Brown (BRO)($44.30) - Insurance and reinsurance products
Paychex (PAYX)($32.16) - Payroll and recordkeeping services.
If nothing else, this exercise has done one thing: Identified a list of highly profitable companies, both in terms of net profit margins, and ROE’s, with low levels of debt. We’ll see what Warren Buffet ends up buying in the coming year, if anything.
I do have one suggestion for him. Your editor is a shareholder of a highly profitable, well-known brand name company that he could probably pick up for between $2 and $ 3 billion. It’s business is fairly simple, it’s profit margins are consistently above 15 percent, and it’s owners may be looking to get out. Sound like anything you read about in a previous Cheap Stocks post? If you guessed Tootsie Roll, you’d be correct. WB loved Dairy Queen, and ultimately bought the company. Wonder if he likes Charleston Chews, Tootsie Pops, Dubble Bubble gum, or Andes mints? We can only hope.
Saturday, April 09, 2005
Company Update
Tootsie Roll Industries
Ticker: TR (A shares), TROLB (B shares)
Price: $32.27(A shares)
Shares of Tootsie Roll were up more than 8 percent yesterday ($2.47) based on a Business Week article that echoed sentiment we featured in our January 28th column Rolling Towards a Takeover that presumed that due to aging owners, and a very strong brand name, Tootsie Roll may be an attractive takeover target.
The Business Week article quotes Elliot Schlang, an analyst with LJR Great Lakes Review who follows the company, projecting a takeout price of between $35 and $37 per share. Your editor has taken a position in Tootsie Roll within the past two months, but is not satisfied with the takeout range Schlang suggests.
A caution here for readers who are interested in this company. While Tootsie Roll had a nice gain yesterday, this was due to the Business Week article, obviously. There is no new information to suggest that a takeover is imminent. While we at Cheap Stocks expect it in the future, no one knows when (or if, for that matter).
While we are happy to be up 12 percent since purchasing the shares in the $29.50 range (return includes the recent 3% stock dividend, and $.07 cash dividend), we would not be surprised to see shares pull back once again, when the markets realize that while the Business Week article has merit in principle, the timing is uncertain.
Tootsie Roll Industries
Ticker: TR (A shares), TROLB (B shares)
Price: $32.27(A shares)
Shares of Tootsie Roll were up more than 8 percent yesterday ($2.47) based on a Business Week article that echoed sentiment we featured in our January 28th column Rolling Towards a Takeover that presumed that due to aging owners, and a very strong brand name, Tootsie Roll may be an attractive takeover target.
The Business Week article quotes Elliot Schlang, an analyst with LJR Great Lakes Review who follows the company, projecting a takeout price of between $35 and $37 per share. Your editor has taken a position in Tootsie Roll within the past two months, but is not satisfied with the takeout range Schlang suggests.
A caution here for readers who are interested in this company. While Tootsie Roll had a nice gain yesterday, this was due to the Business Week article, obviously. There is no new information to suggest that a takeover is imminent. While we at Cheap Stocks expect it in the future, no one knows when (or if, for that matter).
While we are happy to be up 12 percent since purchasing the shares in the $29.50 range (return includes the recent 3% stock dividend, and $.07 cash dividend), we would not be surprised to see shares pull back once again, when the markets realize that while the Business Week article has merit in principle, the timing is uncertain.
Thursday, April 07, 2005
Company Update:
PICO Holdings
Ticker: PICO : $26.10
Market Cap: $322.76 million
Average Daily Volume: 18000
We featured PICO Holdings in our January 21st column: PICO Holdings, Mini Berkshire Hathaway?, and wanted to give an update, based on a recent event.
On April 5th , the company’s subsidiary Vidler Water Company, announced an agreement to sell 15,470 acres of Arizona land, along with 42,000 acre feet of water, to an unnamed Arizona developer, for $95.25 million in cash, or $6157.10 per acre. The carrying cost of the assets being sold is $35 million.
That’s a $60 million capital gain for PICO. More relevant, though is the purchase price, relative to PICO’s market cap of $323 million. I continue to be impressed by PICO management, and their ability to identify and purchase undervalued assets, and ultimately convert them into cash. (The author does have a position in PICO Holdings)
It is not clear, at this point, the tax consequences of the property sale. Nor is it clear how PICO will utilize the proceeds. There really are just four possibilities: A share buyback (unlikely), acquisitions, institution of a dividend (also unlikely), further investment in undervalued (in management’s eyes) securities, or a combination. Stay tuned.
*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.
PICO Holdings
Ticker: PICO : $26.10
Market Cap: $322.76 million
Average Daily Volume: 18000
We featured PICO Holdings in our January 21st column: PICO Holdings, Mini Berkshire Hathaway?, and wanted to give an update, based on a recent event.
On April 5th , the company’s subsidiary Vidler Water Company, announced an agreement to sell 15,470 acres of Arizona land, along with 42,000 acre feet of water, to an unnamed Arizona developer, for $95.25 million in cash, or $6157.10 per acre. The carrying cost of the assets being sold is $35 million.
That’s a $60 million capital gain for PICO. More relevant, though is the purchase price, relative to PICO’s market cap of $323 million. I continue to be impressed by PICO management, and their ability to identify and purchase undervalued assets, and ultimately convert them into cash. (The author does have a position in PICO Holdings)
It is not clear, at this point, the tax consequences of the property sale. Nor is it clear how PICO will utilize the proceeds. There really are just four possibilities: A share buyback (unlikely), acquisitions, institution of a dividend (also unlikely), further investment in undervalued (in management’s eyes) securities, or a combination. Stay tuned.
*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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