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Tuesday, September 15, 2009
Tuesday, September 01, 2009
Steak 'n Shake (SNS) Primer: Cheap Stocks Guest Blogger Series
Today's post is the first(and hopefully not last)in a series of pieces written by guest bloggers. Today's guest is an investment analyst in the Philadelphia area. I've known him for a few years, and during that time, he's demonstrated an affinity for deep value. He's also been a long-time Cheap Stocks reader. When we first discussed his idea (Steak 'n Shake), I hadn't really ever considered the guest blogging concept. But, I'm happy to try new things here at Cheap Stocks, and give readers the benefit of the insights of others.
Today's guest blogger wishes to remain anonymous. This gave me great pause initially, until I remembered that I'd written this site anonymously for several years. He is also in the process of launching his own site Fresh, and we look forward to reading about his ideas.
The Birth of a Holding Company from the Town of Buffetville
Steak ‘n Shake (SNS)…May I take your order?
Management Direction (from 3Q09 10Q)
New management, during the fourth quarter of fiscal year 2008, enacted a change in strategic direction under which we began to operate in a manner designed to generate cash. Our long-term objective is to maximize intrinsic business value per share of the Company. (Intrinsic value is computed by taking all future cash flows into and out of the business and then discounting the resultant number at an appropriate interest rate.) Thus, our financial goal is to maximize free cash flow and return on invested capital. We regard capital allocation as immensely important to creating shareholder value. Steak n Shake is transforming into a holding company. Its basic premise is to reinvest cash generated from its operating subsidiaries into any investments with the objective of achieving high risk-adjusted returns. Pursuant to a resolution of the Company’s Board of Directors on June 17, 2009, all investment and other capital allocation decisions are made for the Company by Sardar Biglari, Chairman and Chief Executive Officer.
Steak and Shake is a restaurant chain with system-wide sales of $700 Million and 486 units (413 company owned, 73 franchised), which is on the verge of evolving into a capital allocation vehicle.
Mr. Biglari (age 31) gained control of Steak ‘n Shake last year (after a drawn out proxy fight) and has since turned the company around by reducing expenses, curtailing capital expenditures, focusing on core products, and lowering prices --- which has resulted in positive free cash flow and increased guest traffic.
A few bullet points on SNS’s financial position as July 1st, 2009:
• Cash and cash equivalents are roughly $38MM
• Long term debt has essentially been eliminated, which should save roughly $1-2 MM/yr in interest costs (not considering the potential merger with Western Sizzlin (WEST – see Additional Information), which would add to the debt load and interest expense)
• $13.7 MM outstanding on a revolving credit facility at a rate of One Month LIBOR + 350 bps
• Operating expenses have been dramatically reduced from the prior period (Nine months ending July 1, 2008) by about $12 MM (according to Biglari there could be more reductions to come)
• Generated $41 MM in cash from operations for nine months ending 7/1/2009, $13 MM of that was related to income tax refunds that were received during the period
• Operating Cash Flows could approach $25-$30 MM annually going forward
• Maintenance Cap Ex. is expected to be roughly $5-6 MM annually (according to Biglari) as new company store openings will not be taking place
• SNS Market Cap = approximately $318 MM as of 8/28/2009
On top of the attractive financial metrics you have another layer of conservatism with management as they are value oriented, risk averse, transparent, shareholder friendly, and have the utmost integrity. In addition, “free cash flow coupons” will be redeployed to the greenest pastures rather than systematically into the business. This creates an added bonus as intrinsic value can grow at an above average rate.
In addition, SNS owns a lot of its real estate (Land and Buildings for 149 locations, 12 improved properties, and 16 parcels held for sale, carried at around $315 MM excluding improvements and depreciation, Capital lease obligations stand at $132 MM), which helps create a floor for the valuation and leaves the potential for resource conversion opportunities. Refranchising is also an option to generate cash and free up capital as SNS has many company owned restaurants.
SNS has historically generated strong cash inflows, but outflows were mismanaged and reinvested back into the company in the pursuit of sales growth with complete disregard for ROIC. A few years ago SNS was generating roughly $60 MM in operating cash flows, but it was squandered away by prior management.
Many successful capital allocaters started out in a similar way; however, not many had the type of cash flows and assets that Mr. Biglari has at his disposal. If you’re wondering if SNS is a viable business with a “moat” then I suggest you read this article written by Roger Ebert. Mr. Biglari recently said that he was even surprised by the strength of the brand after he took over.
Mr. Biglari’s record with his Investment Partnership (The Lion Fund – reminiscent of the Buffet Partnership) has been impressive and provides a paper trail for his capital allocation abilities. As of 12/31/2008, The Lion Fund (TLF) had outperformed the S&P 500 by 17% annually since inception (2000). One thing to note is that SNS and Western Sizzlin (WEST) represent over 50% of The Lion Fund. WEST has the bulk of its shareholder’s equity invested in SNS and Biglari has the majority of his net worth invested in TLF --- Interests are aligned.
So here you have a sizeable cash flow stream (relative to current market valuation), valuable assets, and an iconic brand in the hands of a capital allocator from the town of Buffetville --- who knows?...maybe good things can happen…
Additional Information:
Western Sizzlin, which was first entity where Mr. Biglari gained control, recently had their AGM. An intent to merge Steak and Shake and Western Sizzlin (Company Structure) was announced the same day. Here are the best notes I could find of the meeting.
Timeline of Biglari’s control endeavors.
Letter to SNS Shareholders (10/21/2008)
NYSE Opening Bell --- Same day as AGM and NASDAQ Stock Market Closing Bell (8/13/2009)
Western Sizzlin Corporation Rings The NASDAQ Stock Market Closing Bell --- Those are WEST shareholders who were there for the AGM in the back.
Sardar Biglari's Speech at the NASDAQ Stock Market Closing Bell
Corner of Berkshire & Fairfax Investor Message Board (They have a category dedicated to discussion about Sardar Biglari, Western Sizzlin, & Steak ‘n Shake)
*The author has positions in Western Sizzlin and Steak'n Shake. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
Today's guest blogger wishes to remain anonymous. This gave me great pause initially, until I remembered that I'd written this site anonymously for several years. He is also in the process of launching his own site Fresh, and we look forward to reading about his ideas.
The Birth of a Holding Company from the Town of Buffetville
Steak ‘n Shake (SNS)…May I take your order?
Management Direction (from 3Q09 10Q)
New management, during the fourth quarter of fiscal year 2008, enacted a change in strategic direction under which we began to operate in a manner designed to generate cash. Our long-term objective is to maximize intrinsic business value per share of the Company. (Intrinsic value is computed by taking all future cash flows into and out of the business and then discounting the resultant number at an appropriate interest rate.) Thus, our financial goal is to maximize free cash flow and return on invested capital. We regard capital allocation as immensely important to creating shareholder value. Steak n Shake is transforming into a holding company. Its basic premise is to reinvest cash generated from its operating subsidiaries into any investments with the objective of achieving high risk-adjusted returns. Pursuant to a resolution of the Company’s Board of Directors on June 17, 2009, all investment and other capital allocation decisions are made for the Company by Sardar Biglari, Chairman and Chief Executive Officer.
Steak and Shake is a restaurant chain with system-wide sales of $700 Million and 486 units (413 company owned, 73 franchised), which is on the verge of evolving into a capital allocation vehicle.
Mr. Biglari (age 31) gained control of Steak ‘n Shake last year (after a drawn out proxy fight) and has since turned the company around by reducing expenses, curtailing capital expenditures, focusing on core products, and lowering prices --- which has resulted in positive free cash flow and increased guest traffic.
A few bullet points on SNS’s financial position as July 1st, 2009:
• Cash and cash equivalents are roughly $38MM
• Long term debt has essentially been eliminated, which should save roughly $1-2 MM/yr in interest costs (not considering the potential merger with Western Sizzlin (WEST – see Additional Information), which would add to the debt load and interest expense)
• $13.7 MM outstanding on a revolving credit facility at a rate of One Month LIBOR + 350 bps
• Operating expenses have been dramatically reduced from the prior period (Nine months ending July 1, 2008) by about $12 MM (according to Biglari there could be more reductions to come)
• Generated $41 MM in cash from operations for nine months ending 7/1/2009, $13 MM of that was related to income tax refunds that were received during the period
• Operating Cash Flows could approach $25-$30 MM annually going forward
• Maintenance Cap Ex. is expected to be roughly $5-6 MM annually (according to Biglari) as new company store openings will not be taking place
• SNS Market Cap = approximately $318 MM as of 8/28/2009
On top of the attractive financial metrics you have another layer of conservatism with management as they are value oriented, risk averse, transparent, shareholder friendly, and have the utmost integrity. In addition, “free cash flow coupons” will be redeployed to the greenest pastures rather than systematically into the business. This creates an added bonus as intrinsic value can grow at an above average rate.
In addition, SNS owns a lot of its real estate (Land and Buildings for 149 locations, 12 improved properties, and 16 parcels held for sale, carried at around $315 MM excluding improvements and depreciation, Capital lease obligations stand at $132 MM), which helps create a floor for the valuation and leaves the potential for resource conversion opportunities. Refranchising is also an option to generate cash and free up capital as SNS has many company owned restaurants.
SNS has historically generated strong cash inflows, but outflows were mismanaged and reinvested back into the company in the pursuit of sales growth with complete disregard for ROIC. A few years ago SNS was generating roughly $60 MM in operating cash flows, but it was squandered away by prior management.
Many successful capital allocaters started out in a similar way; however, not many had the type of cash flows and assets that Mr. Biglari has at his disposal. If you’re wondering if SNS is a viable business with a “moat” then I suggest you read this article written by Roger Ebert. Mr. Biglari recently said that he was even surprised by the strength of the brand after he took over.
Mr. Biglari’s record with his Investment Partnership (The Lion Fund – reminiscent of the Buffet Partnership) has been impressive and provides a paper trail for his capital allocation abilities. As of 12/31/2008, The Lion Fund (TLF) had outperformed the S&P 500 by 17% annually since inception (2000). One thing to note is that SNS and Western Sizzlin (WEST) represent over 50% of The Lion Fund. WEST has the bulk of its shareholder’s equity invested in SNS and Biglari has the majority of his net worth invested in TLF --- Interests are aligned.
So here you have a sizeable cash flow stream (relative to current market valuation), valuable assets, and an iconic brand in the hands of a capital allocator from the town of Buffetville --- who knows?...maybe good things can happen…
Additional Information:
Western Sizzlin, which was first entity where Mr. Biglari gained control, recently had their AGM. An intent to merge Steak and Shake and Western Sizzlin (Company Structure) was announced the same day. Here are the best notes I could find of the meeting.
Timeline of Biglari’s control endeavors.
Letter to SNS Shareholders (10/21/2008)
NYSE Opening Bell --- Same day as AGM and NASDAQ Stock Market Closing Bell (8/13/2009)
Western Sizzlin Corporation Rings The NASDAQ Stock Market Closing Bell --- Those are WEST shareholders who were there for the AGM in the back.
Sardar Biglari's Speech at the NASDAQ Stock Market Closing Bell
Corner of Berkshire & Fairfax Investor Message Board (They have a category dedicated to discussion about Sardar Biglari, Western Sizzlin, & Steak ‘n Shake)
*The author has positions in Western Sizzlin and Steak'n Shake. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
Thursday, August 27, 2009
Maui Land and Pineapple Update
If there's anything we like to cover besides net/nets here at Cheap Stocks, it's real estate, more specifically, company's that own relatively large amounts of raw land, commercial property, or a combination of the two. My portfolio is chock full of these companies, from retailers such as Cabela's, to restauarants (Cracker Barrell, Denny's) to shipping company's (Alexander and Baldwin) to agriculture (JG Boswell and Limoneira), to name just a few.
Over the years, I've also sold out of some names as well. Maui Land and Pineapple is a great example. I continue to follow the company, however, looking for a re-entry point, or making a determination of whether I want to take a new position.
MLP, which owns 24,500 acres primarily in Maui, Hawaii, including 10.6 miles of ocean frontage with 3300 of lineal feet along sandy beaches, has fallen on hard times during the recession. The company recently reported a $54 million loss for the second quarter, which included more than $37 million in writedowns, $21.3 million of which represented a decrease in value of the Company’s investment in the Kapalua Bay resort. Clearly, the downturns in real estate prices and resort visitors has been a double whammy for MLP. The stock now trades at $6.22, down 79% from it's 52 week high of $29.69.
While there is still value in MLP, declining cash ($1.5 million) and debt ($60 million short-term, and $35 million long-term) complicate matters for this $50 million market cap company.
Some recent transactions, however, demonstrate the value of some of MLP's land. In March, the company sold its Plantation Golf Course for $50 million in cash. (It's a somewhat complicated transaction, for more detail, see note 10 in the most recent 10Q).
In March 2007, the Company sold the land underlying the Ritz-Carlton, Kapalua hotel. 49 acres, for $25 million in cash and a 21.4% interest in the Hotel JV. As of June 30, 2009, MLP's stake fell to 15.9% of the hotel, due to cash calls in which MLP did not participate.
A good portion of MLP's land is preserved, including the 8,304-acre Pu‘u Kukui Watershed Preserve, which is the largest private nature preserve in Hawai‘i, and the 3,307-acre Honolua-Mokule‘ia Marine Life Conservation District, both located in West Maui. An additional 2000 acres is used in the oompany's pineapple growing operation.
With a current enterprise value of about $145 million, the EV to acres calculation we are fond of works out to just over $5900. Of course, not all of MLP's land is as valuable as the ocean front property, and this calculation does include the preserved land.
We'll keep an eye on this company, it does have it's share of issues, but is interesting nonetheless. Keep in mind that average trading volume is just 35,000 shares/day, and Steve Case owns nearly 43% of the shares.
*The author does not have a position in Maui Land and Pineapple. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
Over the years, I've also sold out of some names as well. Maui Land and Pineapple is a great example. I continue to follow the company, however, looking for a re-entry point, or making a determination of whether I want to take a new position.
MLP, which owns 24,500 acres primarily in Maui, Hawaii, including 10.6 miles of ocean frontage with 3300 of lineal feet along sandy beaches, has fallen on hard times during the recession. The company recently reported a $54 million loss for the second quarter, which included more than $37 million in writedowns, $21.3 million of which represented a decrease in value of the Company’s investment in the Kapalua Bay resort. Clearly, the downturns in real estate prices and resort visitors has been a double whammy for MLP. The stock now trades at $6.22, down 79% from it's 52 week high of $29.69.
While there is still value in MLP, declining cash ($1.5 million) and debt ($60 million short-term, and $35 million long-term) complicate matters for this $50 million market cap company.
Some recent transactions, however, demonstrate the value of some of MLP's land. In March, the company sold its Plantation Golf Course for $50 million in cash. (It's a somewhat complicated transaction, for more detail, see note 10 in the most recent 10Q).
In March 2007, the Company sold the land underlying the Ritz-Carlton, Kapalua hotel. 49 acres, for $25 million in cash and a 21.4% interest in the Hotel JV. As of June 30, 2009, MLP's stake fell to 15.9% of the hotel, due to cash calls in which MLP did not participate.
A good portion of MLP's land is preserved, including the 8,304-acre Pu‘u Kukui Watershed Preserve, which is the largest private nature preserve in Hawai‘i, and the 3,307-acre Honolua-Mokule‘ia Marine Life Conservation District, both located in West Maui. An additional 2000 acres is used in the oompany's pineapple growing operation.
With a current enterprise value of about $145 million, the EV to acres calculation we are fond of works out to just over $5900. Of course, not all of MLP's land is as valuable as the ocean front property, and this calculation does include the preserved land.
We'll keep an eye on this company, it does have it's share of issues, but is interesting nonetheless. Keep in mind that average trading volume is just 35,000 shares/day, and Steve Case owns nearly 43% of the shares.
*The author does not have a position in Maui Land and Pineapple. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
Wednesday, August 12, 2009
Rising Tide Shrinks the Net/Net Universe: Top 5 by Market Cap
Without a doubt, the recent market "recovery" off March lows has had a dramatic effect in the land of misfit companies; more specifically, the number of net/nets is falling. This is not at all surprising; we've seen it happen several times before when markets recover.
There are still 140 or so net/nets with market caps greater than $5 million, but those at the upper end of the market cap spectrum are few and far between. Case and point, on February 19th, there were more than 320 such net/nets; 38 of which had market caps above $100 million. Currently, there are just 10 above $100 million.
The top 5 Net/Nets by market cap:
Adaptec
Ticker:ADPT
Price:$2.91
Market Cap:$350
NCAV:375
Market Cap/NCAV:.93
Cash/Share:$3.14
Opnext Inc
Ticker:OPXT
Price:$2.20
Market Cap:$195
NCAV:$200
Market Cap/NCAV:.975
Cash/Share:$1.87
Volt Information Sciences Inc
Ticker:VOL
Price:$8.95
Market Cap:$186
NCAV:$200
Market Cap/NCAV:.93
Cash/Share: $6.99
Audiovoxx
Ticker:VOXX
Price:$7.30
Market Cap:$167
NCAV:$212
NCAV/Market Cap:.79
Cash/Share:$2.73
Note: Audiovoxx seems to be a perennial net/net. Has been on the list for several years.
Silicon Graphics
Ticker:SGI
Price:$5.39
Market Cap:$161
NCAV:$200
NCAV/Market Cap:.81
Cash/Share:$5.82
Stay tuned. There's never a dull moment in the wonderful world of net/nets....
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
There are still 140 or so net/nets with market caps greater than $5 million, but those at the upper end of the market cap spectrum are few and far between. Case and point, on February 19th, there were more than 320 such net/nets; 38 of which had market caps above $100 million. Currently, there are just 10 above $100 million.
The top 5 Net/Nets by market cap:
Adaptec
Ticker:ADPT
Price:$2.91
Market Cap:$350
NCAV:375
Market Cap/NCAV:.93
Cash/Share:$3.14
Opnext Inc
Ticker:OPXT
Price:$2.20
Market Cap:$195
NCAV:$200
Market Cap/NCAV:.975
Cash/Share:$1.87
Volt Information Sciences Inc
Ticker:VOL
Price:$8.95
Market Cap:$186
NCAV:$200
Market Cap/NCAV:.93
Cash/Share: $6.99
Audiovoxx
Ticker:VOXX
Price:$7.30
Market Cap:$167
NCAV:$212
NCAV/Market Cap:.79
Cash/Share:$2.73
Note: Audiovoxx seems to be a perennial net/net. Has been on the list for several years.
Silicon Graphics
Ticker:SGI
Price:$5.39
Market Cap:$161
NCAV:$200
NCAV/Market Cap:.81
Cash/Share:$5.82
Stay tuned. There's never a dull moment in the wonderful world of net/nets....
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Friday, August 07, 2009
Back in the Good Old USA; Catalyst Investment Research in the Wall Street Journal
Your Cheap Stocks editor recently returned from a 10 day mission trip to the Dominican Republic. It was truly an eye opening experience. Thirty Americans and several Dominicans worked to clear a small piece of land, so that a church can be built on the site in the town of Haina. We used axes, shovels, pick axes, and machetes- possibly the greatest tool ever, and a must have in every garden shed- to get the job done. I come back very appreciative of the small things that we take for granted: clean, cold water, ice, toilet paper, a toilet that flushes, you name it. What the Dominicans we worked with lacked in material possessions, and many of the things we don't think we can live without, they more than made up for in their joy. Amazing people. As a side note, machete's were so popular with our group, that 18 brand new ones ($8.00 each) came home with us, in our checked luggage.
Hedge Fund Solution's Catalyst Investment Research in the Wall Street Journal
While I was away, the latest from Catalyst Investment Research (The Hedge Fund Solutions product that I've teamed up with Damien Park on), a special report on recent Steel Partners activity, was featured in the Wall Street Journal print and on-line editions.
Finally,it's back to work, and more regular postings. Stay tuned.
Hedge Fund Solution's Catalyst Investment Research in the Wall Street Journal
While I was away, the latest from Catalyst Investment Research (The Hedge Fund Solutions product that I've teamed up with Damien Park on), a special report on recent Steel Partners activity, was featured in the Wall Street Journal print and on-line editions.
Finally,it's back to work, and more regular postings. Stay tuned.
Wednesday, July 08, 2009
The Return of Lazare Kaplan (LKI)
Long-time Cheap Stocks readers may recall our many postings on diamond company Lazare Kaplan throughout the years. A perennial net/net, its a company that we owned for a 2 year period until February 2008, when we sold out at around $10. Truth is, we made a little money (26%), but the story had gotten dull, and we were convinced that LKI was just one of those companies that would forever trade below net current asset value.
Interestingly enough, in October 2007, Lazare anounced a bizarre 1 for 101 reverse stock split, followed by the buy out of any shareholders owning less than 1 post-split share, and then by an immediate 101 for 1 forward split. This was intended to reduce shareholder roles to save an estimated $25,000 per year in costs. At the time, we thought that the company was aiming to go dark. That has not happened.
In the months following our sale of LKI, the economy all but imploded, and LKI fell to as low as $1.05 per share, about 10% of our exit price. While a diamond company is not a great place to be during a recession, we were compelled to take a position in March, when the stock was at $1.16. We did so at great peril to our capital, given the company's declining performance, and ample debt.
The latest quarter tells the tale quite well. Revenue fell 49% from the same quarter last year, and LKI lost $3.6 million, or $.43 per share, versus income of $3.3 million, or $.40 per share. Clearly, not many diamonds change hands during a deep recession, when discretionary spending falls dramatically, and retailers become reluctant to carry inventory, especially expensive inventory. The company also has a lot of debt for you average $20 million market cap company (less than $10 million when we took our position): $36 million in short-term, and another $40 million long-term which is due in May, 2010. Although the company ended the quarter with $13.2 million in cash, this is a potentially dangerous situation, and not one that we'd normally get involved with.
But Lazare also has something on the books we believe to be quite valuable: namely an inventory of $125.7 million of rough ($36.6 million) and polished ($89.1 million) diamonds. Furthermore these diamonds are carried at the lower of cost or market. While we typically don't care for net/nets whose current assets are concentrated in inventories (or receivables)for that matter, this is the kind of inventory where we are happy to make an exception.
Of course further success, and company solvency for that matter, is dependent on an economic recovery. While diamond prices are starting to show signs of a recovery, the consumer is not there yet, and Lazare has many challenges ahead.
One little known, but interesting fact about LKI is that Chairman of the Board Maurice Templesman is perhaps better know as Jaqueline Kennedy Onassis' long time companion and son Leon serves as President of the company.
Lazare Kaplan Intl
Ticker: LKI
Price: $2.46
Shares Out: 8.25
Market Cap: $20.3
NCAV: $56.3
NCAV/Mkt Cap: 2.77
Tangible Book Value/Share: $11.46
Average daily volume:15,700
*The author has a position in Lazare Kaplan. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Interestingly enough, in October 2007, Lazare anounced a bizarre 1 for 101 reverse stock split, followed by the buy out of any shareholders owning less than 1 post-split share, and then by an immediate 101 for 1 forward split. This was intended to reduce shareholder roles to save an estimated $25,000 per year in costs. At the time, we thought that the company was aiming to go dark. That has not happened.
In the months following our sale of LKI, the economy all but imploded, and LKI fell to as low as $1.05 per share, about 10% of our exit price. While a diamond company is not a great place to be during a recession, we were compelled to take a position in March, when the stock was at $1.16. We did so at great peril to our capital, given the company's declining performance, and ample debt.
The latest quarter tells the tale quite well. Revenue fell 49% from the same quarter last year, and LKI lost $3.6 million, or $.43 per share, versus income of $3.3 million, or $.40 per share. Clearly, not many diamonds change hands during a deep recession, when discretionary spending falls dramatically, and retailers become reluctant to carry inventory, especially expensive inventory. The company also has a lot of debt for you average $20 million market cap company (less than $10 million when we took our position): $36 million in short-term, and another $40 million long-term which is due in May, 2010. Although the company ended the quarter with $13.2 million in cash, this is a potentially dangerous situation, and not one that we'd normally get involved with.
But Lazare also has something on the books we believe to be quite valuable: namely an inventory of $125.7 million of rough ($36.6 million) and polished ($89.1 million) diamonds. Furthermore these diamonds are carried at the lower of cost or market. While we typically don't care for net/nets whose current assets are concentrated in inventories (or receivables)for that matter, this is the kind of inventory where we are happy to make an exception.
Of course further success, and company solvency for that matter, is dependent on an economic recovery. While diamond prices are starting to show signs of a recovery, the consumer is not there yet, and Lazare has many challenges ahead.
One little known, but interesting fact about LKI is that Chairman of the Board Maurice Templesman is perhaps better know as Jaqueline Kennedy Onassis' long time companion and son Leon serves as President of the company.
Lazare Kaplan Intl
Ticker: LKI
Price: $2.46
Shares Out: 8.25
Market Cap: $20.3
NCAV: $56.3
NCAV/Mkt Cap: 2.77
Tangible Book Value/Share: $11.46
Average daily volume:15,700
*The author has a position in Lazare Kaplan. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Friday, July 03, 2009
Catalyst Investment Research- Lion's Gate Entertainment(LGF)
Hedge Fund Solutions, LLC's unique investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.
Click here to download a complimentary copy of our latest report, an analysis on Lion's Gate Entertainmnent(LGF).
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in LGF. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Click here to download a complimentary copy of our latest report, an analysis on Lion's Gate Entertainmnent(LGF).
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in LGF. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Thursday, June 18, 2009
Anatomy of a New Net/Net Position: Chromcraft Revington
Buying net/nets is sometimes an ugly business. It's often hard to justify sinking capital into a business that appears to be headed for the scrap heap. But part of being a net/net investor is knowing the risks inherrent in buying companies that have probably already seen their best days, are thinly traded shadows of their former selves; reduced merely to assets that you believe may worth at least a few times the current price.
Chromcraft Revington is a great example. A member of the Cheap Stocks 21 Net Net Index, the Indiana based furniture maker and distributor has seen sales fall for the past 6 consecutive years, from $214 million in 2002 to just $ 99 million in 2008, a 54% decrease. The company lost $26.5 million last year, or $5.79 per share. In the first quarter of 2009, sales dropped 39% from the same period last year, and the company lost another $3.2 million. Clearly, a bad situation made even worse by the economic environment of the past 18 months.
Greenbackd features an excellent analysis on Chromcraft back in April, making the bearish case. At the time, the company was all but out of cash, and Greenbackd laid out their reasons for exiting their Chromcraft position at $.48. Now trading for $.83, one of the few brightspots in the most recent quarter was the fact that the company raised cash, and ended the quarter with $5.2 million, or $.85 per share, primarily through inventory and account receivable reductions.
While the quarter end cash balance is no reason to jump for joy, if you believe that an economic recovery is under way, Chromcraft may have bought itself some time. Just how long is difficult to say; it depends on the company's ability to cut costs, scale back operations, and is dependent on an uptick in the economy.
What's intriguing about Chromcraft beyond the fact that it has no debt on the books (there are some operating leases, however, a total of $4.4 million through 2012), are the company's other assets. Chromcraft owns a 519,000 square foot warehouse/distribution center in Delphi Indiana, and a 560,000 square foot manufacturing/distribution site in Senatobia Mississippi, for a total of nearly 1.08 million square feet of space. The Senatobia site sits on 100 acres. Granted, probably not the most valuable locations for warehouse space, and commercial real estate is currently suffering, but these assets have value, nonetheless, and are unencumbered by debt.
With current assets of $30.6 million, and total liabilities of $10.3 million, Chromcraft's net current asset value (NCAV) was $20.3 million as as of April 4th, 2009, nearly 4 times market cap. Currently trading at just .25 times NCAV, tangible book value per share is $4.94.
Beyond the risks laid out previously, CRC is a tiny company, with very low trading volume. While we recently took a position in CRC, we did so understanding the risks involved. Proceed with caution.
Chromcraft Revington
Ticker:CRC
Price:$.83
Avg volume: 7,000
Market Cap: $5 million
Book Value per share: $4.94
Shares Out: 6.1 million
NCAV:$20.27 million
Market Cap: $5.08 million
NCAV/Market Cap: 3.99
*The author has a position in Chromcraft Revington (CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Chromcraft Revington is a great example. A member of the Cheap Stocks 21 Net Net Index, the Indiana based furniture maker and distributor has seen sales fall for the past 6 consecutive years, from $214 million in 2002 to just $ 99 million in 2008, a 54% decrease. The company lost $26.5 million last year, or $5.79 per share. In the first quarter of 2009, sales dropped 39% from the same period last year, and the company lost another $3.2 million. Clearly, a bad situation made even worse by the economic environment of the past 18 months.
Greenbackd features an excellent analysis on Chromcraft back in April, making the bearish case. At the time, the company was all but out of cash, and Greenbackd laid out their reasons for exiting their Chromcraft position at $.48. Now trading for $.83, one of the few brightspots in the most recent quarter was the fact that the company raised cash, and ended the quarter with $5.2 million, or $.85 per share, primarily through inventory and account receivable reductions.
While the quarter end cash balance is no reason to jump for joy, if you believe that an economic recovery is under way, Chromcraft may have bought itself some time. Just how long is difficult to say; it depends on the company's ability to cut costs, scale back operations, and is dependent on an uptick in the economy.
What's intriguing about Chromcraft beyond the fact that it has no debt on the books (there are some operating leases, however, a total of $4.4 million through 2012), are the company's other assets. Chromcraft owns a 519,000 square foot warehouse/distribution center in Delphi Indiana, and a 560,000 square foot manufacturing/distribution site in Senatobia Mississippi, for a total of nearly 1.08 million square feet of space. The Senatobia site sits on 100 acres. Granted, probably not the most valuable locations for warehouse space, and commercial real estate is currently suffering, but these assets have value, nonetheless, and are unencumbered by debt.
With current assets of $30.6 million, and total liabilities of $10.3 million, Chromcraft's net current asset value (NCAV) was $20.3 million as as of April 4th, 2009, nearly 4 times market cap. Currently trading at just .25 times NCAV, tangible book value per share is $4.94.
Beyond the risks laid out previously, CRC is a tiny company, with very low trading volume. While we recently took a position in CRC, we did so understanding the risks involved. Proceed with caution.
Chromcraft Revington
Ticker:CRC
Price:$.83
Avg volume: 7,000
Market Cap: $5 million
Book Value per share: $4.94
Shares Out: 6.1 million
NCAV:$20.27 million
Market Cap: $5.08 million
NCAV/Market Cap: 3.99
*The author has a position in Chromcraft Revington (CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Saturday, June 13, 2009
Catalyst Investment Research- Enzon Pharmaceuticals
Hedge Fund Solutions, LLC's recently launched investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.
Click here to download a complimentary copy of our latest report, an analysis on Enzon Pharmaceuticals.
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in ENZN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Click here to download a complimentary copy of our latest report, an analysis on Enzon Pharmaceuticals.
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in ENZN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Tuesday, June 02, 2009
Catalyst Investment Research- Penwest Pharmaceuticals
Hedge Fund Solutions, LLC's recently launched investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.
Click here to download a complimentary copy of our latest report, an analysis on Penwest Pharmaceuticals.
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in PPCO. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Click here to download a complimentary copy of our latest report, an analysis on Penwest Pharmaceuticals.
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in PPCO. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
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