Saturday, July 22, 2006

PICO Holdings: The Poor Man's Berkshire Hathaway?
Company Update

Ticker: PICO
Price: $29.72
Market Cap: $394 million
P/E: 12.9
Price/Book: 1.35
Enterprise Value: $369 million

We last wrote about PICO a couple years ago, we owned it then, and still do. This company is typically not on anyone's radar, but is an interesting combination of businesses and investments.

Graham and Dodd: In Management's Own Words
We acquire businesses which we identify as undervalued based on Graham and Dodd-style fundamental analysis, and our assessment of what the business is worth based on the private market value of its assets, earnings, and cash flow. We favor long-established businesses in basic industries, with a history of operating successfully through industry cycles, recessions, and geo-political disruptions. We also acquire interests in companies where there is significant additional unrecognized value in land and other tangible assets. Our objective is to generate superior long-term growth in book value per share.

When we purchased PICO a few years back, the primary reason was the company's vast Nevada land holding-the company was the largest private landowner in the state-at the time nearly 1.2 million acres. This was old railroad land, certainly not the same quality as some of the other companies we've researched, but it included water rights, a very compelling package at just $13 per share.

Not Just Land and Water
PICO also owns two insurance companies in "runoff" Physicians Insurance Company of Ohio and Citation Insurance Company. Insurance companies in runoff no longer write new business, just service existing policies, and claims on those policies. PICO makes money by managing the investment portfolios associated with these companies, essentially booking the difference between claims and investment income.

European Investment Portfolio
As of 12/31/05, PICO also listed the following holdings:

Jungfraubahn Holding AG: 1.3 million shares or 22.5 % of this Swiss railroad company
Raetia Energie AG: 70,556 shares in this producer of hydro electricity
Accu Holding AG:29,294 shares of this Swiss battery manufacturer

Hyperfeed Technologies
PICO also owns more than 6 million shares, or 80% of Hyperfeed (Ticker:HYPR) which provdes financial market data and data-delivery solutions to the financial services industry. Truth be told, we are not sure why PICO invested in this company in the first place, but it represents is a very small portion of company interests.

First Quarter Results
The company reported first quarter net income of $7.2 million, primarily due to a gain on the sale of investments. The company ended the quarter with $243 million in investments, $54 million in cash, and $12 million in debt.

Stock Offering
In May 2006, PICO completed a private placement of 2.6 million shares of newly issued PICO common stock with two institutional investors, for $30 per share. The offering generated $71.4 million. It is believed that FMR corp, parent company of Fidelity family of mutual funds, was one of the institutions. FMR recently reported that it owns a 15.3 percent stake in PICO.

If you are looking for a steady ride in terms of earnings, this is not the company for you. Management is focused primarily on increasing shareholder equity, and due to the structure of the company, reported earnings will be choppy. That being said, management has done an excellent job of increasing shareholder equity, and the stock price has followed. We can't but help think of PICO as the poor man's Berkshire Hathaway.

*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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