Biloxi Marsh Lands: Compelling Price But Not Without Risks (BLMC)

By now you’ve gotten used to (or are getting tired of) the off the beaten path ideas we often feature here at Cheap Stocks. It’s not that we are trying to be different, we just believe there is a whole other world of investment ideas out there for investors besides the Microsofts (MSFT), Home Depots (HD), Harleys (HDI), and all the other big names that the institutions own.

Not that there’s anything wrong with any of these companies. But they have been researched to death, and there is no new information under the sun. The dead horse has bean beaten, so to speak.

While we try to come up with original ideas, we are the first to admit when they don’t originate from our research alone. Take this week’s company, Biloxi Marsh Lands Corp (BLMC). Last year we received a few e-mails asking for our opinion, or whether we had any research on this company. Truth be told, at the time, we’d never heard of the company.

Fast forward to last week’s e-mail from a reader asking if we covered (BLMC), as he’d seen our research on Avoca. Reader, we hear you loud and clear. Thanks for the idea, even if it was not ours. (We are big believers in honesty here at Cheap Stocks).

Biloxi Marsh Lands Corp, which trades on the pink sheets, and is not required to file with the SEC, owns 90,000 acres in St. Benard Parish in Louisiana. The majority of company revenue is from oil and gas exploration and production taking place on company land. 2005 revenue of $22.5 million was up slightly from 2004’s $22.2 million. This was due primarily to an increase in natural gas prices. Net income also rose, to $13.9 million, from $13.8 million.

First quarter 2006 revenue was $8.35 million, up from $6.8 million for the same quarter last year. The increase was due to rising oil and gas prices, and a one time change in revenue recognition. Net income rose to $5.3 million from $4.5 million.

The Land

Sure, we could do our typical Enterprise Value/Acre calculation (for which we are becoming known here at Cheap Stocks), but keep in mind this is marsh land, 90,000 acres of it, which is about 14 square miles. This is not St. Joes, nor JG Boswell quality land. Its value is from the contents that lie beneath. There’s probably little use or value besides. (Ok, we can’t help ourselves. With an enterprise value of $83.8 million, and 90,000 acres, that’s an EV/acre of $931)

The Balance Sheet

As of 3/31/2006, the company had $1.6 million in cash, and $19.5 million in LT marketable securities, to go along with no debt. With 2.85 million shares outstanding, that equates to about $7.00 per share in cash and securities. The land itself is carried at cost, a paltry $234,939, or $2.61 per acre. We don’t know its true value, but granted, the oil and gas beneath are worth significantly more than carrying value.

The Dividend

During 2005, the company paid 3 dividends, for a total of $3.25 per share. In 2006, the company paid a $2.00 dividend in January. BLMC recently stated in its first quarter earnings release that it intends to “equal or exceed the amount of dividends paid in 2005”. That statement got our attention.

Assuming the company equals 2005 payout, ($3.25 per share), that equates to an 11% yield at current prices. If that ends up happening, we’d expect some share price adjustment above the current level. Keep in mind, BLMC was a $60 stock just one year ago, and has not yet come close to pre-Katrina levels.

The Risks

In our minds there are two risks or factors that are either weighing on this stock, or could if conditions change. The first is what we’ll call a “Hurricane Discount.” This company’s production was affected by Katrina and Rita, and with another hurricane season approaching, this no doubt weighs on the stock.

The second is the price of natural gas. If gas stays relatively high or rises, the expected dividends should follow, and they may even rise. If gas falls, so will revenue, and further dividends this year (the company usually pays one dividend per year, last year it paid three) may be at risk.

Conclusion

Once again, some of the most interesting stories are lurking in the pink sheets. This company reminds us of Avoca (AVOA) (in which we have a position and which we wrote about recently), but has much greater liquidity (if you consider 1700 shares/day liquidity).

At $30.00 per share, BLMC is compelling, but not without a degree of risk. If you were interested in Avoca, and its fat yield, but wary of the $5500 price tag and lack of available shares, this one might be for you. BLMC has 2.8 million shares outstanding, while Avoca has just 8 thousand.

BLMC Basics

Market cap: $83.8 million
Current Price: $30.00
52-Week High: $57.50
Average Volume:1700

Full Disclosure: The author does not have a position in this stock.