Central Securities Still Has Value

Feb.18.13 | About: Central Securities (CET)

Central Securities Corporation (NYSEMKT:CET). I have written about it before, and it is still worthy of consideration. CET is a closed-end fund offering tremendous value. You cannot judge its performance on a quarter-to-quarter basis, but CET must be viewed over time. CET makes long-term investments, and its results should also be viewed over a longer term.

CET is owned and controlled by its management. All directors and officers own 12.3% of the outstanding shares. The Christian A. Johnson Endeavor Foundation, headed by the president and chairman of CET, owns another 32.4%. I am content investing with others who are prepared to place their money where their mouths are. Management is not young and Wilmot Kidd, who is now 71, has been running the fund since 1972. This is basically his entire life.

CET holds investments for very long periods of time. Below is a schedule, as of December 31, 2012, of its 10 largest holdings, cost, market value, acquisition date and percent of assets:

PLYMOUTH ROCK $2.2 $164 28.8 1982 YES
COHERENT 22.0 40.6 7.1 2007 NO
INTEL 16.3 30.7 5.4 1986 NO
ANALOG DEVICES 8.8 25.2 4.4 1987 NO
BRADY 2.0 24.7 4.3 1984 NO
AGILENT TECHNOLOGIES 12.6 24.2 4.2 2005 NO
BANK OF NEW YORK MELLON 18.3 23.8 4.2 1993 NO
PRECISION CASTPARTS 10.0 18.9 3.3 2008 NO
MURPHY OIL 1.0 16.7 2.9 1974 NO
CONVERGYS 13.0 15.0 2.6 1998 NO
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The major asset of CET is its long-term investment in The Plymouth Rock Company, which is a privately held property and casualty insurance company located in Massachusetts. It specializes in automobile and homeowner insurance. The carrier's earnings are cyclical but it does pay a substantial dividend, has a conservative balance sheet and a substantial book value. CET has the value appraised by an independent consultant and then gives the value a haircut, when including its value in its portfolio, because it is privately held.

Plymouth Rock has become a larger and larger percent of the total assets of CET, approaching almost 29%. Considering the value haircut given to Plymouth Rock by management and the 20% discount CET trades at, you are purchasing Plymouth Rock at less than 60% of its independently appraised value. Although it appears that no corporate actions or changes will occur in the near future, the aging ownership of both Plymouth Rock and CET, will produce some change at some time in the future. This will happen - the question is only when.

As of December 31, 2012, CET had total assets of $569,465,087 of which 5.2% were in short-term near-cash assets. It had no leverage. As would be expected from such long-term holdings, the cost basis of its $539,820,479 of investment securities was only $292,136,363. This is a substantial unrealized income, which when realized, will be taxed to existing investors.

As of December 31, 2012, CET has not done well for the past five years but over the long term, has succeeded.

I YEAR 2.70% 1.25% 15.99%
5 YEAR 1.89 (0.03) 1.66
10 YEAR 10.01 9.37 7.09
15 YEAR 6.99 5.25 4.47
20 YEAR 11.45 11.41 8.20
25 YEAR 11.98 12.85 9.69
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As of December 31, 2013, CET had low operating expenses, extremely low turnover and decent invest income. The past five years look as follows:

2012 0.79 2.14 3.55
2011 0.71 1.62 8.07
2010 0.78 1.92 6.67
2009 0.91 1.49 7.94
2008 0.66 1.43 11.04
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CET sells at a substantial discount from net asset value. This discount ranges between 20% - 23%. This discount is understandable, in light of the tax liability relating to its unrealized appreciation, as well as to a substantial share of its assets occupied by a private company. As approximately 60% of its unrealized appreciation relates directly to Plymouth Rock, the question really relates to what will happen with Plymouth Rock. The insurance company is valued by CET at a substantial discount from its estimated net worth and the market then values CET at also a great discount. If a corporate event does happen, it may be non-taxable or only partially taxable, as I have to believe that the long-term management of CET are fully aware of this issue.

I simply believe that the discounts are too great and that CET is simply a cheap investment. As usual, I would not put all my eggs in one basket, but I would definitely make CET a part of my basket.

Disclosure: I am long CET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.