Investors who have followed billionaire Phillip Frost and his open market stock purchases have made a handsome return in the past year. Castle Brands (ROX) has returned upwards of 200% since Frost's first purchase back in February. Opko Health (OPK), of which Frost is President and CEO of, gained 75% since his purchase on January 2nd, 2013. Ladenburg Thalmann Financial Services Inc. (LTS) has appreciated more than 50% since one of Frost's many purchases back in November of 2012. If you want to get a piece of all of this and even more, then you should consider investing in the Vector Group (VGR); a financially solid holding company that is invested in the same companies mentioned above, and operates a few others.
The Vector Group operates through four main subsidiaries, focusing mainly in the tobacco market. Vector Tobacco Inc. is based in North Carolina and is focused on researching reduced risk cigarette products. The Liggett Group is a cigarette manufacture that has been focusing on the discount cigarette market, featuring brands such as Pyramid, Grand Prix, Eve, USA Gold, and Eagle 20s. Liggett Vector Brands coordinates the marketing, sales, and other functions for the tobacco products. Lastly, the Vector Group operates New Valley LLC, an investment company that owns 50% of the largest residential real estate brokerage in the New York metropolitan area, Douglas Elliman Realty. Add a hefty dividend, solid management, and a large investment portfolio consisting of companies tied with Dr. Frost and physical real estate, and you've got a highly diversified company that should be in every investors DRIP account. With strong, consistent growth and a current market capitalization of $1.5 billion, the Vector Group stands to continue its gradual price appreciation.
Buy A Little Sin
With a market share of 3.4%, as of June 2013, the Vector Group is the fourth largest tobacco company in the U.S. Leggitt focuses on manufacturing and selling discount branded cigarettes, a segment of the tobacco industry that has been steadily growing for more than a decade. The company's strong cash flow and low capital requirements are very encouraging. Leggitt generated $192 million in the last twelve months while only spending $6.3 million in capital expenditures. The company has also seen positive effects from their price increases that took effect last year, which helped boost margins by 8%.
Leggitt also stands to benefit from being such a small player in the tobacco industry. Under the Tobacco Master Settlement Agreement (MSA), Leggitt is exempt from certain payment obligations thanks to their small market share, while the three big tobacco companies have to face an extra tax on their products. This exemption is worth approximately $164 million in 2013 for Liggett and Vector Tobacco. The favorable treatment received from the MSA allows Leggitt to competitively price their premium quality cigarettes as discounted cigarettes.
The Vector Group and its tobacco subsidiaries are poised for continued long-term growth, especially with their current strategy and management team. Ronald Bernstein, the President and CEO of Liggett has been working for the company since 1991, and was appointed CEO back in 2000. Since becoming CEO, he has grown adjusted EBITDA from $78.8 million to $192 million today. The chart speaks for itself. (click to enlarge)
Liggett's commitment to capitalize on their pricing advantage thanks to the decision in the MSA, focusing their marketing and selling on the discount segment, and emphasis on minimizing operational costs through the utilization of technology and efficiency are just a few pieces of the company's strategy that point to long term growth in shareholder value.
Location, Location, Location
The Vector Group's reality operation is just one more component of this vast holding company. New Valley LLC's holds a 50% stake in the fourth largest residential brokerage company in the U.S., Douglas Elliman. The subsidiary had revenue and adjusted EBITDA of $397 million and $35 million respectively, for the last twelve months ending June 30th 2013. The New Valley subsidiary has almost $90 million in cash.
Douglas Elliman is growing, and making strategic acquisitions along the way. Currently, Elliman is in talks with Prudential to redeem approximately 20% of Prudential equity owned by a former investor of Prudential. If the redemption is finalized and completed, the Vector Group will contribute a significant amount and end up owning more than 50% of Douglas Elliman. In 2012, Douglas Elliman operated a total of 63 offices, and generated real estate sales of $8.4 billion in New York City, and $3.6 billion in Long Island and Westchester County.
While New Valley's stake in Douglas Elliman is poised to grow, along with the company, what's more intriguing to me as an investor is New Valley's investment in physical real estate. New Valley's property investments include:
- A 25% interest in a joint venture that has the rights to acquire a 15-story building on a 31,000 square foot lot in the Tribeca neighborhood of Manhattan ($19.3 million)
- A 45% stake in a condominium conversion project in Queens ($7.4 million).
- A 18% interest in a condominium conversion project located in Manhattan ($2 million)
- A 7.2% interest in Sesto Holdings, which owns 42% of a 322 acre plot of land in Milan, Italy ($5 million)
- A 12% interest in the Lofts 21, condominiums located in the Flatiron District of Manhattan ($900,000)
- A 5% stake in a luxury condominium located in the Flatiron District ($6.6 million)
- A 17% interest in the Hotel Taiwana, located in the French West Indies ($6.3 million)
- A 18% stake in The Marquand, luxury condominiums located between Fifth and Madison avenue in Manhattan ($7 million)
- A 49% interest for a luxury condominium located in Manhattan ($10.4 million)
- A 12% stake in a 120,000 square foot building in Times Square.
- A 7.5% stake in a portfolio of approximately 5,500 apartment units located throughout Baltimore County, Maryland ($5 million)
The company also has majority stake in a master planned, 450-acre community in Palm Springs, California, which sports 867 residential lots, an 18-hole golf course, completed club house, and a seven-acre site approved for a 450-room hotel. Currently the book value stands at $13.1 million. They are also invested in a real estate conversion project located in Indian Creek, Florida, with a book value of $10.1 million.
The diverse and premium locations that New Valley is invested in, and the possibility that The Vector Group may take more than a 50% control in Douglas Elliman make this company extremely attractive from a long term, value oriented perspective.
Don't Forget Your Goodie Bag
How about a dividend that yields more than 9% and has been issued for 18 consecutive years, and an investment portfolio worth approximately $120 million that is solely focused on companies that are affiliated with Dr. Frost.
The Vector Group owns 11.5% of Castle Brands, 7.6% of Ladenburg Thallman Financial, and an unspecified amount of Opko Health. The company also owns 5.6% of the Morgans Hotel Group, 8.8% of SG Blocks, and an unspecified amount of CoCrystal Discovery, a privately held biotech company that was co-founded by a recent recipient of the Nobel Prize in Chemistry. While many of these securities may be viewed as risky, speculative holdings, following Dr. Frost and his management has paid off tremendously in the past, and will most likely continue to do so.
Risks To Consider
Always consider the risks! While The Vector Group operates as a diverse holding company, the majority of their revenue and earnings is derived from their tobacco operations. Investors should lump this company in the likes of cigarette companies, and should understand that the more than $100 million in prime real estate investments will take years upon years to come to fruition and provide true value to shareholders. Also, consider the risks and uncertainties of the real estate market, as well as new regulation and legislation regarding the tobacco industry.
The Vector Group is facing pressure from a liquidity standpoint over the next twelve months. The company has an interest expense of $101.6 million, dividends to pay out (at an annual rate of $143.9 million), and other corporate expenses and taxes to deal with. The holding company is nearly $1 billion in debt, and while the company expects to cover all expenses with cash flows from operations, it should be noted for all potential investors. While it is not expected to happen, if there is a shortfall in resources and the Vector Group is struggling to pay expenses, expect the dividend to be reduced.
The Vector Group is in a long term uptrend, started way back in 2002. Hovering above the current trend line, and investors should wait and see if the price retreats back towards the trend line until opening up a position. A pullback to $15.50-$15.75 would be prime time to open up a long position, though the possibility of the stock recently creating a new support line after breaking above the top trend line is very possible.
The Vectors Group is one of the most unique companies I've come across in my time as an equity enthusiast. Their diverse and stable business operations, strong investment portfolios, and relationship to Dr. Frost make this a compelling buy to all long term oriented buyers. The company's revenue almost doubled from 2008 at $565 million, to $1.08 billion in 2012. This trend should continue, especially with the long term oriented investments in prime, luxurious, New York City real estate. A current market cap of $1.5 billion does not seem justified for this diverse holding company; investors should add this company to their buy list.