Avatar Holdings: Throwing Good Money After Bad?

Includes: AVHI, MODVF
by: Saj Karsan

Avatar Holdings (AVTR) owns and develops land for a variety of uses, including single-family homes. As most of its operations are in Florida and Arizona, its business conditions, as well as its stock price, have taken a beating in the last couple of years. While it might represent value at its current price, in a way similar to which Melcor (OTC:MODVF) traded at a large discount to its value not too long ago, management's intentions make the situation a little bit unclear.

The company has lost almost $10 million per quarter in 2009, as it struggles to sell its units for more than their carrying value. While this is by no means a pretty situation, consider the depressed level of the stock relative to the company's assets:

Stock Market Value: $200

Cash on hand: $219

Land/Inventory: $287

Total Liabilities: $156

In other words, the company could lose $20 million per quarter (double its current rate) for five more quarters, and still sell at a 15%+ discount to just its cash and land assets (i.e. excluding its other assets including A/R and prepaid expenses).

Despite the company's strong balance sheet, however, management is making some interesting decisions. While they have curbed new construction in favour of converting inventory into cash, they recently issued $40 million worth of shares! Selling shares when the company trades at only half of its book value is quite dilutive, and seems hardly necessary when the company has far more cash than it has debt - until one considers the company's plans for the future: the company appears to be clearing the way to make a $150 million investment in a new highway!

Is this highway a profitable venture in which management sees a bright future? It would not appear so, as the company has twice written down this project's $47 million initial outlay. So the profits aren't there, but is the company obligated by contract to complete this project? Yes and no. There is a contract with the government, but it appears it would only cost the company $1.9 million to break it.

While management has not made it clear that it will go ahead with the project, the share issuance described above, along with the fact that it recently re-negotiated its contract with its existing lenders that would allow the company to borrow an additional $140 million, suggests this is management's preferred course of action. Unfortunately, from the outside looking in, it would appear that management is chasing a sunk cost (its $47 million initial outlay) rather than adding value for current shareholders by cancelling the contract and buying back shares to close the gap between the company's price and its value.

Disclosure: None