Contributor since: 2010
Company: BCIA
I agree completely. The rise in value likely cancels out any discounting. The $30k per acre number is useful from an analysis standpoint, but not accurate from a recent history standpoint. The land sales in the past year have farr exceeded $100k per acre. If the company had to sell all of their land this year they would not average more than $100k. Over time that is not how things will work out. As more land is sold and developed the surrounding property will become more valuable. The land that may sell for $30k per acre this year may sell for $100k per acre in a couple of years.
Discounting in this type of scenario is not very useful in understanding the value of future land sales.
Nice work. I have one small quibble. You are double counting the pension liability. Subtracting the pension liability is redundant. The pension is a pay as you go kinda things. You can't calculate earnings that include pension expense and also subtract the present value of the expense at the beginning. Remove the reduction of the lump sum pension value to correct.
There has not been much to report regarding the sale. The company has increased their dividend by 50% and they reported that they would be closing on a $20 million conservation easement by the end of this month. There has been no word yet as to whether that has closed as anticipated. If not it will slip into fiscal year 2014.
Brian - Their prior earnings will not dictate their future earnings. The company did not have the E-2D in full rate production in the past. Lumpy earnings are fine as long as they move lumpily upward.
Nick - Although the pensions costs are unfunded, the liability (which is frozen) will be paid over twenty plus years. I understand offsetting cash for the sake of being conservative, but the cash is available now while the pension costs only have a small portion due currently. The cash level is also depressed likely based on timing issues. It would be no surprise to see the cash balance vault over $20 million next quarter.
I am here for the royalty revenues. The newly increased dividend was the exact right message to send to investors. It is good to see the company executing on their strategy and it has been a long time coming. I expect to continue to be pleasantly surprised on a regular basis over the next several years.
Nice article.
I have thought about the time value of money impact and mentioned it in the article. When you discount a sum back to present value you usually are talking about a fixed amount. Some certain cash flow received in the future can be discounted back to today's value.
All kinds of time could be spent arguing about what discount rate to use. I would say that a 5% or 6% discount rate is more appropriate.
The land has two factors working in its favor. Land rises in value due to inflation and scarcity. Second, the value of land can rise in response to the development of nearby land. Both will impact the value of CTO's land. In my opinion, the best guess as to the current value of the land sold in the future is the current value of the land. I estimate that the discounting of the land is negated by the factors that will increase its value over time.
I don't know what stupid numbers you reference. I would be glad to address any stupid numbers if you elaborate on which numbers are stupid.
The company does not estimate that their land at 1/3 of the value I place on it. They are reporting what value the market places on it. The company values it higher. Even 10 years ago they had vowed not to sell any acreage at less than $20k per acre. The average sale price has been much higher than that.
If you think the analysis is flawed you are certainly welcome to your opinion. I have committed a good deal of capital to CTO and am perfectly comfortable investing in them. With you being so skeptical they may not be a good fit for you. All of the information is publicly available. If you doubt my numbers they are easy enough to check.
Great to hear from you Jane. I am pretty comfortable with the odds that the shares hit $50 in the next year or 2. While the share price could hit $200 my guess is that it will be many years from now. Even if the shares hit $60 that is a nice double from current levels. May it be sooner rather than later.
Stating that basing the value of unsold land on historic sales is ridiculous, is in it self ridiculous. How then should the land be valued? Look at how real estate is valued. When buying or selling a house home buyers or sellers look at comparable homes that have recently sold.
I understand the point you are trying to make I just don't believe it has much merit. As development continues to push into company owned land, the land surrounding the development will rise with it. It is a good case can be made that the average sale price will rise with it. If you go back and calculate that average sale price it will be considerably higher than $30k per acre. I set the number "ridiculously" low to emphasize that even at a "ridiculously" low average sale price, the company is still extremely undervalued.
The share price was trading in the $50's in 2008 before the real estate industry had finished tanking. While no guarantees can ever be give in investing, some investments have better odds than other of panning out. When the real estate industry begins to pick back up in Florida, the company is poised to be a prime beneficiary. I don't have a date picked out when this will happen, so I am left to do what I do well, wait.
Thanks for the chance to add clarity to the land values. I hope no offense is taken at my generous use of ridiculous.
The E Nuff Sed screen name is kind coincidental seeing I have a shareholder activist website located at http://www.nufsayd.com.
Yes, they are buying back back stock, but they are not burning up the corporate coffers doing it. Leisurely is the best description of the pace they are buying back shares at.
I have done the work on corporate governance and the unique agency conflict presented by the large family ownership. In the past the company was not run in a very shareholder friendly way. I have been familiar with this company for over ten years and sold shares some years ago when the share price was in the $50's.
Actions in the past few yeas and a dialog with the CFO have given me the indication that things are being run in a more professional manner. There operations are more focused.
In my opinion they have made changes to governance that recognize the fact that they are a public company and need to operate accordingly. Here is one particular example: http://bit.ly/LPnvo7
The hiring of Dr. Ken Smith seems to have signaled the company's current focus on agriculture. The results have been pretty impressive. If you haven't looked at the latest slideshow the company just filed, it is worth a look: http://bit.ly/LPnwIJ
Highly concentrated in the Home Depot (around 60%) and Lowes. Thank you.
Assuming prices move linearly, which they don't and that past correlations predict future correlations, which they don't. It is fancy math that works out real neatly unfortunately it has no bearing on real markets. In the real world the whole thing breaks down and is rendered worthless and investors are again left with identifying arbitrage and empirical evidence of what works, not theoretical models.
"As I said in the article, still more questions than answers. In other words, I am still uncertain as to when concentration stops and proper (diluted) diversification begins"
This will remain a work in progress because it can't be solved in an quantitative fashion. The solution is empirical and that makes a lot of investors uncomfortable. I have owned between 5 and 15 companies each year for the past 13 years (the time since I completed transitioning from mutual funds) and have averaged 14.3% per year. I stick to companies I know extremely well and have an advantage investing in. I can't comfortably follow more than 15 companies and it becomes difficult after a dozen. Most of the time I am between 8 and 12. My other asset class is cash and that averages around 20% since 2008 and was a bit higher (but not much) prior to that. If I invested in more than 15 companies I would be doing myself a great disservice and I would expect that my returns would be lower.
Investing in this few a number of companies doesn't mean I don't pick a number of clunkers. At the same time I can only lose 100% while my winners often climb 400%, 500% or 1500%. That can make up for some pretty boneheaded mistakes. Sometimes you find a company that is so significantly mis-priced that you can't help but make money. It is helpful to commit 10% to 15% of your portfolio in a situation like this. When it reaches 25% or more I am often forced to lighten up due to the impact a significant drop would have.
Can you crunch this down to a tidy number, not even close. It is no precise formula. Does it work, hell yes. Do I have the chance to prove it, ... not a prayer.
Nice article. I would submit that to an extent using DCF is playing the earnings game. To perform a DCF analysis you need to project earnings ( which over time is cash flow) out into the future. The key is to avoid companies who you have a limited view of likely future operating results and to focus on those companies that have a more predictable future path. I conceded that this may vary by investor.
The negative cash flow was to support added working capital needs related to additional higher margin products being carried by the major home improvement retailers.
I don't see the flooring market vastly improving over the next year, but I don't see a major decline. QEPC has had increasing sales even with the backdrop of dismal new home construction. The home improvement market has shown strength in the past when new home construction declines. People who would otherwise be buying an new one fix up their old one.
"I don't think it's wise to make sweeping assumptions that they will reverse the trend."
What trend? The arbitrary, self confirming, short term 2 quarter results you anointed a trend. The company has been cash flow positive for more than 10 years. I am not saying that it guarantees they will always be cash flow positive, only that there is no trend. You are seeing something that does not exist. Every change needs to be evaluated in the context of everything that is going on, not taken at some superficial level. Negative cash flow bad, positive cash flow good. A company increasing inventory in front of large sales increases being cash flow negative is different than a company watching customers struggle to pay and seeing receivables balloon
"So why don't you write about WHY AR and inventory will correct?"
Inventories are up about $7 million and A/R is up about $6 from the end of FY08. Over the same time sales have risen from $49 million to $61 million or an increase of $12 million. What you see on the balance sheet is a result of increased working capital needs for the added sales and probably some timing differences mixed in. The rise in working capital necessarily precedes any sales unless you can get your buyer to prepay. This will not happen in retail, a Home Depot or Lowes would laugh at those terms. QEPC is forced to lay out the cash and pay for the products before they can bill a customer.
"I don't think it's wise to make sweeping assumptions that they will reverse the trend."
I don't think it is wise to make sweeping assumptions that there is a trend. When you analyze the underlying mechanics of what has occurred it is much less concerning. That doesn't mean that the situation does not need to be closely monitored. New information could certainly cause the situation to take on radically different meaning. So far management has done a tremendous job increasing sales in a tough market. The housing market has not gotten any better in the fall months and the recession is no help. Management needs to closely monitor cash flow and maintain their tight cost controls. The drop in oil will help reduce material costs and shipping costs. The drop in LIBOR will soften interest expense. The rapid change in the economy is going to make it harder for many companies. It will take some time to sort the winners from the losers. A good management team with a proven track record is nice to have, but is certainly not a guarantee. I look forward with cautious optimism to continued solid results from QEPC.