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A Chemistry PhD employed as a researcher in the pharmaceutical industry since 2000, I have been an active equity investor since 2006.
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  • Legal tail risk creates a compelling value in Imperial Sugar
    Imperial Sugar (IPSU) is a sugar refiner operating two refineries in Louisiana and Georgia.  The last several years have been tumultuous for Imperial, but things are are starting to look up for them if they can just get past a few lawsuits...

    Let's start in 2006.  Sugar prices were way up after Katrina and IPSU earned $4.45/share.  They paid $0.24 in regular dividends plus a $3 special dividend.

    In 2007 they earned $3.43 per share and paid $2.78 in regular and special dividends.  You can see how those are some great numbers for a company currently trading at just over $17.

    But then there was 2008...  in February the larger of their two refineries (roughly 60% of their total capacity) had a major explosion.  That refinery was shut down and didn't start producing again until July 2009 (it's still ramping up for full production levels this spring).  With all of that lost capacity, plus the costs of dealing with the explosion, the company lost $1.81 and $2.03 per share for the years ended September 2008 and 2009, respectively.

    Now for the good part.  After a rough two years, Imperial's turnaround plans are coming to fruition.  Since the time of the accident, IPSU has received insurance payments totaling $300 million which were used to rebuild their refinery.  But because there had been no settlement with the insurance company, those payments were just advances on whatever the final settlement would be.  So as the refinery was repaired, its new value showed up as an asset, while most of the $300 million was on the balance sheet as a liability (not all though; for reasons that aren't clear to me, some of the advances were recognized as gains).  In December, Imperial and its insurer reached an official settlement for $345 million.  The insurance companies advances are no longer a liability and Imperial will record a pre-tax gain of $278 million for the quarter (that's over $23 per share!).

    So we have $23 of (pre-tax) earnings per share for a company that's trading around $17/share.  I feel confident that there is a large upside to the shares based on this fact alone.  Then consider the fact that the damaged refinery is approaching full production levels and that sugar prices are far higher now than they were in the wildly profitable year after Katrina.  In 2006 prices averaged roughly 14 cents/lb compared to the current price of ~28 cents/lb.  I don't make stock price predictions, but consider that a P/E of 10 on 2006 earnings would give a price of roughly $44.

    Then there is the balance sheet.  Imperial has $115 million in cash currently, and the insurance settlement mentioned above includes one additional payment of $45 million due this month.  That gives them $13.33 per share in cash, and once the insurance liabilities mentioned above are wiped out, their tangible book value per share will be $30.  So that gives you another reference point for what a fair value for the shares might be.

    What's the catch?  You don't find obviously, substantially undervalued shares without some problem that's scaring people off.  The catch here is that 14 workers were killed in the explosion mentioned above and many others were wounded.  There are 45 lawsuits pending against Imperial relating to the accident.  Imperial management has stated that they believe their workers' compensation and liability insurance should be sufficient to cover any losses resulting from those lawsuits.  On the other hand, this Forbes article states that the workers' attorneys are seeking $500 million in damages and that Imperial has only $100 million in insurance. (The article also has good information on the joint ventures that Imperial is looking to for growth.) 

    So how is this likely to play out for Imperial?  I looked around the websites of law firms based in Georgia, and believe it or not, workers in Georgia are not allowed to sue their employers for pain and suffering or wrongful death.  And workers' compensation insurance covers unlimited payments for medical care, so it seems very likely to me that Imperial management is correct that they will owe nothing aside from their insurance deductible of $0.5 million.  There is a chance of some surprise outcome from the lawsuits that could significantly hurt Imperial.  But the favorable outcome looks more likely, and the share price appreciation that would accompany it could be large. 

    Your judgment of the likely hood of those outcomes, and their consequences for Imperial's share price, will determine your estimate of IPSU's fair value.  To me it looks considerably higher than $17.  I am long IPSU.




    Disclosure: Long IPSU
    Tags: IPSU
    Jan 18 11:42 PM | Link | Comment!
  • Harris & Harris Group: Introduction to a publicly traded venture capital firm
    Harris & Harris Group, Inc.(TINY) is (according to their statements) "an internally managed venture capital company specializing in nanotechnology and microsystems that has elected to operate as a business development company."  At first glance, that's a unique and intriguing investment opportunity.  I was interested enough to do some research, but for my taste there isn't enough publicly available information to value the company.  However, the information I gathered might help others evaluate this opportunity.

    What follows comes from TINY's most recent 10K (Mar. 12, '09), their most recent letter to shareholders (Nov. 9, '09), a slide presentation available at their website (Sept. 30, '09), and a visit to the websites of seven representative companies in which TINY has invested (out of roughly 30), plus a few google searches.

    From a financial perspective, as of last month they had approximately $61 million in cash and no debt.  That includes the $21 million they raised in October through the sale of 4.9 million shares.  Annual operating expenses for their 11 employees are expected to come in under $6.2 million in 2009 (not including stock-based compensation that totaled ~$2.4 million as of September).  An undisclosed amount of additional funds goes to support their investment companies.  At the beginning of 2009 they had 33 active companies.  During the year they provided funding to one new company and follow up funding to 12 of their existing investments.  As of the last shareholder letter they had 27 active companies with estimated value above zero.

    In the Sept. 30 presentation (before the stock sale mentioned above) the company estimated it's NAV/share at $4.30.  The value comes from the $42.7 million cash they had at the time plus their VC portfolio which they valued at $70 million.  There is no specific information to support that $70 million valuation.  I'm sure TINY management has models to justify those valuations, but they don't share the models, or the inputs to the models.  Nor do they share how much they've invested in any individual company.  So really we just have to take their word on the value of the portfolio.  Investments in private companies are necessarily going to require estimated valuations.  And there may be competitive or legal reasons why management doesn't provide a great deal of detail on its investments.  But at the end of the day, this limited information on the value of their VC portfolio is why I don't feel comfortable investing my money in TINY.

    Back to the portfolio value: their cost basis for that $70 million portfolio is $94 million.  And as a point of comparison on NAV/share, TINY estimated their NAV/share at $5.95 on 6/30/08.

    On to the companies TINY has invested in.  First, I wouldn't really agree with TINY's assertion that they invest almost exclusively in nanotechnology and microsystems.  There is some of that, but there are also investments in biofuels, biotech, and advanced LED lighting and battery technologies, just among the seven companies I investigated.  Those are all exciting, potentially profitable areas, but calling them nano- or micro-tech is a stretch.  Second, I wasn't able to find any information about the size of TINY's investments in any of these companies, either on a dollar or percentage basis.  They do state that their top 10 holdings represent 68% of their VC portfolio, but it's not clear which companies make up the top 10.

    Now for the specific companies.  All of the companies below are private. I assume that all of the companies TINY has invested in are private, but I do not know that for a fact.

    --Adesto Technologies: Fabless semiconductor company that develops next-generation ultra-low power non-volatile memory technology.  [Seems to be a very secretive company, there's almost no information on its website or anywhere.]
    --Ancora Pharmaceuticals: founded based on state-of-the-art carbohydrate synthesis for vaccines.  There is a synthetic carbohydrate vaccine (not associated with Ancora) already approved in Cuba, so the concept is proven, but this is a very early stage company.
    --Biovex: Developing a cancer-targeting virus.  Phase II results in melanoma and head & neck cancer were impressive.  Phase III began in May '09.  This company looks promising and late-stage, but they raised money twice this year for a total of $110 million and TINY didn't participate either time.  I worry that TINY might have been diluted to a very small position.
    --Bridgelux: developing LED lighting with lower costs than existing technology.  Products are on the market already, but they're still working on getting costs down.  TINY participated in all financing rounds since '06.
    --CFX Battery:  "Advanced" lithium batteries.  It's not clear what is advanced about them.  They've raised $15 million and $26 million in 2 rounds and it's only clear that TINY participated in the first.  They're in talks with OEM's to get their battery technology into a variety of products/markets, but there are no deals yet and there's lots of competition.
    --Cobalt Biofuels: Developing microbes and processes to produce butanol from a variety of plant sources.  Butanol does have advantages over ethanol, but this company seems to still be in the research stage.  TINY participated only in the latest round of funding and is listed 7th of seven VC investors on their website.
    --Molecular Imprints: Technology for laying down materials in specified patterns on a very small scale; like lithography but a different technology.  They're already selling machines for making hard drives, semiconductors, and LED's.  They expect $24 million in revenue in 2009.

    Like I said, exciting investments, but difficult to value individually, and impossible to independently estimate TINY's share of that value.



    Disclosure: No positions
    Tags: TINY
    Dec 31 2:11 AM | Link | 1 Comment
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