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Matt Berry
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Blog with (mostly) shorts: http://www.3footcrowbar.com/ Twitter: https://twitter.com/MattBerry01 Interests: -- reading up on bounded rationality, behaviorism, and philosophy -- writing down observations and organizing them into book form -- bicycling Favorite authors: Emerson, Shakespeare,... More
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  • J. Alexander's Corp. (JAX) and land value 4 comments
    Feb 22, 2010 7:17 PM | about stocks: JAX, DRI, EAT, DIN, ARKR
    JAX is not only trading at less than book value, it is also trading near the value of the land and buildings it owns.
    Of six restaurants I have compared ─ J. Alexander's Corp. (JAX), Darden Restaurants, Inc. (DRI), Brinker International Inc. (EAT), DineEquity, Inc. (DIN), Ark Restaurants Corp. (ARKR), Flanigan's Enterprises Inc. (BDL)─ JAX has fallen the most from its 52 week high. Tracking these companies side by side, JAX has clearly failed to keep pace.
    Of  notice to any value investor would be its price-to-book ratio, .34 (as of February 22, 2010). Of the above restaurants, only BDL is less than par with book value, at about .9.
    Since the beginning of 2004 until the current market crisis began the market has tended to value JAX at a price-per-book value of 1. Restaurants are capital intensive companies, and JAX especially so. The first thing we ask about a company which usually trades on par with equity but which then presents itself at roughly two-thirds discount is whether or not that equity is “solid.”  The second question would be whether or not there are any assets not included on the balance sheet. Third we would want to investigate what other reasons there might be for a devaluation of JAX. I will dedicate this blog to the prior two questions and then follow up with other blogs dealing with the third.
    One striking element in the 2008 10K (the latest 10K available) is land value, which is carried on the books at cost, that is, without appreciation. Here we have 15 million dollars of land, not marked up for appreciation, selling at a roughly a 20 million dollar market cap.  Of course we still need to employ the liability side of the equation and the depreciated buildings (in this estimation, we will throw away the equipment and improvements entirely). For now, let’s look at its land value and a couple of estimations at its possible worth.
     One quick way of making a rough estimate of the value of its owned sites and restaurants is by comparing what numbers were used to secure loans. From the 2008 10K,
    “The line of credit is secured by mortgages on the real estate of two of the Company’s restaurant locations with an aggregate book value of $7,107,000 at December 28, 2008.”
    And a second loan, also from the same 10K,
    “The mortgage loan is secured by the real estate, equipment and other personal property of nine of the Company’s restaurant locations with an aggregate book value of $22,767,000 at December 28, 2008.”
    So I take ($7,107,000 / 2) + ($22,767,000 / 9)/11 and arrive at an average restaurant and land cost of $2,715,818.
     There are 4 other sites owned with (I’m fairly sure) restaurants and equipment on them. Now we’ll take our remaining 4 restaurants multiply this by the average and come up with an approximate book value of $10,863,272.
    Now relying broadly upon the book values for these 11 restaurants, we have an estimated book value of the 15 owned sites and their restaurants of about $40,000,000.  (This calculation only includes the buildings of 15 sites, leaving out another 12 buildings owned on leased sites. See page 11, 2008 10K.) The buildings of course would suffer depreciation, and the land would be something higher ─ the two would work against each other.   
    Here’s another quick way to decide whether or not further study has a good chance of revealing a profitable investment.   The sites in question were purchased from the years 1991 until 2002. If I took 1997 as a median year and calculated the appreciation of $15,848,000 worth of land, from there I come up with a land value of $23,947,000. Here is our rough sketch in thousands:
    9,924
    Current Assets
    11,360
    Current Liabilities
    -1,436
    Capital Deficit1
     
     
    23,947
    Land2
    25,574
    Buildings
    49,521
    Real Estate Assets4
     
     
    31,466
    Long Term Liabilities5
     
     
    16,619
    Stripped Down Equity
    20,220
    Market Cap Feb. 22, 2010
    -3,601
    AT RISK
    17.81%
    at risk6
     
                                                                  
    1Capital Deficit - I'll deal with this in a later blog, or you can go to the 10K and find a quick explanation there. (But if you're looking for risk, you will find greater risk with the debt compliance warning, 10, 3rd qtr 2009, and with the decreasing same store sales in this economic crisis. After studying the debt compliance issue and current deficit, I feel the greatest risk remains with same store sales. But I'll leave that for later.)
    2Land at median purchase date of 1997 till present, appreciating at 3.5%. I began the first year with no appreciation, just to be conservative.
    3Buildings, not including improvements and equipment, with estimated depreciation over thirty years useful life, starting at 40,380 million dollars. I used 11 years for depreciation, since buildings purchased from 1991 to 2008 make 9 years median added to last 2 years (no new buildings after 2008) I begin depreciation first year, just to be conservative.
    4 $101,836Total assets listed on the 3rd quarter 2009 Balance Sheet
    Basically I've thrown away $52.3 Million dollars of assets from the Balance Sheet.
    5 I do not remove any liabilities from the balance sheet in this calculation.
    6 If my rough sketch here is in the ball park, then for every dollar I spent on a portion of the company I would be risking about .18 cents. If JAX returned to book value from this level, my $1 would be worth about $2.90 cents. Although I am investing in odds that I believe are better than 50-50, I like to think of it as, Heads I win $2.9, Tails I lose .18 cents.

    And as a reminder, we have left out the restaurant equipment entirely.

    This is far from exact of course, but I am only deciding whether to continue research into land values, looking at the traffic light, as it were, to see if it is green or red. It is green.
    I am already long on JAX, regarding it undervalued as a going concern.  I also regard the land and building value as a safety net.  

    Disclosure: long JAX
    Themes: casual dining, restaurants, value investing, ben graham, land, book value, real estate Stocks: JAX, DRI, EAT, DIN, ARKR
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  •  
    3.5% appreciation for BARE land ?

    Including the real estate bubble years ?

    Besides, theres ZERO chance they shut this thing down.

    Stout would rather burn it to the ground than admit he should have sold it years ago at $8-12 when he turned away multiple buyers.
    16 Aug 2010, 02:38 PM Reply Like
  •  
    I agree that there is a very low chance of JAX being shut down (but then again, I am very far from being a disinterested observer).
    17 Aug 2010, 10:32 PM Reply Like
  •  
    Given the real estate crisis our country has endured, Im not sure the land is worth 1% per year more than they paid.
    18 Aug 2010, 08:19 AM Reply Like
  •  
    Land has not been purchased since 2002, dodging the latest real estate bubble. (Land, that is. We are not talking about buildings. Jax owns 27 buildings.) From the 2009 10-k: “the Company has leased the sites for all but two of its 15 restaurants opened since 1997 and has not purchased a restaurant site since 2002.” Jax owns 15 pieces of land. That means that 13 of the 15 owned pieces of real estate were purchased before 1997. This fact was at the heart of my calculation of liquidation value.

    At the price of $3.5 per share (the price at the time of my original post) I believe I have an even coin at uneven odds: heads I win; tails I don’t lose very much (tribute to Pabrai). Priced for liquidation, as it was, the only thing JAX needs to do from here, in my opinion, is to prove itself a going concern. It appears from the last quarter (second worst quarter seasonally) that JAX is gaining market share (compare CHUX) and will show itself quite healthy in the fourth and first quarters of next year.
    24 Aug 2010, 08:37 PM Reply Like
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