PICO Holdings (NASDAQ:PICO) is a $550 million enterprise value holding company, with operations in the water rights, home building and canola seed businesses. It's a classic misunderstood sum of the parts story. There is inherent value locked in its businesses thanks to the low carrying costs of land and conservative impairments it has taken over the last few years.
River Road Asset Management is the activist involved, owning 8.85% of the company, with a cost basis that's more than 10% higher than current levels. River Road isn't a small fund, however, with close to $8bn in AUM. Even still, the fund rarely goes active. River Road's February activist filing on PICO marks the third 13D campaign that River Road has waged in its history, the other two being Mac-Gracy and Miller Energy.
The company is still rather "undiscovered" - no sell-side research coverage, the company doesn't do conference calls or offer any real detail in press releases. PICO is a holding company of sorts, with homebuilding and agribusiness segments, it has what's known as scarce assets and that's the real value at PICO - the water resource division.
PICO has been around since the early 80s, with John Hart having run the company for close to 20 years. John Hart has been in charge since 1996 and recently started showing faith in the company, increasing his ownership by more than tenfold over the last 30 months, now owning 1.4% of the company.
But as a holding company, it's all about boosting book value. We've hit some rough patches of late, where its book value has declined 30% over the last five years. But the move in the stock price has grossly outstripped the decline in book value - PICO shares are off 51% over the same period. You now have a stock trading at roughly 90% of book value.
Here's a quick look at the businesses, first is Northstar, the agribusiness, which PICO owns an 88% stake in from the 2010 acquisition. Northstar operates a canola seed processing business. You have to believe this is a bet on healthy eating. The commodity business is tough, however. It makes up the smallest portion of book value.
Second, UCP is its real estate business. PICO got into this business as the housing market was imploding in 2008, buying up distressed homes and land in California. It also constructs homes. So you've got thousands of lots carried on its books for values at much cheaper than today.
Third is Vidler Water Company, which is the water business and holds water rights - most of which are in states with water shortages (read: Nevada). Vidler accounts for most of its book value, but within that, there's some low-cost land on the books - where Vidler bought much of its land water rights in the early 90s. Developing these water rights takes many years and cost a lot of money (hence Vidler still has $100mm to $150mm in NOLs to use), but most of its water rights are developed, so they should be fairly easy to sell. The demand is sound - local governments want the rights, as do homebuilders.
How do we unlock this value?
The catalyst is that River Road is the driver for management to monetize its properties and to become more communicative with shareholders.
The start is to monetize its smaller businesses - UCP and Northstar.
It already dumped a portion of its UCP business but still has a controlling interest. It also generates most of the company's revenues. However, it won't be easy to dump the rest of the business, thus it's likely worth close to $7 a share. It owns most of Northstar, but as mentioned, that's just not a sexy or stable business, so it might get $2 a share for it.
Still, $9 a share in value isn't all that bad, leaving roughly $7 a share for Vidler. But again, valuing that business is tough. On the books, you have $400mm in real estate and tangible water assets. Making the case that those assets aren't worth more than at least $600mm today is a hard ask. Reasonably, you're looking at a water company (Vidler) that's worth $17 a share. In total, roughly $26 a share.
PICO has already hired an investment bank to review strategic alternatives. It's also been encouraging UCP to look at ways to unlock shareholder value. The company also noted that it would use the money from the monetization of Northstar for buybacks. It's a positive sign that River Road and PICO are working together, which tends to be River Roads' modus operandi.
On the surface, the bottoming of housing markets in Arizona and Nevada and the rest of the Southwest just hasn't translated into meaningful growth for its housing-leveraged businesses, Vidler and UCP. In part, with PICO being held back by missteps at Northstar. But PICO really comes down to a sum of the parts story, with the catalyst being a monetization of its various businesses and returning that capital to shareholders.
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