Vulcan International Is The Epitome Of A Dark Company

Summary

• Vulcan Corp.'s value is predominantly in a large stock portfolio amassed in the past three decades. They are hiding it from investors as shareholders are required to sign NDAs.
• The lack of information is no longer a significant problem as their 2016 financials recently surfaced.
• Their liquid stock portfolio is discounted by the market by at least $22 million. If we add their real estate assets there could be an upside potential of 76% here.
• The management is happy with the status-quo and disrespects the minority shareholders. While they do not actively burn the value of the company, they are not utilizing it.
• The situation might change. VULC is likely liable to file 13F form which could add transparency without the need of change in management’s attitude. This would act as a catalyst.

Investment Thesis

I believe that Vulcan International (OTCPK:VULC) is presenting investors with an attractive opportunity even despite having one of the most obscure corporate setups out there in the ‘public’ OTC market.

The company is deregistered from the SEC and forces shareholders to sign a non-disclosure agreement (NDA) when they want to see VULC’s financials. The family that still owns a significant stake in the business is not open to minority shareholders and defends their secretive way of operating the business in court. In other words, VULC is the epitome of a ‘dark company’.

However, there are clear signs that at the current share price the business is still undervalued as the 2016 financials has recently surfaced and allowed the broader public to see what the company owns.

• While the company is operating a small rubber & foam manufacturing facility, the core value is in its stock portfolio which has materially appreciated since the financial crisis. It provides both a material dividend stream and a clear upside potential for investors. In 2016 the portfolio provided the company with $3 million in dividends and is now likely valued at around $161 million as per updated Nate Tobik’s assessment. This compares well with the current market capitalization of roughly $106 million.
• The portfolio is not the only valuable asset. Their real estate holdings are overdepreciated. Despite the fact that the manufacturing facility is losing money, the underlying real estate is likely to be valuable and could be worth at least $4 million as per property tax assessment. They also own large timber holdings in around Michigan which could add up to $14 million. Lastly, they develop real estate from time to time which is troublesome to track without the update financials but could add at least $7 million (based on property tax assessment) to the valuation.
• One might think that the current discount to the potential value of the assets could be partially justified given the OTC trading, family control and lack of information. However, there could be a catalyst that could force the management to be more transparent. The catalyst is tied to form 13F which is regularly filed by investment companies which own over $100 million in securities. The form shows their exact positions. VULC is likely to be liable to file this form even though they are not registered with the SEC and they are not an ‘investment company’ per se. If they file such form the market might be more comfortable in repricing the shares higher and closing the discount.

On the other hand, one has to account for the following risk;

• The corporate governance is terrible. As mentioned the insiders are treating minority shareholders as something to be dealt with in court and through NDAs. They also do not seem to be open to strategic alternatives as the state of the business remained the same for the past few years with the dividend stream being burdened by the money-losing manufacturing facility. At least they do not burn cash and do pay out a small dividend.

While the corporate governance is far from ideal, it does not fully offset the upside potential. The management is not actively destroying any of the value, it is just not utilizing it well and tries to hide it.

Company Background

Before VULC became the infamous dark company in the OTC circles, it was able to build a successful rubber shoe product business that in the 1970’s operated 28 factories throughout the US. However, as the foreign competition entered the market in the 1980’s the business started to face increasing challenges which ultimately forced VULC to exit most of the operations.

During this tumultuous period, the company was steered by the previous management team which mainly revolved around Benjamin Gettler and Lloyd Miller II., father of the famous small-cap investors Lloyd Miller III.

After the downturn, they sold most of the operations and put proceeds into the stock market. Since the end of 1980’s they only maintain a manufacturing facility in Clarksville, Tennessee which is generating a small amount of revenue at a loss.

The story complicates in early 1990’s after Lloyd Miller II. died and his son succeeded him. Due to what likely was a troublesome relationship with the board, Lloyd Miller III. decided to exit the investment. He got paid for most of his shares and signed a release form. At this point, the Gettlers became the key shareholders and control more than 50% of the shares.

One can read about the whole situation in the biography of Benjamin Gettler.

In the 1990’s VULC continued to stagnate. There were no significant developments in the manufacturing business. Their income from dividends was the major reason for their profitability in that period as per their SEC filings.

As there was no change to be seen at the beginning of the 21^st century, the company decided to deregister from the SEC to save cost and lessen the regulatory burden.

Miller’s Lawsuit

Since then they were operating in the dark. Only shareholders had the opportunity to understand what has been happening and only if they signed the NDA.

The stock might still lay dormant and unnoticed if it hadn’t been for Lloyd Miller III. who started to buy shares of VULC again sometime in the 2000’s. He accumulated a meaningful position and wanted to see how the company is doing. Thus, he requested financials.

He faced an uphill battle as the management was not forthcoming and declined to give him the information. In the meantime, Benjamin Gettler died and his son Thomas Gettler, a lawyer, became the main voice of the company. He acts as a legal counsel for the company and is on the board of directors.

Miller resorted to filing comprehensive requests based on Section 220 of the Delaware General Corporation Law, but even this did not work. The main argument of the management was that Mr. Miller signed a release in 1991 which prevents him from making any claims. Mr. Miller started to sue VULC and the judge was not impressed by VULC’s argument, however, Miller and VULC decided to settle the case out of court. The court filings can be accessed via PACER.

Increasing Interest

While this could have stirred an interest in the company, the main issue around 2014 was still the fact that shareholders that have seen the financials were tied by the NDA they were forced to sign. Thus, the increased interest could not replicate.

The first major break for the company came in 2015 when Nate Tobik wrote about the company on his blog. He did not provide specific numbers as he did not see the financials but he alluded to what could be the value of the company (the stock portfolio) and he provided basic background information.

The share price jumped, and more OTC investors started to scrutinize the company.

The share price languished in 2016 but since 2017 has been increasing continuously until it reached the current highs.

Release of Financials

As we have learned in May of this year the share price action was completely justified. One day Nate received an envelope containing the raw audited financials of the company for 2016 and 2015. Apparently, it came from the sister of Thomas Gettler.

The tangible book of the company in 2016 was $102 million which roughly matches the current market as can be seen below.

Note: VULC has a defined benefit pension plan, however, the asset base is small, and the underfunded liability is only $0.7 million.

The income stream was unchanged as the manufacturing facility kept on losing money and the dividend stream acted as an offsetting factor.

The valuation

While the share price action was justified, some might now be wondering why I believe that there is still plenty of upside left. The company trades at its tangible book from 2016 and generated only minuscule profit that does not really ask for a significant premium.

However, one has to remember the nature of the balance sheet. Most of the value is in a stock portfolio. Thus, one needs to adjust the value for the share price developments of their holdings. Unfortunately, the financials do not break down each position, however, Nate has shared an assessment of their portfolio based on positions from 2000’s.

According to Nate, other VULC’s shareholders have confirmed that this is a relatively accurate assessment. One can support this assertion by looking at the income statement or cash flow which did not show any realization of the positions in either 2016 or 2015. Thus, management is unlikely to trade frequently.

I have updated the assessment to reflect the current prices.

Now one must remember that this portfolio value does not take into account the capital gains tax liability which was standing at $41 million in 2016. As the marketable securities were valued at only $137 million then, one should expect this liability to change.

However, one must account for the recent change in the tax code which lowered the tax rate thus, the liability is lower than in 2016 in the end. It could be around $33 million (current gains * tax rate). Thus, the net value of the portfolio in a liquidation scenario would be around $128 million.

There are ways for VULC to side-step the liability and try to either eliminate or minimize the effect of taxes. One example strategy could be to exchange some of stocks in the portfolio for VULC. A potential acquirer could also perform a stock exchange which would result in a similar tax minimizing effect.

This portfolio then provides a straightforward and strong margin of safety and clear upside potential.

What makes VULC even more attractive is the rest of the balance sheet which is overdepreciated and hidden in the PP&E item.

As mentioned VULC still owns and operates the Clarksville facility. While the business is unlikely to have much value, the underlying real estate certainly does. One can take the appraised value of the county property assessor which stands at $3.87 million.

The company also holds a material investment in timberland around Michigan. VULC still owns 14,000 acres as per 10K from 2005. One can see that the asset value for timberland in 2016 is the same as in 2005. One can check Keweenaw Land Association (OTCPK:KEWL), a timber company operating in the area, for price per acre which comes to about $1,000 per acre, or $14 million for VULC. One has to remember that this would also be subject to corporate tax in the event of liquidation.

VULC also ventures into real estate developments. Probably their most valuable holding could be the Cincinnati Club building which they hold at the balance sheet since at least 1996. The market value assessment comes out at $4.39 million (due to this and this assessments which are for different parts of the building). One can’t forget the Florida asset held for sale on the balance sheet which was valued at $2.5 million in 2016.

They also bought a mall for $3.8 million in 2017. However, the value of that could be relatively the same since the acquisition thus I am not going to include it in the valuation.

Finally, there is $4.5 million on the balance sheet which comprises of the cash and current marketable securities in 2016.

Putting all this together we can come up with a solid upside potential.

As you can see even if one takes the tax liability into account there is a solid opportunity currently present. However, as aforementioned, it is likely that VULC would be able to eliminate or minimize such a liability and significantly increase the upside.

13F Form as a Catalyst

As mentioned in the thesis, investors might be sceptical about the upside. They can argue that the discount is rightfully in place given the attitude of management towards the minority shareholders and the unknown status of the financials. Not many people are willing to take an investment decision without knowing the exact current situation.

This could change soon, and we might not need to wait for the insiders to understand how a management of a public company should behave.

The reason behind this is a 13F form which VULC is likely liable to file with the SEC.

The 13F is normally filed by ‘institutional investment managers’ that have over $100 million in their portfolios. The form shows all of their stock positions. The definition of ‘institutional investment manager’ is relatively broad as per this paper. You can see it below, the emphasis is mine.

For the purposes of Section 13(f), an institutional investment manager is an entity that invests in or trades securities for its own account, or a person or entity that exercises investment discretion over someone else’s account.

As it is broad, it certainly applies to VULC. They have a portfolio worth over $100 million which they acquired through investing. The fact that they do not manage money for anyone else but them does not matter.

I have two examples to support this assertion.

First is the Daily Journal (DJCO). This publishing business is filing its 13F despite the fact it does not manage the portfolio actively and invests only their own capital.

The SEC questioned DJCO whether the company is not an investment company under the 1940 Act which would lead to further regulatory requirements. The company argued that it is not, and the SEC agreed (more on this later), however after this conversation they did start to file the 13Fs. Their portfolio is worth over $100 million. Thus, it seems that they are liable to file since they can be labelled as an ‘institutional investment manager’.

DJCO is registered with the SEC thus some might say that VULC could be a different case.

However, I have an example of Koch Industries, a company that is private and not registered with the SEC. They routinely file their 13Fs and according to what I know, they do not manage outside capital. The entity ‘Koch Industries’, which operates several lines of businesses, is specifically named as an institutional investment manager. They do mention another manager, Spring Creek Capital LLC, which I believe is a family office and thus should also invest only for its own account.

Due to these two examples, VULC is likely to be liable to file 13F as it certainly can be described as an institutional investment manager under the definition of the SEC. As shown in the second example it should not matter whether they are registered or not.

VULC is also likely an investment company

Not only that VULC should be liable to file the form because the ‘institutional investment manager’ definition can be applied to the company, but they could also be defined as an investment company under the 1940 Act. This would again mean that they need to file a 13F which further supports the main thesis.

The core of the argument revolves around the Investment Company Act of 1940 which dictates which entity should be regarded as an investment company.

The case of Daily Journal is useful as it shows how the company argued that they are not an investment company despite having a large stock portfolio.

The core legal section of the act is the wording regarding exemption from the act which states that the exempt company needs to be ‘primarily engaged… in a business… other than investing, reinvesting, owning, holding or trading in securities’ (abbreviated for clarity).

Daily Journal was arguing that it passes the ‘five-factor’ test that is usually used to determine whether a company is exempt or not. I believe that VULC fails at least 2 if not 3 of the factors and certainly fares much worse than Daily Journal which did end up filing the 13F.

Note that the linked article about the five-factor test mentions that factor #4 and #5 are usually the most important ones. I believe VULC fails exactly these two factors.

The following are the individual factors;

• The Company’s Historical Development

I believe it is relatively clear that VULC has been unable to profitably run the manufacturing facility. Not only that, the revenues tied to the facility has been dwindling. While in the 1990’s the company generated roughly $10 million from it, in 2016 they registered a mere $4 million revenue stream. The nature of the company has been tied to its stock portfolio over the past three decades. Without it they would not be in business as the income has always offset the losses.

In fact, one might be even able to argue that the insiders kept on running the facility in order to prevent the entity to be regarded as an investment company.

Thus, it would be dubious to say that the company passes this factor easily.

Sure, they are likely trying to be engaged in the manufacturing business, however they primarily make money from the securities portfolio. While this is a grey area, I believe VULC could potentially fail this factor.

• The Way the Company Presents Itself to the Public

Well if we accept that the website of VULC is the way they present themselves to the public and we totally write off the fact that the company is anything but transparent, then one could make the argument that they are not portraying themselves as an investment company.

However, describing Vulcan Corporation as ‘a rubber and foam manufacturing facility housing 272,000 square feet of manufacturing space with a total mixing capacity exceeding 50,000,000 pounds annually.’ is dubious to say the least. Where is the part about the $160 million stock portfolio??

• The Activities of the Company’s Officers and Directors

Not much can be said here as we do not much about the roles etc. It is likely that VULC insiders could paint themselves as managers who accidentally bought some stocks and did not do any research etc.

• The Nature of the Company’s Present Assets

It should be clear that VULC will have a hard time defending itself on this factor as the portfolio represented 94.2% of the total assets (including the current stocks) in 2016. One argument that Daily Journal noted was the outsized value of the portfolio was due to appreciation. VULC could again try to paint themselves as lucky investors, however, given the size of the portfolio I believe it is hard for them to do so.

I believe VULC should fail this factor.

• The Source of Company’s Present Income

The last factor is also the clearest. I believe that in any way you try to ‘skin the cat’ the result is the same.

VULC’s profitability is solely based on the portfolio income. If they were to stop trying to be engaged in the manufacturing business their income statement would be better off. Their gross profit is abysmal when one compares it with the operating and general and administrative expenses ($0.7 million versus $3 million).

I have not been able to think of any argument that VULC could use here. Yes, they do from time to time sell real estate assets, but that is nowhere near the amount of dividends collected from the portfolio over the years. I also do not need to even use the ‘comprehensive income’ to prove my point here. Plainly put they generate a material amount of dividends and are profitable because of them.

Thus, VULC should easily fail this factor and more likely than not become liable to file a 13F if the entity is ever contested on this topic.

If you believe like I do that VULC should not be exempt from filing a 13F then you can alert the SEC and fill out a complaint.

Managerial Incentives

After all of this, one is likely to ask why on earth is the management so secretive about the company? They could increase their own wealth just by becoming more transparent and avoid potential problems.

I believe that it could be because of estate taxes. They want to keep the share price as low as possible in order to avoid increasing their tax burden. They could also prefer to sustain the status-quo, or in other words ‘leave us alone’ preference. This, in my experience, can be an underappreciated incentive of the management teams in the OTC world.

The insiders are likely paying themselves comfortable compensation and do not need to put much effort into the company, i.e. they value the long-term cash flow they can receive. While they are not burning value of the company, they are certainly not creating much. It is a ‘symbiotic’ relationship of sorts between the management team and the stock portfolio.

Other than that, I have not been able to find another reason. One might think about fraud here as the previous two reasons might seem weak at first. I believe that the possibility is low given the audited results from 2016. Their mid-sized local auditor is based in Ohio and does not seem to show any clear red flags.

How to request financials

If you are further interested in VULC and are willing to buy one share or already own some and would like to see the current financials in order to be more comfortable with the investment I am sharing a straightforward way to request the needed information. A simple email or a call is unlikely to suffice here, a letter is needed.

First, you need to use the following address; Thomas Gettler Law Office 950 3^rd Ave, Floor 31, New York, NY 10022-2705

Secondly, in the letter, you need to state that you request the financials under the Section 220 of the Delaware Corp. law. Connected to this you need to state the purpose for the demand. One can read more about the purposes here. However, a simple purpose of ‘performing a valuation of one’s investment’ is sufficient.

Thirdly, you need to show them proof of ownership. A broker statement (blacked out apart from VULC position) should be enough.

Finally, be aware that not all brokers allow the purchase of VULC shares.

Conclusion

The secrecy of Vulcan’s management has unsurprisingly backfired and for a good reason. Even after the recent developments the shares continue to be undervalued. While the insiders might try to continue to hide and not utilize the value of the company, I believe that the situation is unsustainable.

The company is likely liable to file 13F form which could provide a clear catalyst as it would show their stock portfolio. This would certainly realize part of the significant upside potential.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VULC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.