Monday, July 12, 2010

The importance of a good track record for compensation.

In the Case of Nevada Gold (UWN) a potential pitfall of an investment (in a company that is presently losing money) is that executive compensation seems verrrry high considering the small size of the company. If a potential investor would only look at, say, a 10Q or the income statement, they could have the potential to be repulsed and pass over what could be a great investment.

In the case of UWN, when looking at the proxy Robert Sturges is compensated quite well... to the tune of more than 1/2 a million dollars a year, in addition, he some outstanding options. Other execs are compensated quite well, also. One of the nice things that we see in the proxy is a brief history of execs employment, which you can do some research on. Here is what the company has to say about Bob:

Mr. Sturges has been CEO of Nevada Gold since October, 2006. He has over 25 years of gaming industry experience including over 15 years with Carnival Resorts & Casinos and Carnival Corporation. Among his many accomplishments as President of Carnival's Gaming Division, Mr. Sturges oversaw the development and operation of the Casino Rouge Riverboat in Baton Rouge, Louisiana, and Casino Rama Resort and Casino in the Toronto, Ontario, Canada market. Earlier in Mr. Sturges career, he also served as Deputy Director and Director of the New Jersey Division of Gaming Enforcement. Until recently, Mr. Sturges was a board member of Benihana, Inc. (Nasdaq: BNHN - News) and served as the Lead Independent Director, as well as a member of the Audit, Compensation and Executive Committees. Mr. Sturges is a limited partner of the Miami Heat NBA franchise. He is a graduate of Dartmouth College and a cum laude graduate of Rutgers School of Law.

Now, certainly, this is a statement that could be fudged or even lied in to make the company sound a lot better than it should. However, in an age where Google can find just about anything, we can learn a lot more about the previous statement.

For example, we can see the great appreciation in the stock price of Carnival Cruise lines while Struges was involved in the gaming operations of the company, a time in which he was working with Micky Arison the CEO of Carnival Corp. Their relationship continues to this day, with the Miami Heat.


We can also learn a bit about Sturges' and Arison's involvement with the Miami Heat. Apparently, he was instrumental in getting the team to Miami, is presently a limited partner in the team, and
surrounds himself with smart people. In addition, the futures market provided to us by sports betting favors what the heat have managed to do by buying a triumvirate of awesome. In predicting a champion for next year, it appears that opposing teams (other than the Lakers) will have to assassinate players on the Heat to stand much of a chance.

Take a look at the director positions that Sturges held in the past: Benihana and Americredit. One had a pretty bad impairment and some dumb debt usage that put the company in a precarious position with a credit crisis bank. The other seems to be well run. To make a long story short, Sturges resigned from the one that went downhill and is still with the good one. Notice in the press release from Benihana, the company makes no mention of him not disagreeing with management or the board- a rarity, at best. Again, Sturges is still with the one that is making money, which also is fortunate enough to have the Leucadia guys on board.

Sturges is also connected in with the New Jersey Division of Gaming Enforcement; I can't think that this sort of connection would ever hurt a company. With the company engaging in management of various casinos both in Vegas and formerly in the Caribbean, butting elbows with people that know gaming in the North East as well as in other areas may well provide valuable leads and relationships for the company; people like to do business with people they know.

I will re-iterate that the company is embarking on an expansion plan that I like: buying casinos for 3-4x EBIDTA. If one looks at the numbers, it appears that they are buying these things with cash and debt for significantly less than they were purchased in previous years. The debt is issued in the form of notes, which have favorable terms for all parties involved. Furthermore, when integrated into the system of casinos that they presently have in the area, cost efficiencies will occur and earnings will improve.

Bottom line, I think that, as a shareholder, I am getting a good deal on Sturges. As icing on the cake, he has some outstanding options, and owns a chunk of the company, which provides him with some good incentives.

I will add in that I don't think that the company will immediately become profitable. However, I think that the prospects are great for the casino owner/operator, and when coupled with the potential sale of a ton of land that the company owns, makes for an interesting company. This company will be doing a ton in revenue in no time and it looks like it will be generating nice returns on invested capital. Also, when calculating out an intrinsic and/or liquidation value for the company, you probably want to stay away from a heavy reliance on book value for any sort of back of the envelope calculation or rule of thumb thinking... There is a lot, and will continue to be a lot of goodwill on the books that may make a net-net Grahamite uncomfortable. I reiterate that the earnings power of the company has the potential to be tremendous.

Disclosure: I am long UWN. This is not investment advice. Don't do anything that I think or write about without doing a ton of thinking and research on your own.

1 comment:

ShadowStock said...

Good Stuff!
I’ve had a position but had to move on with a small profit. The stock still looks good. Conf call gave me confidence with management and their ability to utilize their high paid talent.
Great minds think alike but not mine.
http://shadowstock.blogspot.com/2010/04/noteworthy-week-ending-041710.html

Good luck
John (ShadowStock)
BTW FIGI.PK had a good day