Thursday, May 24, 2012

Some Thoughts...

Here is a scattered post that hopefully, Seeking Alpha WON'T pickup, as it isn't really on anything concrete, but rather, me bouncing some thoughts off of readers. This will likely come off as scattered, and the positions don't make up nearly as much of my portfolio as the postings on them would likely suggest. Regardless, feel free to email me with any thoughts.
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I think that it is unfortunately apparent that Mark Sellers' once very enthusiastic opinion of Premier Exhibitions will likely not come to full fruition- which isn't a big deal... everyone makes mistakes. In the article (which I found through a great blog called Variant Perceptions), Sellers talked of using a DCF to get a value of $20 and the value being as much as $50 "in a few years". He also stated that he thought that the company could sell off all of it's Titanic related material for 25-50% of it's market cap, which was roughly $450 million... So, basically, he was figuring that the assets were worth $112.5mm-$225mm before the last expedition.

Moving on to today, I think that it is interesting to look at the language that the company used in it's most recent conference call (the italics and underlining are mine):

I want to be clear that our Board is committed to monetizing the Titanic assets. And we intend to do so in a tax efficient, judicious and disciplined manner, recognizing the appraise value of the artifacts and the intrinsic value of the other Titanic assets. In addition, when a transaction is completed, we do intend to direct substantially all of the net proceeds to shareholders..." -Samuel Weiser, Interim CEO, President, and Director.

It just might be that the company is trying to subtly say something to it's shareholders... Am I speculating by owning PRXI stock? To an extent, yes. However, as I have noted before, I am ok with it as a small amount of my portfolio, as the risk reward ratio seemed very intriguing to me at the time that I bought a large number of my shares (being in the $2.teens). I can't say that I'd blame anyone for sitting on the sidelines though.

As a side note, it is awesome that Sellers likes and brews good beer. The finance industry and the rest of the world could use more people like that.
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As for SUPERVALU, it is no secret that the stock price continues to get pummeled on an almost daily basis... While I have gradually been buying the stock (and LEAPS) for a long enough period of time that it almost seems like I have slit my wrists on a falling knife, it perfectly illustrates to me why I don't generally like the idea of using margin, since the short term nature of stocks can be quite volatile despite this particular instance with the company's continual improvement in tangible book value. For a lot of trading institutions, margin requirements have arbitrary price rules that apply to margin maintenance requirements- check out the literature from Zecco and TDAmeritrade on the matter. Between that and the company having lost it's place in the S&P 500 I don't think it would be a stretch of the imagination for there being some further crazy fluctuations in the price due to rebalancing of funds, ETFs (there may be some more left to work out?), and even people's margin accounts getting called.

As an example of this sort of forced selling, on April 30th, the day that SVU got kicked out of the S$P 500, almost 60 million shares traded hands, whereas it generally sees volume in the single digit millions. Put another way, if the shares that got traded on that day were all unique, which, don't get me wrong, is pretty unlikely, more than a quarter of the company was traded in a single day and the price only went down by ~2%. If that isn't enough craziness, as of April 30th, 88.55mm shares were sold short. That equates to nearly 42% of all the company's shares! As a percent of float, that is approaching Sears like numbers... But, the difference here, is that SVU has a much larger float that SHLD; if you look at Sears shorted shares as a percent of shares outstanding, the percentage drops from 52.5% to 9.9%.

Then, there is the other side of this sword, where there could be glut of forced buying. It seemed like that was the direction that things were going in for a handfull of days after they last reported results that certainly weren't overly disappointing. Mr. Market had other thoughts though.

When you think about it, the whole situation is pretty mind blowing.

Regardless, low prices can be the friend of the VALU investor... get the pun? ;)


Disclosure/Disclaimer: I and various members of my family (who have some accounts that I manage) are long shares and/or options of PRXI and/or SVU. I reserve the right to change any of our positions at any time. This is not advice of any kind and is solely my own opinion. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

8 comments:

Tom L said...

Hi Jeff,

Great blog. For SVU, have you investigated the multi-employer pension liability? This sounded pretty awful to me when I read about it. The WSJ ran an article recently about the MEPP disaster.

Just trying to help you identify all of the risks. I have no position.

Cheers,
Tom L

jeff said...

Tom,

Is this the article you speak of?

http://online.wsj.com/article/SB10001424052702304203604577393941108053800.html

You are right, that is a huge risk. Last year, the unfunded liability increased hugely . However, the way I figure it, is that even if SVU gets hit hard by this, they are still trading for such a small multiple of cash flow that they won't be destroyed for quite sometime, as a lot of the liabilities are far down the road. Even when you throw in the increased unfunded liabilities, they still are generating a sizable amount of value relative to their market cap.

I would also say that it is fair to say that the company wil be keeping this in mind in the future. For example, with their Save-a-lot stores that are fueling growth (and are often franchised) they shouldn't be getting a larger liability from the pension. Furthermore, it really does seem like they are turning things around.

Time will tell. What are your thoughts?

Andy said...

I have been adding SVU in size this past week. Short interest too high, no big debt till mid-2016, still managable,, net income grew in FY 2012 excluding goodwill, and Ebitda remains good.

Anonymous said...

SVU was trading very strongly after earnings.... then Goldman came out with a $5 share target/downgrade...Poof to 300,000,000 in market cap. I think the risks are high....but at this price, the rewards are much higher... I am putting a buy in tonight. The shorts may be overplaying their hand.

Multi-employer plans aside.... I am not comfortable with SUV 7.75% assumed rate of return.

I always thought I would wait til they suspended the dividend to wade in..... but this appears to already be baked in to the price.

Finally, why did Herkert not make all these personell changes two years ago.

Going Long tomorrow.

shlomi ardan said...

Why are you uncomfortable with a dividend that's less than a fifth of FCF (some would say much less)?

Anonymous said...

Why am I uncomfortable with the dividend that is less than 1/5 fcf.

1. Same store sales and margins have been declining for years. I would SVU to error on the side of conservatism.

2. The metrick ignores wear and tear of the stores (i.e., depreciation).

2. Most of the Save-a-lots are franchised...... I would like to see SVU own and operate them.

3. Getting rid of the dividend would make a symbolic message to all stakeholders that all stops are being pulled to ensure a successful turn-around.

4. Finally, as SVU refinances this debt in a couple of years, their financial rating will be less than it otherwise would have been if they had focused on debt reduction.

5. Lee Enterprises is a good example of a Company kept the dividend too long and ended up going into a pre-packaged bankruptcy. Mind you, LEE neither had nor has any trouble making interest payments. But the street judged in unsafe and balked at offering decent terms (the lowest tier now has a 15% coupon Warren Buffet has been buying).

6. 3 years out, SVU could be in the same situation as LEE was.

Just my 2 cents. (I am also long LEE.... a lot in common with SVU).

Tom L said...

@jeff

Regarding the MEPPs, there is a Credit Suisse report on them that I found posted online somewhere, but I can't find the link right now. The WSJ article below references the CS report.

http://online.wsj.com/article/SB10001424052702304331204577356210545503368.html?KEYWORDS=jakab+pension

Anyway, for me this is an easy pass - but you may be able to figure it out.

Cheers,
Tom L

jeff said...

Tom,

Can you send me an email?