Tuesday, May 1, 2012

Why I Missed (but am now swimming to) The Boat Of PRXI

Something that I have discovered by doing this blog is that I end up eating my own words a lot; which is actually one of the reasons why I like to write on here. It is really nice to be able to see how I was thinking in the past. As such, here is a snippet from an unpublished post on why I once thought that I would likely never own Premier Exhibitions... From April of 2009:
While owning the Heritage pattern by Pfaltzgraff that my parents gave me as a 'thank you' for moving out of their house; I personally prefer to use Gladware and the plastic boxes that Chinese food comes in for most of my food holding needs... As such, I don't get why people would actually pay money for some dishes that were put on a poorly constructed mammoth of a ship, which have been ruled to be owned by Premier Exhibitions. It seems to me that there is no moat for the assets and that public opinion could wane at anytime-no one cares about syringes from the Lusitania and it isn't like that someone can make another blockbuster about the a sinking ship for a while. (Edit: this would have been really cool though...)
Ultimately, it wouldn't shock me if there is a ton of upside. Certainly, if the company just trades for the estimated value of the Titanic assets that it holds, then there is a nice run up left in the stock. I know that the guys over at Complete Growth love this company (as well as a lot of other smart people), but I have to sit this one out for some stuff that I know is cheap, rather than this company which I think is cheap.

Ultimately, it seems that I did make the right decision by passing on PRXI at the time and going long select other companies, rather than PRXI, whose catalyst was quite far off at the time... Despite this, I feel that the past few weeks have created an interesting situation for the stock. Do I purport to have any special insight on the value of the Titanic assets? Not really. What I will say is this: traditional logic (not mine) could argue that it makes sense for people to be snatching up assets that are typically viewed to be inflation hedges- say, artsy things. It also seems as if people are bidding "priceless" asset prices through the roof. Additionally, there was recently a telegraph that wasn't even on the Titanic that sold for $27.5K, a set of 3 rivets (that were part of what caused the ship to sink) and some glass sold for $12.5K, some medals that were given to people that tried to rescue survivors have sold for thousands of poundsPeople even care about authenticating money that passengers were carrying when they were aboard the ship...

If that isn't crazy enough, a billionaire is reconstructing the ship in China so sale the seas! Cruise ships ain't cheap and I think that the potential prospect (which, don't get me wrong, I don't place great odds on of happening) of some of these artifacts making their way onto that ship, would be quite interesting and profitable for all parties involved. For example, I would think that there would be some rich ass hole (insert any occupation that you don't like here) out there that would relish the idea of getting to pay an exorbitant amount of money to eat food off of dish ware from the original Titanic, while cruising around on the 2016 reconstruction. I don't know that's the sort of monetization would be in the vein of the preservation that the US Courts would approve of, but, surely you get my tongue in cheek drift...

The key thing to remember here, is that the Titanic holds a place in the public's mind like no single painting ever has. I obviously missed this 3 years ago when I thought that there was no moat for the assets, despite their not being able to be reproduced and holding a place in the public's mind. To illustrate this point, I will pose a few questions: how many people would pay $30 bucks to see a few thousand Titanic artifacts? How many people would pay a dollar to see a telegraph that the Titanic sent? How many people would pay $10 dollars to see a single painting that sold at auction for $50 million dollars? As such, the Titanic assets, if viewed strictly from a cash flow basis (which, when dealing with single pieces of art/artifacts, then scaling up, gets difficult if not impossible to do) there seems to be a fair chance of these recovered dishes retaining their value as a whole and not exponentially depreciating down when not sold as individual pieces... Former execs at the company thought that the exhibition rights could be quite lucrative as well. Throw in that you are going to have some bidders that don't care about return on invested capital and you have a real possibility that these assets could do very well at auction (OK, so the Federal Government may not be bidding, but, I still thought it was a funny link).

There are also the salvage rights, which, I would imagine the high bidder would want simply so they can control the supply of any future artifacts. If the appraised price of $189 million has any bearing on what the salvage rights should be worth, then they are likely quite valuable. The few expeditions that the company did yielded costs that are a fraction what the assets have the potential to be worth, even if the auction price ends up being 1/2 the 2007 appraised value! I view the salvage rights as a hidden asset that the market may not be fully realizing the potential value of.

Looking back, would someone have been willing to invest, say, $200 million dollars to own the Titanic movie franchise that has generated over $2 billion in ticket sales? Obviously the answer is yes, given that the budget for the film was over $200 million. The whole of the franchise has actually been nothing but free advertising for more than a decade for the assets owned by PRXI and any future cash flows that the artifacts will provide... It is interesting to think that these assets were appraised for less than the budget that went into making the blockbuster film, but, economically, it isn't a surprise- movies are not bound by being shown in a single location.

Getting to the point, after following the company for something like 4 years, I finally bought some  shares as the risk reward ratio is very intriguing to me at this moment, which when combined with the ~$123 million market cap, makes me more than willing to speculate on the fate of the auction. Would I do as I have been known to, and put more than 1/2 my portfolio in this stock? Hell no. But like SVU, do I think that it deserves a small place in my holdings? Why yes, yes I do. I have no idea if the stock will go down like the Titanic or shoot through the roof, but, I would imagine that we will have an answer sooner, rather than later, and I am willing to place a wager on it- annualized returns on this one will likely look great or wretched. Anytime that value guys (who are probably the only owners of the company anyway) start selling out of fear or for other reasons, the contrarian's contrarian in me gets really excited. As has been said before, either the assets are undervalued or they are not. I am betting that they are, in relation to the market cap of the company... If I am wrong, well, it is a risk that I am willing to take.

Given that there are a lot of value investors out there that have been discussing PRXI, I am surprised that there hasn't been any discussion as to what will happen to the cash from this auction. Everyone seems to like this company for the assets being auctioned off. I personally don't really like the business of traveling exhibitions and frankly, have my doubts that Mark Sellers- the company's chairman, really likes it either. This seems to leave a huge cash dividend or Premier becoming a holding company with a glut of permanent capital in it: a hedge fund manager's wet dream (Mark Sellers anyone?). If that is the case and the auction tanks, even after taxes and commissions, the company won't be trading for a whole lot more than book value... A book value that will largely be made up of cash, of a company that doesn't have the worst cash burn that I have ever seen... Ultimately, not a terrible position to be in.

Disclosure/Disclaimer: I and various members of my family (who have some accounts that I manage) are long shares of PRXI and 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.

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