Aztec Land and Cattle revisited, still as cheap as ever

Many of the stocks I write about make the term 'sleepy' seem exciting.  If only some of these oddball companies would become sleepy, it would be a step up.  Even with companies that appear to be dormant it's helpful to look at them every few years to keep up with developments.  I last wrote about Aztec Land and Cattle (AZLCZ) in 2012, and it's finally time for an update.

If you're an investor dying to buy cheap real estate than Aztec Land and Cattle is a company you need to look at.  When I first took a look at the company their 228,000 acres of land were effectively selling for $49 an acre.  This is land they originally purchased for $.50 an acre in the 1860s.

The company's land is mostly Arizona pasture land.  In 2012 the company submitted a master development plan detailing to the county how they expected to slowly shift land usage from pure pasture to both commercial and residential uses.  

Since my last post on Aztec the stock has appreciated about 50%, which is significant for a company most investors expect to go nowhere for years.  What prompted me to look at Aztec again is a new report by Andrew Slusser of Seven Pines Capital.  Andrew initially emailed me his report, then we talked on the phone about the idea.  What Andrew put together highlights how a small to medium amount of research on some of these oddball companies can give an investor an incredible informational advantage.  Andrew highlighted a few aspects to Aztec Land and Cattle that I hadn't appreciated when I first evaluated the company.

In the past two years the company has been very active.  For the past few years the company has considered leasing out a portion of their land to a windmill farm.  Two years ago this was just a concept, but today 14,000 acres are leased generating $140k in rent income.  There are plans to increase the amount of land for additional wind power, although the timing for that is unknown.

A bigger development in my mind is the purchase of the Catalyst Paper Company and Apache Railroad Company by Aztec.  Both Catalyst Paper and the Apache Railroad fell into financial difficulties recently prompting bankruptcy filings.  Aztec's Chairman led a group of investors that purchased a number of assets out of bankruptcy, including the railroad and 19,000 acres of land.  Control of the railroad could serve as a catalyst for commercial development on Aztec's land.  My suggestion on viewing the railroad is to view it not as a source of potential earnings, but as a reason for potential development.  The company is marketing the commercial land by the railroad as the West Snowflake Railpark development.  The area already has power, natural gas, road and railroad connections.

Even with a wind farm and railroad commercial park the main thesis for Aztec rests on the value of their land.  Their operations are essentially break-even and pay for the carry on their land holdings.

Arizona is unique in that 16% of the state's land is deeded to private citizens and corporations. Arizona essentially has a 16% public float on their land.  This is much less than surrounding states, and is partly the reason that pasture land averages $940 an acre in Arizona vs $360 an acre in New Mexico.  The average price for pasture land in the US is $1,200 an acre.  Also unique to Aztec is that their 228,000 acres are a single continuous segment, in a state little available land a single usable segment of contiguous land is significant.  Pasture land in the US has steadily appreciated over the last decade.

Sometimes a company gives investors insight into how they view their own assets.  In the case of Aztec the company completed several inter-company transactions where land was swapped between subsidiaries.  In these transactions the company valued their own acreage at $137 an acre, or double what the market values the company at.

I think a very simple and compelling argument could be made that Aztec's land is worth more than the current market value of $77 an acre.  The question I had when I first looked at the company was how long would investors need to wait for value to be realized?  If the land is truly worth a few hundred dollars an acre, but an investor needs to wait 30 years for value to be realized this isn't a great return.  A lot can happen in 30 years, and taking a gamble on something that far out is risky.  Either the land needs to be worth significant more, or a change in value needs to happen relatively quickly, say in the next ten years or so.

In Andrew's report he put together a matrix showing a NPV analysis of land values to years to value realization.  The chart is shown below:

At current prices investors are saying the land is either worth little, or there is very little certainty as to when this thesis might play out.  But an undervalued asset is undervalued regardless of whether it's land in Arizona or New York.  Patience is not a skill that many investors have, which is probably why Aztec is trading for such a low valuation.

If the company were to simply sell themselves as a ranch at today's New Mexico land prices they would receive $529/sh in proceeds.  Let's consider that maybe it takes 20 years before the company decides to sell themselves as a ranch at today's prices, even still the shares would fetch $200, which is higher than the current share price.

Granted no one ever knows what something is worth until it's sold, but there is a considerable margin of safety at these prices.  With the current margin of safety investors also get the optionality of something good coming from the company's recent actions.  Maybe the railroad will spur development, or maybe an additional wind farm will be built.  We don't know, but even if this is 'just' a pasture and never progresses from being a pasture it should at least be priced like similar pastures throughout the state or country.  

My only qualm about the company is that they don't pay a dividend.  When I invest in oddball stocks that are dark and my expected holding period is long I like to be paid something for waiting.  Unfortunately shareholders of Aztec simply need to wait. 

If you're interested in Andrew's report drop me an email.

Disclosure: No position