In this Investor Summit Virtual Happy hour Ian Hunter, Dave Waters, and Nate Tobik discuss the valuation gap between small and large stocks.
Looking for value in the overlooked margins of the market.
Pardee Resources in Oddball Stocks Newsletter ($PDER)
We've mentioned Pardee Resources (PDER) on the blog several times lately, and it's one we write about frequently in the Oddball Stocks Newsletter as well. We thought we would share a couple of excerpts from the Newsletter, so that blog readers who haven't experienced it can get a feel for the types of things we discuss in the Newsletter.
Issue 22 (November 2018)
Issue 22 (November 2018)
On August 16th [2018], Pardee announced a self-tender for its shares. They offered to purchase up to 26,463 shares at a price of $188.94 per share, which represents a market capitalization for the company of $130 million. The share price was determined as the volume weighted average price over the ten days ended August 15th. We had just been asking “why buy table grape vineyards instead of repurchasing shares” and apparently the company has come to the same conclusion.Issue 25 (June 2019)
We recently obtained and read a copy of Calvin Pardee, 1841-1923: His Family and His Enterprises which is a family history written by descendants (and Pardee executives) C. Pardee Foulke and William G. Foulke. Copies of this are scarce and expensive because it was a small printing of a family history for a wealthy family. A certain number were given to outsiders and have ended up on the used book market. Ours was originally given to Manford O. Lee of VF Corp – a big deal apparel company both now and back when the copy was sent in May 1981.
The Pardee presence in America was founded by a Parliamentarian ancestor who came to New Haven during the English Civil War. During the 19th century a Pardee got interested in Lehigh Valley anthracite coal, and that is where the story of wealth starts. The one mistake they made, or the reason they did not become a household name like Carnegie, is that they did not follow the coal and steel industry west to Pittsburgh. (The reason for the westward shift was that steel-making using bituminous coking coal made more sense in Pittsburgh, nearer to deposits of that type of coal. Plus the market for steel rails was in the expanding west, not the east.)
Ultimately, though, Calvin Pardee did take the cash generated by the eastern PA mines and reinvested it towards the end of the 19th century in lands in Louisiana (timber, later oil and gas), West Virginia, Kentucky, and Virginia (the latter three all coal). The Louisiana lands that were bought based on timber value but proved to have oil were the big winner. That leaves PDER as a family owned resource company that has been mining coal, growing timber, and producing oil and gas for more than a century. I can't think of anything else quite like it. Texas Pacific Land Trust has been around since 1888 but is not actively managed.
Last Issue we also did a comparison of Pardee and Keweenaw based on implied timberland value, but of course the valuation of Keweenaw has fallen to $641 per acre for the timber. If you assumed, just for ballpark, that the acreage of Pardee was worth the same as KEWL, then the almost quarter acre per share of land at PDER would be worth $154 now instead of $192 when KEWL was trading at a higher price.
Inverting this calculation, the market capitalization of Pardee is about $789 per acre of timber, ignoring the value of the other resources. Given that Pardee has paid over $1,000 per acre for some of its timberland, why not up the ante on share repurchases? We'll see what the company does.
We recently attended the 180th Pardee Resources annual shareholder meeting on May 16th [2019] at the top of the BNY Mellon Center building in downtown Philadelphia. While management was friendly, gave a very detailed presentation, took almost a dozen audience questions, and even served a (cold) lunch, we came away with a pessimistic view on the principal-agent problem that exists here.Keep in mind these excerpts are from a couple years ago. If you want to stay up to date with what's happening at Oddballs like Pardee Resources, join the Oddball Stocks Newsletter.
[O]ne thing that has been bothering us recently are the paltry earnings from Oddball companies' timber holdings. In most investors' sum of the parts valuations of Pardee, timber is the single largest asset. If you value the timber at anything more than $704 per acre, it covers the entire enterprise value with the stock at $170 per share. However, with its 165,000 acres of timber, Pardee's timber division earned $2.1 million in 2018 and $2.9 million the previous year. In 2016 it earned $2.6 million. That is $15 per acre, average, per year. The company's land and timber is on the books at $45.2 million (which is $274 per acre). If you take those three year average earnings and capitalize them at a 5% cap rate it's $50 million; about book value. This is way less than comparable transactions for timber or the prices that Pardee has bought and sold timber, and yet... why would you want to pay more than this? At the $1,000/acre numbers that are bandied about, you get a 1.5% plus or minus inflation, very long duration cash flow that might be attractive to a college endowment or an insurance company, but how is it attractive to a micro cap value investor? (If nothing else, the timber could be dumped just as a way to get less long of long term government bonds.)
Sure, we believe that if all the assets of Pardee were sold the proceeds would be more than the current enterprise value. The shares might be worth double. Even selling the timber alone would probably result in proceeds greater than the current enterprise value. But management is not incentivized to do that, and the biggest shareholders (some of whom might be, if they knew) seem more concerned with keeping the company around as a family monument than maximizing their net worth. (If you want your descendants to maximize the value of a family business, leave your name off of it.)
Here is the problem with management's incentives. They have $189 million of assets at book value. The annual SG&A expense is $6.95 million which is 3.7% of this. If they were to sell land at anything over $700 per acre after tax, which they probably could, they could buy back stock at the current price of $170 and get the rest of their coal, oil, gas, solar, and agricultural assets for free. (Note that their current book value of land and timber is about $45 million, so a hypothetical sale of 165,000 acres of timber for after-tax proceeds of $116 million is not totally implausible.) But shrinking the asset base, and pre-SG&A operating income, would leave the company with a top heavy, too-high expense structure and overhead burden. A Pardee executive pointed out during the meeting that the company has only 26 employees, one fewer than 20 years ago. Unfortunately, it is also about the same number that Berkshire Hathaway has at the Omaha headquarters with 4,000 times more assets.
This incentive misalignment was made awkwardly clear at the meeting (which was the best attended we have seen this season, with some writers from Motley Fool, some institutional asset managers, and a number of private value investors). Many of these shareholders asked questions during the Q&A, and the questions fit into two categories: will you promise not to dabble in any more weird investments, and will you buy back more stock?
Two shareholders mentioned Texas Pacific Land Trust and its capital allocation policy that has consisted of dividends and share-cannibalization. The name did not seem to ring any bells with Pardee management, which is sad because it is one of the most successful non-operating resource investment vehicles of all time. The Chairman said that more money has been returned to shareholders than used to buy assets over the past five years, and they do not want to decapitalize the company by buying back “too much” stock. Also, and specifically regarding SG&A at 20% of revenues, the Chairman said that they still have the same expense base that they had when revenue was much higher, and they would rather have higher revenue than try to cut expenses.
So now we know why the company has been experimenting with solar and agricultural investments instead of dumping overpriced timberlands and returning that cash. The company has been forced out of its comfort zone with predictable results: as they said at the meeting “wild cards & skunks” like the mobile solar generator Ponzi scheme and the table grapes that had a $2.1 million loss because of unseasonably warm followed by unseasonably cold weather. (The CEO did say that they are going to “take a breather” and are not investing in subsequent phases of the grape and almond projects.)
Our current thought on Pardee is as follows. If management is not going to sell the timber at a once in a lifetime high valuation (due to low interest rates) then those need to be capitalized at a reasonable interest rate. Book value seems like a reasonably attractive price. If you make that assumption, then all of a sudden you really need to sharpen your pencil on the coal, oil, and gas assets. We did a little digging on Pardee's coal mines. The operator of their biggest tract actually went bankrupt, although is continuing to operate and made good on its royalties. But the West Virginia metallurgical coal is high enough cost that there is a risk that mining could one day stop.
Meanwhile, the SG&A burden ticks on. And the need to replace the asset base creates pressure to do deals – like the agriculture, solar, or the biggest recent one: the $54.5 million invested in oil and gas in 2013. That was year that crude hit $110, before collapsing into the $20s from the second half of 2014 through the beginning of 2016.
Hanover Foods FY 2020 Annual Report
Hanover Foods is a classic Oddball that has been written about on this
blog a number of times over the years: the original posts (parts 1 and 2) back in 2012, and an update in 2013, their quarterly results this June, and the recent obituary of John Alan Warehime.
It has been a year since we last looked at Hanover Foods Corp's FY 2019 results, and now the FY 2020 annual report has arrived in the mail.
At a share price of $75 for the HNFSA (non-voting) share class, the market capitalization of the company (with 715,205 common shares outstanding) is now about $54 million, compared with net current assets of $126 million ($176 per share), and a book value of $245 million ($342 per share).
Hanover's results improved from FY 2019 to FY 2020. Their revenue went from $395 million to $401 million, but more impressively gross profit grew from $32 million to $41 million. Meanwhile, SG&A shrank by $2 million, with the result that operating profit went from just over breakeven to $12 million.
We'll have more about Hanover Foods in the upcoming November Issue of the Oddball Stocks Newsletter.
It has been a year since we last looked at Hanover Foods Corp's FY 2019 results, and now the FY 2020 annual report has arrived in the mail.
At a share price of $75 for the HNFSA (non-voting) share class, the market capitalization of the company (with 715,205 common shares outstanding) is now about $54 million, compared with net current assets of $126 million ($176 per share), and a book value of $245 million ($342 per share).
Hanover's results improved from FY 2019 to FY 2020. Their revenue went from $395 million to $401 million, but more impressively gross profit grew from $32 million to $41 million. Meanwhile, SG&A shrank by $2 million, with the result that operating profit went from just over breakeven to $12 million.
We'll have more about Hanover Foods in the upcoming November Issue of the Oddball Stocks Newsletter.
Hanover Annual Report FY 2020 by Nate Tobik on Scribd
Pardee Resources Reports Q2 2020 Results
In June we posted Pardee's annual meeting slides. Also see our recent posts on Pardee's 2019 annual report and its share repurchases. We just received the second quarter (2020) report for Pardee:
Quick takeaways: met coal was idled because of covid, so their coal division income fell from $8.3 million for the first half of 2019 to $2.4 million for the first half of 2020. Oil and gas division and timber were both down as well. Interestingly, the alternative energy division produced more power and had higher revenue than in the year prior.
We will have more to say about Pardee in the November Issue of the Oddball Stocks Newsletter.
Quick takeaways: met coal was idled because of covid, so their coal division income fell from $8.3 million for the first half of 2019 to $2.4 million for the first half of 2020. Oil and gas division and timber were both down as well. Interestingly, the alternative energy division produced more power and had higher revenue than in the year prior.
We will have more to say about Pardee in the November Issue of the Oddball Stocks Newsletter.
Nate Tobik on "The Widest Valuation Gap This Millennium!" - Tonight
Nate Tobik is going to be on a panel for the Investor Summit this evening from 6pm-7pm ET. He will be discussing the valuation gap between small caps and the market in general. You can register here.
Right now we are experiencing the widest valuation gap between value and growth stocks in decades. What does this mean and how can we act on this opportunity?
Thursday, August 27th at 6 PM EST
Panel
The Widest Valuation Gap This Millennium!
Panelist
Ian Hunter from Hunter Value Capital
Nate Tobik from Oddball Stocks
Dave Waters from OTC Adventures & Alluvial Capital
Agenda
6 PM Opening remarks from CEO Fred Rockwell
6:15 PM Panel
6:40 PM Table talks and open networking
7 PM Event ends
Making Progress at Conrad Industries ($CNRD)
We have been writing about barge-builder Conrad (CNRD) on the blog for years. Last year we published a sample from the Newsletter, and Nate wrote about it twice back in 2012.
Conrad is a rare Oddball with good, friendly management, but their business is really challenged by the lack of oil and gas activity in the Gulf of Mexico. However, they signed a big job this year:
Here is a table showing their results for Q2 2020 showing a big improvement year-over-year. Gross profit up with revenue down, and big SG&A reduction, for a nice increase in income overall.
We'll have more coverage of Conrad in upcoming Issues of the Oddball Stocks Newsletter. (Try a sample here.)
Conrad is a rare Oddball with good, friendly management, but their business is really challenged by the lack of oil and gas activity in the Gulf of Mexico. However, they signed a big job this year:
Our backlog increased to $133.0 million at June 30, 2020, compared to $79.2 million at December 31, 2019 and $116.8 million at June 30, 2019. The increase in our backlog is primarily due to the signing of our largest contract to date, a 6,500-cubic-yard-capacity Trailing Suction Hopper Dredge, which will be constructed at our Deepwater South shipyard in Amelia with expected delivery in the first quarter of 2023.The market capitalization is currently $61 million. Current assets net of all liabilities are $57 million. They also got a PPP loan of $8 million.
Here is a table showing their results for Q2 2020 showing a big improvement year-over-year. Gross profit up with revenue down, and big SG&A reduction, for a nice increase in income overall.
We'll have more coverage of Conrad in upcoming Issues of the Oddball Stocks Newsletter. (Try a sample here.)
Big Share Repurchase at Crazy Woman Creek Bancorp, Inc.
Nate mentioned CRZY in Issue 13 of the Oddball Stocks Newsletter, back in July 2016. Here is what he had to say at the time:
On Wednesday (August 18th), the company put out a press release about a big share buyback funded by a issuance of ten year debt:
Total assets for CRZY at June 30, 2020 were $138 million, there is $3.4 million of premises and equipment, and only $132k of goodwill. Shareholder equity (then) was $14.6 million.
The company has a market cap of $8.5m with 632,842 shares outstanding. The company has issued slightly over 1m shares and repurchased approximately 400k of them, including 8,329 shares in 2015. The continual buybacks are a positive sign for investors and demonstrate appropriate capital allocation.CRZY traded above $20 earlier this year, then fell as low as $13.95 after the March crash. They've recovered to $15.62 as of today. They've also paid $1.26 of cumulative dividends since Nate mentioned them in the Newsletter.
The bank has a book value of $11.7m ($18.58 per share) and could be worth $15m ($24.06 per share) in an acquisition according to our CompleteBankData acquisition valuation model. Both book value and acquisition value are significantly higher than where shares currently trade at $13.50. [P/B at the time was 0.73x]
The bank could be a potential acquisition target for a larger bank looking to get into the Wyoming market, or for a bank in the region looking for a bolt-on acquisition. At current prices this is a great bank to add to the cheap bank basket.
On Wednesday (August 18th), the company put out a press release about a big share buyback funded by a issuance of ten year debt:
"...Buffalo Federal Bank, today announced the completion of its private placement of $2.0 million of 5.0% fixed-to-floating rate subordinated notes due 2030 (the “Note”) to a Wyoming bank. The Note will initially bear a fixed interest rate of 5.0% per year for five years and then reset quarterly to the three-month SOFR rate, plus a spread of 460 basis points, payable quarterly in arrears to the August 14, 2030 maturity. The Company may redeem the Note upon the end of the fixed rate period, or at any time upon certain other specified events. The primary use of the proceeds was to fund a block repurchase of 93,000 outstanding shares, or approximately 15%, of Crazy Woman Creek Bancorp’s common stock. The transaction is expected to increase book value per share by approximately $1.57. At June 30, 2020, book value per share was $23.40 with outstanding shares of 623,103. After giving effect to the repurchase of 93,000 shares, outstanding shares are 530,103."If their calculation is accurate, that would bring book value up to almost $25, making the current P/B ratio 0.62.
Total assets for CRZY at June 30, 2020 were $138 million, there is $3.4 million of premises and equipment, and only $132k of goodwill. Shareholder equity (then) was $14.6 million.
Guest Post: Northeast Bank ($NBN) by Dave Anderson
[This guest post is by Dave Anderson who works for Anbec Partners, LP, which focuses on value and special situation investments. They are long shares of Northeast Bank.
Issues of the Oddball Stocks Newsletter will typically have a guest piece like this one. Try a sample of the Newsletter to see what it's like.]
Summary
Northeast Bank (NBN - $18.50) is an interesting opportunity at current prices due to its strong loan portfolio, capable underwriting, and a new income stream from a recent PPP relationship that is not reflected in its most recent earnings. While this is a summary write up, the company provides very useful information in their quarterly earnings presentations.
Despite its generic name, NBN is more than a sleepy regional bank. It is a sophisticated national player with strong capital allocators at the helm. The CEO, Rick Wayne, a skilled owner/operator, has an impressive track record purchasing loans in the secondary market and is committed to conservative underwriting standards. Board members include Chair Robert Glauber, the former Chairman and CEO of NASD (now FINRA), and Matthew Botein, the former co-head and Chief Investment Officer of BlackRock Alternative Investments.
While the stock has rebounded from a COVID-related decline, during which the Company re-purchased nearly 10% of the common stock, we believe there is still considerable long term value at current prices. And I believe that NBN is poised for strong earnings going forward given: (i) loan portfolio quality, (ii) insider purchases and share repurchases, (iii) balance sheet capacity to acquire and originate profitable new loans, and (iv) earnings from the new PPP loan relationship with Loan Source not yet reflected in financials.
Background
CEO Richard “Rick” Wayne co-founded Atlantic Bank & Trust Company in 1988. In 1993 the bank began purchasing quality assets in the secondary market, primarily from regulators who had taken over failed competitors. The strategy proved very successful. The bank went public in 1996, changed its name to Capital Crossing in 1999, and was ultimately acquired by Lehman in 2007 and surrendered its bank charter at that time.
In 2009 Wayne raised funds for FHB Formation, LLC with the intent of investing the capital in a financial institution. At the end of 2010, FHB Formation, LLC merged with Northeast Bancorp. NBN remained as the surviving entity. At the time, NBN was a sleepy community bank with ~$600M in total assets and net interest income of roughly $16M. The bank specialized in lending in its local region primarily in Maine. At 6/30/20 NBN had total assets of $1.3 billion, TTM net interest income of $60 million and a national loan footprint.
Today NBN operates three business segments: the Loan Acquisition and Servicing Group (“LASG”), Community Banking, and Small Business Administration (SBA) lending. LASG, which purchases and originates commercial real estate loans nationally, has historically been the earnings driver. But a new PPP/SBA business relationship with Loan Source, discussed in the 6/30/20 earnings call, could add meaningfully to future earnings.
Loan portfolio quality
In the 3/31/20 earnings call, management laid out the portfolio LTV and provided color on current reserves. Active insider purchasing in the spring (see below) would certainly seem to indicate their faith in the portfolio value.
Insider purchases and share repurchases
Insiders were active purchasers in March and April. Importantly, since May 2019 the Form 4s have been filed with the FDIC, not the SEC, making them less obvious to investors.
The Company aggressively repurchased common stock in late calendar Q1 and Q2 (NBN has a June 30 FY end) as shown below in the 6/30/20 investor deck provided by NBN.
Balance sheet capacity
As of 6/30/20, NBN has loan purchase/origination capacity of $500mm. If we assume NBN utilizes 50% of that capacity to add net new loans to the balance sheet, we get the following incremental net income. Note, this could be conservative given COVID-driven loan purchasing opportunities - see 3/31/20 earnings call comments from CEO:
In reviewing the historical growth of NBN’s LASG loan book note that, until recently, the bank had been constrained by certain capital requirements imposed by regulators at the time of NBN’s founding merger. After the 2019 corporate reorganization and a subsequent 2020 capital requirement change, NBN earning power has increased. As an example, prior to the 2019 reorg, Purchased Loans were limited to 40% of Total Loans. Post-reorg, that limit increased to 60% permitting NBN to bid more competitively while maintaining credit quality, according to the CEO.
In the 4/23/20 earnings call, Rick Wayne made the following comment:
“I'm pleased -- very pleased to report that the remaining regulatory conditions have been waived. The bank's Board has reduced the Tier 1 leverage ratio limit from 10% to 9% and the total capital ratio limit from 13.5% to 12%. The impact of this change is shown on Slide 4, where based on capital at March 31, loan capacity has increased by $143 million from $255 million to $398 million. With this change, we are now in conformity with the capital limits of many other banks, and we have additional capacity to prudently, and I say prudently, grow our balance sheet.”
New PPP loan relationship with Loan Source
In the 6/30/20 earnings call, management discussed their new relationship with Loan Source related to PPP loans. This relationship, in addition to providing meaningful one time gains (Fiscal Q4 2020) on sale of PPP loans (with potentially more to come), also includes ongoing servicing income (for the life of the PPP loans) and correspondent fees (to be amortized over the life of the loans). Other than the gain on sale, these components were not meaningfully reflected in the 6/30/20 earnings but will hit in the quarters to come and their impact is material:
Valuation Summary
Noteworthy Risks
Issues of the Oddball Stocks Newsletter will typically have a guest piece like this one. Try a sample of the Newsletter to see what it's like.]
Summary
Northeast Bank (NBN - $18.50) is an interesting opportunity at current prices due to its strong loan portfolio, capable underwriting, and a new income stream from a recent PPP relationship that is not reflected in its most recent earnings. While this is a summary write up, the company provides very useful information in their quarterly earnings presentations.
Despite its generic name, NBN is more than a sleepy regional bank. It is a sophisticated national player with strong capital allocators at the helm. The CEO, Rick Wayne, a skilled owner/operator, has an impressive track record purchasing loans in the secondary market and is committed to conservative underwriting standards. Board members include Chair Robert Glauber, the former Chairman and CEO of NASD (now FINRA), and Matthew Botein, the former co-head and Chief Investment Officer of BlackRock Alternative Investments.
While the stock has rebounded from a COVID-related decline, during which the Company re-purchased nearly 10% of the common stock, we believe there is still considerable long term value at current prices. And I believe that NBN is poised for strong earnings going forward given: (i) loan portfolio quality, (ii) insider purchases and share repurchases, (iii) balance sheet capacity to acquire and originate profitable new loans, and (iv) earnings from the new PPP loan relationship with Loan Source not yet reflected in financials.
Background
CEO Richard “Rick” Wayne co-founded Atlantic Bank & Trust Company in 1988. In 1993 the bank began purchasing quality assets in the secondary market, primarily from regulators who had taken over failed competitors. The strategy proved very successful. The bank went public in 1996, changed its name to Capital Crossing in 1999, and was ultimately acquired by Lehman in 2007 and surrendered its bank charter at that time.
In 2009 Wayne raised funds for FHB Formation, LLC with the intent of investing the capital in a financial institution. At the end of 2010, FHB Formation, LLC merged with Northeast Bancorp. NBN remained as the surviving entity. At the time, NBN was a sleepy community bank with ~$600M in total assets and net interest income of roughly $16M. The bank specialized in lending in its local region primarily in Maine. At 6/30/20 NBN had total assets of $1.3 billion, TTM net interest income of $60 million and a national loan footprint.
Today NBN operates three business segments: the Loan Acquisition and Servicing Group (“LASG”), Community Banking, and Small Business Administration (SBA) lending. LASG, which purchases and originates commercial real estate loans nationally, has historically been the earnings driver. But a new PPP/SBA business relationship with Loan Source, discussed in the 6/30/20 earnings call, could add meaningfully to future earnings.
Loan portfolio quality
In the 3/31/20 earnings call, management laid out the portfolio LTV and provided color on current reserves. Active insider purchasing in the spring (see below) would certainly seem to indicate their faith in the portfolio value.
Insider purchases and share repurchases
Insiders were active purchasers in March and April. Importantly, since May 2019 the Form 4s have been filed with the FDIC, not the SEC, making them less obvious to investors.
The Company aggressively repurchased common stock in late calendar Q1 and Q2 (NBN has a June 30 FY end) as shown below in the 6/30/20 investor deck provided by NBN.
Balance sheet capacity
As of 6/30/20, NBN has loan purchase/origination capacity of $500mm. If we assume NBN utilizes 50% of that capacity to add net new loans to the balance sheet, we get the following incremental net income. Note, this could be conservative given COVID-driven loan purchasing opportunities - see 3/31/20 earnings call comments from CEO:
In reviewing the historical growth of NBN’s LASG loan book note that, until recently, the bank had been constrained by certain capital requirements imposed by regulators at the time of NBN’s founding merger. After the 2019 corporate reorganization and a subsequent 2020 capital requirement change, NBN earning power has increased. As an example, prior to the 2019 reorg, Purchased Loans were limited to 40% of Total Loans. Post-reorg, that limit increased to 60% permitting NBN to bid more competitively while maintaining credit quality, according to the CEO.
In the 4/23/20 earnings call, Rick Wayne made the following comment:
“I'm pleased -- very pleased to report that the remaining regulatory conditions have been waived. The bank's Board has reduced the Tier 1 leverage ratio limit from 10% to 9% and the total capital ratio limit from 13.5% to 12%. The impact of this change is shown on Slide 4, where based on capital at March 31, loan capacity has increased by $143 million from $255 million to $398 million. With this change, we are now in conformity with the capital limits of many other banks, and we have additional capacity to prudently, and I say prudently, grow our balance sheet.”
New PPP loan relationship with Loan Source
In the 6/30/20 earnings call, management discussed their new relationship with Loan Source related to PPP loans. This relationship, in addition to providing meaningful one time gains (Fiscal Q4 2020) on sale of PPP loans (with potentially more to come), also includes ongoing servicing income (for the life of the PPP loans) and correspondent fees (to be amortized over the life of the loans). Other than the gain on sale, these components were not meaningfully reflected in the 6/30/20 earnings but will hit in the quarters to come and their impact is material:
Valuation Summary
Noteworthy Risks
- Reserves/LTV - Management gave a thoughtful response to an analyst’s question in the 3/31/20 earnings call regarding the values used in the LTV analysis shown above and NBN’s allowances for losses. You can see the detailed analysis here (as of 3/31/20) and additional portfolio data here (as of 6/30/20)
- Interest rate sensitivity
- New loans - how quickly can NBN appropriately deploy their capital. The CEO says he will not compromise on underwriting standards, and he does not have a history of write-downs.
Altria's Wine Business (Chateau Ste. Michelle) Isn't Doing Much Better than Scheid Vineyards ($SVIN $MO)
Nate did a post in June, "Interpreting the Scheid Vineyard 2019 Results". The trends that he noted in that post, and also in our post last summer about developing concerns with Scheid, have not really changed. We noted that the most recent quarter's results showed SG&A and interest expense that were 2.6x greater than gross profit.
In their Q2 2020 results, Altria mentioned that it was having challenges in its wine business, Chateau Ste. Michelle, which is something like the 9th largest U.S. winery.
While on-premises sales have collapsed, estimates are that off-premises have risen enough to make up for this. So if a company can't sell booze right now, they should probably be worried.
In their Q2 2020 results, Altria mentioned that it was having challenges in its wine business, Chateau Ste. Michelle, which is something like the 9th largest U.S. winery.
Evolving adult consumer preferences have posed strategic challenges for Ste. Michelle, which has seen slowing growth in the wine category and increased inventory levels in recent periods. Against a backdrop of product volume demand uncertainty and long-term non-cancelable grape purchase commitments, which have been further negatively impacted by government actions which restrict direct-to-consumer sales and on-premise sales, and economic uncertainty surrounding the COVID-19 pandemic, Ste. Michelle experienced additional increases in inventory levels that at March 31, 2020 significantly exceeded long-term forecasted demand.As of May 31, 2020, Scheid had $51 million of wine inventory out of a total of $156 million of assets. It seems like a bad sign if anyone is having trouble selling alcoholic beverages right now. Alcohol sales are way up during quarantine.
During the six and three months ended June 30, 2020, Ste. Michelle recorded pre-tax charges of $394 million and $2 million, respectively, which were included in cost of sales in Altria’s condensed consolidated statement of earnings. The charges consisted of the following: (i) write-off of inventory ($292 million recorded in the first quarter of 2020) as Ste. Michelle no longer believes that the benefit of the blending and production plans for its inventory outweighs inventory carrying cost given the reduced product volume demand; (ii) estimated losses on future non-cancelable grape purchase commitments that Ste. Michelle believes no longer have a future economic benefit ($100 million recorded in the first quarter of 2020); and (iii) inventory disposal costs and other charges ($2 million recorded in the second quarter of 2020). The non-cancelable grape purchase commitments will continue to require cash payments as grape commitments are fulfilled over the next five years.
Given such uncertainty in economic conditions and product volume demand, as well as long-term supply-side contractual challenges, Altria and Ste. Michelle undertook a review of the wine business. As a result, Altria and Ste. Michelle implemented a strategic reset in order to maximize Ste. Michelle’s profitability and achieve improved long-term cash-flow generation. This strategic reset includes: (i) an updated approach to forecasting demand; (ii) supply chain optimization; (iii) SKU rationalization to reduce the number of products and eliminate underperforming brands; and (iv) streamlining operations by reducing future capital expenditures, working capital requirements and ongoing operating costs.
While on-premises sales have collapsed, estimates are that off-premises have risen enough to make up for this. So if a company can't sell booze right now, they should probably be worried.
Try a Sample of Oddball Stocks Newsletter
For anyone who has wanted a low-cost way to try the Oddball Stocks Newsletter, now is your chance. We just lowered the prices on two of our back Issues which are available à la carte:
First, our Highlights Issue from February 2020, which was double the length of a normal Issue and had some of the gems from the Oddball Archives. We have lowered the price on this from $79 to $59; you can purchase here.
Second, Issue 26 which was published in August 2019. Our back Issues are normally priced at $139 (which is just 1/5th of the subscription price), but we are making this one available for $99. Here are some of the highlights of Issue 26:
First, our Highlights Issue from February 2020, which was double the length of a normal Issue and had some of the gems from the Oddball Archives. We have lowered the price on this from $79 to $59; you can purchase here.
Second, Issue 26 which was published in August 2019. Our back Issues are normally priced at $139 (which is just 1/5th of the subscription price), but we are making this one available for $99. Here are some of the highlights of Issue 26:
- "The point of maximum pessimism," a guest piece that looked at a variety of names including AFBA, FREVS, and GULTU.
- A guest piece on Alaska Power & Telephone Company
- "Your Diversified, Permanent Capital Holdco Is Not Going to Work," a very important guest piece pointing out the problems with NOL-shell companies.
- Updates on Bank of Utica, Boston Sand & Gravel, Du Art Film, Goodheart-Willcox, Hershey Creamery, J.G. Boswell, Keweenaw Land, Pardee Resources, and others.
- Reviews of two academic papers, "The Cash Conversion Cycle Spread" and “DotCom Mania: The Rise and Fall of Internet Stock Prices”.
- An essay on the problems with Sum of the Parts investment theses. Our take, "there has never been a better time to sell assets and probably never a worse time to buy them."
A victory for shareholders trying to learn about dark companies!
We often hear from shareholders in OTC-listed "dark" companies that have not only delisted and don't file quarterly financial reports with the SEC, but also don't send out financial statements to their shareholders - and sometimes refuse to provide financial reports to them even when asked!
When a company is incorporated in Delaware, a shareholders' right to information is governed by the Section 220 of the Delaware General Corporation Law. A basic summary is that shareholders have the right to examine company "books and records" as long as the request is made for a "proper purpose".
Since this is such an important tool for shareholders to find out what is going on at micro cap companies, we pay close attention to Delaware court cases that interpret the meaning of Section 220. The controversies tend to involve what purposes are "proper" and which particular "books and records" the shareholders will be allowed to see in connection with those purposes.
There was ruling last month by one of the heavyweights of the Delaware Court of Chancery (Vice Chancellor J. Travis Laster) that is a resounding victory for shareholders who are "outside the tent" of control at companies. It was in a case between a privately held investment fund (Sahara Enterprises, Inc.) and a woman who owned shares through a trust (Avery L. Woods Trust). You can download the whole opinion from the Delaware court website (link), but a key highlight is the decision that shareholders in Delaware have an absolute right to know about management compensation and related party transactions:
We have been talking about this subject extensively in the Oddball Stocks Newsletter, and our concern is that if management is not talking about its own compensation, the compensation may be excessive. At Oddball, we pound the table for shareholder rights and better corporate governance, just as Benjamin Graham did:
When a company is incorporated in Delaware, a shareholders' right to information is governed by the Section 220 of the Delaware General Corporation Law. A basic summary is that shareholders have the right to examine company "books and records" as long as the request is made for a "proper purpose".
Since this is such an important tool for shareholders to find out what is going on at micro cap companies, we pay close attention to Delaware court cases that interpret the meaning of Section 220. The controversies tend to involve what purposes are "proper" and which particular "books and records" the shareholders will be allowed to see in connection with those purposes.
There was ruling last month by one of the heavyweights of the Delaware Court of Chancery (Vice Chancellor J. Travis Laster) that is a resounding victory for shareholders who are "outside the tent" of control at companies. It was in a case between a privately held investment fund (Sahara Enterprises, Inc.) and a woman who owned shares through a trust (Avery L. Woods Trust). You can download the whole opinion from the Delaware court website (link), but a key highlight is the decision that shareholders in Delaware have an absolute right to know about management compensation and related party transactions:
“[H]ow directors and senior officers are compensated and whether they are the beneficiaries of any related-party transactions are basic facts that stockholders are entitled to know. Section 220(b) defines a proper purpose as any purpose reasonably related to the stockholder’s interest as a stockholder. Some information is so foundational that a desire to have that information is itself a proper purpose. A stockholder should be entitled to obtain a general description of the company’s business, the identities of its directors and senior officers, and basic information about how they are compensated. Directors and officers are fiduciaries who have a duty to act loyally, in good faith, with due care to maximize the long-term value of the corporation for the benefit of its residual claimants. The residual claimants are entitled to know how their fiduciaries are taking money out of the corporation. A stockholder should not have to point to a valuation purpose or assert suspicions about corporate wrongdoing to be able to learn how much money the directors and senior officers are receiving.”There are a number of Oddball companies that refuse to disclose this type of information to shareholders. It's not just that they don't put it in the annual reports, but when asked they pretend that shareholders do not have the right to know. Some examples where compensation information is opaque would be William Sadlier (SADL), Hanover Foods (HNFSA), or Bank of Utica (BKUTK).
We have been talking about this subject extensively in the Oddball Stocks Newsletter, and our concern is that if management is not talking about its own compensation, the compensation may be excessive. At Oddball, we pound the table for shareholder rights and better corporate governance, just as Benjamin Graham did:
"It is a notorious fact, however, that the typical American stockholder is the most docile and apathetic animal in captivity. He does what the board of directors tell him to do and rarely thinks of asserting his individual rights as owner of the business and employer of its paid officers. The result is that the effective control of many, perhaps most, large American corporations is exercised not by those who together own a majority of the stock but by a small group known as 'the management.'"Do you know a dark company that needs to open up? If so, leave a comment below.
Just Published: Issue 31 of the Oddball Stocks Newsletter!
We just published Issue 31 of the Oddball Stocks Newsletter. If you are
a subscriber, it should be in your inbox right now. If not, you can sign up right here.
Remember that we have made some back Issues of the Newsletter available à la carte, so you can try those before you sign up for a subscription: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, and 30.
We also published a Highlights Issue in February. The Highlights Issue is available here for purchase as a single Issue.
If you have been curious about the Newsletter, the Highlights Issue is the perfect opportunity to try about two Issues worth of content (much of which is still topical and interesting) at a low cost.
Remember that we have made some back Issues of the Newsletter available à la carte, so you can try those before you sign up for a subscription: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, and 30.
We also published a Highlights Issue in February. The Highlights Issue is available here for purchase as a single Issue.
If you have been curious about the Newsletter, the Highlights Issue is the perfect opportunity to try about two Issues worth of content (much of which is still topical and interesting) at a low cost.
Lumber Prices vs Saw Log Prices
Tom McClellan tweeted this chart showing that lumber prices have been on a tear while log prices have not.
This is similar to what has been going on at the grocery store. Cattle futures prices are down this year, but I'll bet your cost per pound for a nice steak isn't.
Processing is a bottleneck: meatpacking and sawmills. Often when processing is a bottleneck the processors make a lot of money. If you are in refining and a big competitor is down for maintenance, the crack spread rises and you clean up.
Except in this case, covid is just screwing up processing plants: decreasing volumes and increasing costs. Here is what Tyson Foods said in the second quarter:
We will have more about this topic in upcoming Issues of the Newsletter. If you are curious about the Oddball Stocks Newsletter, you can find out more (including à la carte Issues). Also be sure to follow Nate Tobik and the Newsletter on Twitter.
This is similar to what has been going on at the grocery store. Cattle futures prices are down this year, but I'll bet your cost per pound for a nice steak isn't.
Processing is a bottleneck: meatpacking and sawmills. Often when processing is a bottleneck the processors make a lot of money. If you are in refining and a big competitor is down for maintenance, the crack spread rises and you clean up.
Except in this case, covid is just screwing up processing plants: decreasing volumes and increasing costs. Here is what Tyson Foods said in the second quarter:
We are experiencing multiple challenges related to the pandemic. These challenges are anticipated to increase our operating costs and negatively impact our volumes for the remainder of fiscal 2020. Operationally, we have and expect to continue to face slowdowns and temporary idling of production facilities from team member shortages or choices we make to ensure operational safety. The lower levels of productivity and higher costs of production we have experienced will likely continue in the short term until the effects of COVID-19 diminish. Each of our segments has also experienced a shift in demand from foodservice to retail; however, the volume increases in retail have not been sufficient to offset the losses in foodservice and as a result, we expect decreases in volumes in the second half of fiscal 2020.This is relevant in thinking about our Oddball companies who own timber, for example: Keweenaw Land Association, Pardee Resources, and Coal Creek Company. (Be sure to also read one of our older pieces, The Problem With "Sum of the Parts".)
We will have more about this topic in upcoming Issues of the Newsletter. If you are curious about the Oddball Stocks Newsletter, you can find out more (including à la carte Issues). Also be sure to follow Nate Tobik and the Newsletter on Twitter.
Update on Hauppauge Digital Inc. ($HAUP)
In December we did a post on a lawsuit that had been filed against Hauppauge Digital Inc. ($HAUP): a Verified Complaint to Compel Inspection of Books and Records in Delaware Chancery Court.
Regarding Hauppauge Digital Inc. (HAUP), see also these posts from other bloggers:
Then, at the beginning of June, Hauppauge filed a motion to set aside the default judgment.
The motion was granted, and the default judgment has been set aside:
Conclusion:
I conclude that Hauppauge has met its burden of showing excusable neglect, a meritorious defense and that Rivest will not suffer substantial prejudice if the Motion is granted.39 However, recognizing that Section 220 actions are intended to be summary proceedings,40 and given the delays that have occurred related to this Section 220 action, I intend, once this report becomes final, to ensure that this matter proceeds as expeditiously as possible in the future.
Regarding Hauppauge Digital Inc. (HAUP), see also these posts from other bloggers:
- Hauppauge Digital: Gone Dark but is there Value?
- HAUP Hides in the Darkness
- Paging all HAUP Shareholders...
Then, at the beginning of June, Hauppauge filed a motion to set aside the default judgment.
HAUP - Clocked Defendant... by Nate Tobik on Scribd
The motion was granted, and the default judgment has been set aside:
73503773_MVDJ.2019-0848 by Nate Tobik on Scribd
Conclusion:
I conclude that Hauppauge has met its burden of showing excusable neglect, a meritorious defense and that Rivest will not suffer substantial prejudice if the Motion is granted.39 However, recognizing that Section 220 actions are intended to be summary proceedings,40 and given the delays that have occurred related to this Section 220 action, I intend, once this report becomes final, to ensure that this matter proceeds as expeditiously as possible in the future.
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