Friday, March 12, 2010

When The Company Values Itself

Most investors in the market focus on earnings and earnings growth. As value investors, however, we spend a lot time valuing company assets, since earnings can be volatile whereas many types of assets (e.g. cash, trusted receivables, real-estate, re-usable inventory) can provide a margin of safety on an investment if the price is right.

But determining the market value of certain assets can be rather difficult, as in many cases a company's balance sheet will state the assets at cost, even if they were purchased decades ago. This issue is particularly pertinent for companies that hold a lot of real estate, as while land values have appreciated over time, the gains have gone unrecognized on company balance sheets. As a result, investors can put hours or days of effort into attempts to value a company's portfolio of real-estate holdings. When you consider that there may be several investors putting in this type of effort for companies with large land-holdings, it is not inconceivable that years of effort (in the aggregate) are put into valuing such assets.

One company that is making life easier for the investor is Genesis Land Development (GDC), a real-estate development company that plans to have its properties independently appraised and subsequently publish the results! I considered this company as an investment several months ago, but due to the fact that I did not feel confident in determining the value of the company's real-estate assets in combination with the company's debt level, I did not feel I could put a value on the company with any certainty.

What Genesis is doing, however, is beneficial to both investors and the company. Investors, in the aggregate, save time (that can better be spent scouting other investments) and the company makes it widely known what its assets are worth, which should help bring a stock price towards its net asset value. Presumably, Genesis management feels the stock is trading at an undervalued level, but investors don't know the properties as well as does management, so this is a way to bridge that gap.

This is a route more companies should go, even those that are not pure real-estate plays. Often, a company's headquarters may be worth far more than its stated value, but the information is not well-disseminated and shareholders that can't put a value on the real-estate may shy away. By providing up-to-date information on company asset values, companies that trade at discounts would likely to see stock price rises.

Disclosure: None


Anonymous said...

Thank you for the informative post. I would just caution investors that appraised values can vary significantly. They're useful, but should maybe be taken with a grain of salt! (At least to some extent).

Anonymous said...

sure looks like jones soda has gone crazy barel!!!!
ur post about alignment of management incentives comes to the mind
keep up the gud work!