Friday, October 1, 2010

Discount To Artifacts

When a company trades at a discount to its cash/receivables/inventory/real-estate etc., it piques the interest of the value investor. But what about when a company trades at a discount to the artifacts it owns? Premier Exhibitions (PRXI) was just awarded the rights to various items it has recovered over the years from the famous Titanic wreckage. When the court rendered its decision last month that the artifacts do indeed belong to Premier, the company's stock price increased by some 40%. But the stock price of this small-cap may not have increased as much as it should have.

The court placed a conservative estimate of the value of the artifacts at $110 million. In addition, Premier already owns artifacts from the vessel valued at approximately $35 million. Yet the company trades for just $85 million, despite the fact that the company has no debt and only $13 million of liabilities.

As such, it trades at a discount to its net assets. But will investors benefit from these assets in a timely enough manner to make an investment in the company worth it? The answer is far from a sure thing. There are several risks which may prevent the investor from seeing the cash value of the company's net assets.

First, the company as it currently stands appears more interested in exhibiting the artifacts for display than selling them for their court-assessed liquidation value. The court may decide to award the cash to the company, but the company has taken steps designed to encourage the court to simply give the company title to the assets, rather than cash. Furthermore, the company intends to invest some $10 million this year in capital expenditures (depreciation is only about half of that) to revitalize its business.

But the company's exhibition of these (and other) artifacts has not been profitable since 2007. Even though the company had already been displaying the artifacts for which it was just granted ownership, it has been losing a few million dollars every quarter (Some of that was restructuring and downsizing charges, however.) Previous management has been replaced, and new management appears on the right track, but whether the company can get a return on these assets that is satisfactory is far from a foregone conclusion. (It should be noted that at least a couple of value investors do believe in this turnaround, however. Their well-written write-ups are available here and here.)

Finally, the company's ownership situation is in doubt. The company's largest shareholder (owning 46% of the company) has been forced to sell his shares (for reasons unrelated to the company). He currently seeks a private buyer, but nothing prevents him from liquidating his shares on the open market should an adequate price not be found. On the other hand, this sale could be the catalyst that allows shareholders to realize the value of this company's assets. In advance, it's difficult to determine whether this forced sale will turn out to be a positive or negative for remaining shareholders.

A company trading at a discount to its realizable assets is what value investors are constantly seeking. But if the company has no interest in monetizing these assets in the near future, shareholders are incurring more risk than they would otherwise have to. This company appears to be trying to monetize these assets over the long-term, by running a profitable, global exhibition company. Shareholders will have to reach their own conclusions as to whether or not this endevour is likely to be successful.

Disclosure: None


Anonymous said...

"despite the fact that the company has no debt and only $13 million of liabilities."

Now there's an oxymoron. LOL.

Marlie said...

nice nice. thanks for the rec. one thing i realized recently after doing some cheap stocks, net-nets, cash situations, etc. is that investing not at all as hard as it seems. in fact it's fairly easy. i'm not kidding. one can do all the net-nets they want, but what's the point of having to find one every other day to keep the 20% per annum going? and paying short-term gains tax on most of them? so that's a handicap, the tax and the continuous requirement of supply. then there is competition as you know from just the visitors to your blog and then other guys that run blogs and people who just screen and don't even run blogs and the explosion of managers. what i realized is that 90% of it is temperament, if not more. so if you pick the 4 companies you like and sit around and do a lot of work to find 10 more you like and then sit around some more till everybody panics and then put all your money in. then you are really attacking where most people are weak, even a lot of self professed value investors. if in 09, you acted swiftly to move ALL your money into philip morris international at $35 to $40 or AXP at 9 or 12 or whatever price, you may not have to make any investments for yrs to come and comfortable get better returns than most net-nets w/o interim taxes. and that whole time until the next one you can sit around and think about what the next philip morris is gonna be whenever another crisis hits. as a popular investor said (and his name is well known but this quote is not), about one of his equity investments "they were panicking, they needed to sell, they needed a buyer and there wasn't any. so we took it. they knew it was cheap just as we did. didn't take a genius. we essentially cut their balls off". now that's not a nice thing to say but i think he made the point. what do you think barel? i'm not against your approach, i'm only looking for your opinion on what seems to me to be an easier approach. i think your approach is fine as well. thanks

Saj Karsan said...

Hi Marlie,

I think that approach is a fine one. It reminds me of Joel Greenblatt's approach, as in you are buying high ROIC businesses when their P/E's are low.

Unknown said...

Well said Marlie, one of the most important skill set of an investor is the ability to sit on his ass and do nothing. It's unbelievable how hard this is when the market is doing 20% per year.