Friday, January 10, 2014

Maxxam, unbelievably cheap at 27% of BV and potentially 2x earnings

The common refrain being tossed around by investors right now is that bargains are rare, and good bargains non-existent.  In some senses I agree, there aren't lists of profitable net-nets, or companies earning 15% on their equity at 50% of book value, but there are still bargains to be had if you look deep enough.  I did nothing special to find this stock, simply navigated to OTCMarkets and saw it on the front page.  From there I investigated further.

Maxxam's (MAXX) main business before 2007 was real estate and real estate development.  The company owns country clubs and resort communities in Arizona and Puerto Rico.  They specialize in second home and vacation home real estate.  The company's sales came crashing to a halt in 2008, and they have had substantially no new revenue since then.

The company has struggled to generate cash flow to as they've struggled to survive over the past five years.  Executive salaries have been cut, and the company delisted from the NYSE, which purportedly saved over $1m.  To put their despair into perspective, the company generated $9.1m in sales for the first nine months of 2013 from their real estate leasing division;  in 2007 they made $34m and in 2006 $77m over the same period.

The company started to monetize their assets in order to ensure their survival.  They sold half of their greyhound racing operation to Penn National Gaming.  They have also sold off various properties as opportunities arose.

What's left is a company that's a loose collection of cash, marketable securities, and interests in a number of joint ventures.  Here's a break down of their assets and liabilities:


The value appears straight-forward, there is $177m worth of assets and $132m worth of liabilities for an equity value of $44m.  Considering that the company's market cap is $12m, their book value of $44m is fairly incredible.  

A deeper reading of the annual report reveals that there is much more to like about Maxxam.  The first is their debt situation.  The company has $100m in debt, of which all of it is non-recourse and tied to their real estate.  The non-recourse debt is held by one of their real estate subsidiaries.  In theory if the company decided to default on their debt the bank could take the properties the debt is secured by, but not any of the holding company assets.  This means that the company's cash, securities and other investments are protected in the case of a debt default.  The truth is in a bankruptcy court all rules are thrown out and it's possible creditors could make a grab at the company's cash or other assets.  Even if creditors weren't successful it would waste the company's cash to defend against those claims.

The company carries their greyhound racing operations on their books at $9.7m, which is a potential source of hidden value.  The company sold 50% of the operations to Penn National Gaming for $40m a few years ago.  It stands to reason that if the half they sold to Penn National Gaming is worth $40m, then the 50% they retained is worth $40m as well.  

The company's Firerock investment is valued at $200,000 on their balance sheet.  The joint venture owns a country club golf course.  The country club has been losing money and the company has continued to write down the value of their investment.  Even though country club is losing money, I don't know of many golf courses that can be purchased for $200k in cash.  I would imagine if Maxxam decided to sell this venture they'd receive much more than their carrying value.

The last item worth mentioning is the company's earnings.  Their earnings come from real estate leasing, their racing operations, and asset sales.  It stands to reason that earnings aren't completely repeatable if asset sales are included, but they are worth mentioning.  The company earned $7.9m in the most recent quarter, and earned $6.4m for the last nine months.  If they merely broke even in the fourth quarter they're currently trading at 2x trailing earnings.  The company's earnings were derived from racing land sales, realty sales, and lot sales, plus leasing revenue.

The caveat with Maxxam is that there aren't many shares available for purchase.  The CEO owns 73% of the common and preferred stock as of the last annual report.  This is both good and bad for investors.  The good news is the CEO is highly incentivized to keep the company out of the hands of creditors.  The bad news is there are not many shares available to purchase, and minority shareholders essentially have no rights, they are tagging along on this investment.

Disclosure: No position

18 comments:

  1. Thanks nate

    This sounds like a very interesting opportunity. What are the final factors for u to think about before u really decide to invest in it or not?

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    1. As others have notes there are some concerns about management. Personally I am not investing because I don't want to invest in a company associated with greyhound racing/gambling. It's a personal preference, most might not share it.

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  2. what about this: http://www.jailhurwitz.com/

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  3. $12 million market cap and CEO pays himself $1.8 million per year? Seriously?

    Did you look at the long range stock chart? It is comical. Split-adjusted price peaked in 1999 at approx $4 million per share (!). In late 2009 management engineered a 1:250 reverse split in an attempt to squeeze out small shareholders. At least that is what the multiple lawsuits claim.

    I don't think Mr. Hurwitz will be looking out for the best interests of minority shareholders. I think that Mr. Hurwitz will be too busy looking out for the best interests of Mr. Hurwitz.

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    1. I don't disagree, not everything I post is a stock if recommend. I post about companies I find interesting and others might as well. They could be terrible investments, it's up to you to decide.

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    2. I agree that it is an interesting stock in an academic sense, but it seems a bit reckless to present it as a bargain without some discussion of why it is so cheap. I am sure you would feel terrible if someone naively invested in this stock based on your write-up and wound up losing his life savings. It would be his own fault, of course, for not doing his own DD, but still.

      The bottom line here is that the company assets are probably quite valuable, but the stock is probably worthless. All of the benefit will go to insiders; minority shareholders will never see a dime.

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    3. I would feel bad if anyone purchased something because it appeared on here without doing their own research. I post about stocks which I find interesting, this isn't a newsletter where I recommend things. Many stocks which I find interesting others don't. Some stocks like this I wouldn't buy, but others might.

      This isn't a completely researched idea either. The goal is to highlight something that might be grounds for further research. I have had posts where I explicitly say the stock is cramp and I would never buy and there is a buying frenzy once I post.

      I have learned that my audience is extremely varied, what works for some doesn't wor for others. Instead of trying to write something that pleases anyone I write about things that are interesting to me. Maybe you like my perspective, maybe you don't, but that's what ends up on here.

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  4. As a result of that 2009 reverse split (if Yahoo! is to believed) the share price fell by approximately 99.9 percent (from a split-adjusted price of roughly $600,000 to around $600). The company is effectively private. I expect that there will never be a dividend, and at best minority shareholders might eventually be bought out for a pittance. This seems to be the quintessential value trap.

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  5. I think that the Yahoo! chart may be wrong (big surprise!). The price change was not that dramatic, but the conclusion remains the same. The reverse split was designed to reduce the "shareholders of record" below 300 so that management could de-list the stock (i.e., go dark). So, no more of those pesky SEC filings. Yay!

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    1. The delisting saved them $1.5, which falls straight to the bottom line (when it exists). The company files with OTCMarkets, I think investors would prefer that.

      SEC reporting isn't the end-all be-all that some investors think it is. I've found SEC filing frauds and tried to report them..it was like talking to a brick wall, completely ignored.

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  6. Interesting find Nate. My experience with companies like this is they tend to hang around forever and never do much to create value for the minority group. Just take out compensation for the owner as has already been mentioned. That's probably why the discount is so steep. Also, is this a C corp? If so, there will be a nasty tax hit if they sell the real estate.

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    1. I've seen that as well. My best guess for something like this is minority holders sit flat for years until the CEO passes away or retires.

      Pioneer Railroad is similar to this. Great assets, a self serving CEO/Chairman who was not working in the best interest of shareholders. The stock stayed cheap/flat for years. Then the CEO dies and the thing doubled.

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    2. I guess that is what is known as "negative personal goodwill" if there is such a thing. How old is this guy : )

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  7. So he would rather eke $1.8 million a year out, than shape this thing up and quadruple his $9 million stake to $36 million (~1X book value)? and STILL take a $1.8 million salary?

    Has anyone found his age?

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  8. Hi Nate: I've followed Maxxam for years and although I believe there is lots on value tucked away on this company, one item keeps me on the sidelines - Charles E. Hurwitz. I believe Hurwitz only cares about Hurwitz and has no regard to minority shareholders.

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  9. The quality of the average comment on this post seems to be directly proportional to the quality of the company profiled :D

    I should like to see these people grill OTC markets for allowing the company on their home page, and the operators of internet infrastructure for allowing information about this company to be transmitted over their hardware to unwitting investors who might foolishly obliterate their savings by investing in this company without doing their own DD after hearing about it on Nate's blog.

    Sheesh.

    Interesting charity idea: if you had billions and billions, you could spend $5M here, $10M there going activist on these criminals running public cos as private piggy banks, just being a craw in their side. Hilarious AND socially beneficial!

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    1. Well someone went out and bought 2 shares yesterday for $799.99 LOL.

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