Cardinal Ethanol at 72% of book, a P/E of 3 and high yield

In my last post on Sugar Terminals Limited I highlighted a company selling at a very low valuation available for purchase by only a few parties.  Some of the feedback I received is that opportunities like Sugar Terminals aren't widespread, or don't exist for anyone who isn't a sugar grower.  Thanks to a comment left on the previous post I've found an American company that appears to be even cheaper than Sugar Terminals Limited, and is available for purchase by anyone.

Sometimes a market investor's viewpoint is limiting.  Companies and stocks are interchangeable.  Some investors will even reference companies by their ticker symbol.  To many, even most, if a company isn't exchange traded it is un-tradable.  Institutional mandates prevent many investors from ever investing in an OTC registered stock, let alone something more esoteric.

In the United States every corporation has shares and shareholders.  These shares are legally exchangeable if certain qualifications are met.  This means in theory if you wanted to buy a piece of your plumber's S-Corp you could if they were willing to sell, and you could find a lawyer to complete the transaction.  Even though most companies aren't exchange listed it doesn't mean that it's impossible to buy shares in many of them.  There are brokers and companies that make markets in these private companies.

Cardinal Ethanol is an example of a company I described above.  They have shares available for sale, but are not traded on an exchange.  Shares can be purchased through a specialized broker whose website lists trade prices as well as a crude order book.

When a company's shareholder count crosses a certain threshold they are required to file with the SEC, which is the case for Cardinal Ethanol.  The company also provides a nice newsletter on their website with a short and useful management statement about business conditions.

The company is located in rural Indiana, which is ideal because their main raw material is corn.  Corn is distilled into ethanol which is then sent to oil refineries to mix into gasoline for distribution.  Ethanol is shipped from the distillery to oil refineries by rail.  I have a picture of Cardinal's facility below to show their reliance on railroads.  Note the giant loop for tank car storage next to their facility.  Also note that across the railroad tracks from their plant are corn fields.


The company's profitability has ebbed and flowed with ethanol prices, as well as with corn supply and price dynamics.  They reported a loss in 2009, and a very small profit in 2012.  They earned $26m in 2013, $25m in 2011, and $20m in 2010.  These profit numbers are significant considering their market cap is $90m.  The company earned $1,804 per share in 2013, which with a $6,200 last trade gives them a P/E of 3.4.

I found it interesting that the company broke down the drivers of revenue and expense in the 10-K with this graphic:


The company pays out a large portion of their earnings as a dividend.  Most recently the company paid $855 per share in dividends giving them a 13.7% dividend yield.

If the low P/E and high dividend yield aren't enough the company is also selling at a significant discount to book value.  Their shareholder equity after the  most recent distribution was $124.53m.

The company has $57m in current assets, of which $24m is cash, $20m in receivables and $10m of inventory.  The majority of their asset value resides in their facilities, the plant and equipment.  One could easily argue that their land and facilities aren't worth much because it's probably hard to liquidate an ethanol plant and sell rural land.  The flip side of that argument is it's easy to sell an asset that's generating $25m in income a year, even if it's located in rural Indiana.

The company had focused on paying down their debt in response to the financial crisis, and pressure on ethanol prices.  Now that their debt is more manageable they are planning to focus on increasing the volume of ethanol they produce in an effort to push their plant to capacity.  The company has a lot of operating leverage, if they are able to generate the volume they need their net income could see a significant increase.

There are a number of risks to this investment.  The first is the limited market for shares.  While it might be easy to purchase shares it is probably not easy to get out, especially after a bad quarter or bad year when other investors might want to sell too.  A second risk is really a dual risk, corn prices and ethanol prices.  Corn and ethanol are closely related commodities, but they are also distinct.  Factors that could change the price of one might not have an effect on the other.  This could put the company in a situation where their input price is high and their output price is low.

The last risk is that it might be a very long time before value is realized.  Due to the extremely limited market these companies seem to trade off of dividend yield, not earnings or book value.  While the company seems cheap on all reasonable metrics investors in this market might consider it fairly valued or overvalued.  As trading volume is low it might be a long time before the company's true value apart from their dividend is recognized.

For those able to stomach these risks the rewards appear appropriate.  It's not often that a company like this comes along.



"You've got to get out while there's gold in the air.." - Deep in the Motherlode, Genesis

Disclosure: No position

An oddball: Sugar Terminals Limited

Have you ever heard of the Australian National Stock Exchange?  I hadn't either until Dave Waters mentioned that I should take a look at a little company that trades on the exchange, Sugar Terminals Limited (SUG.Australia).  He thought I might be interested because the company trades at close to 60% of book value and pays a 10% dividend.

The company owns and operates wharfs and sugar terminals in Australia.  Their terminals were originally owned by the Queensland Government until they were privatized in 2000.  As part of the privatization ownership passed to sugar growers and millers, and a new corporate entity was formed to manage the terminals.  The company has two classes of stock, G shares for growers and M shares for millers.

When investors talk about companies that have economic moats I doubt they're thinking of Sugar Terminals Limited.  Sugar terminals must be a commodity business right?  A competitor just needs to build a dock further down the shoreline and charge less.  The company's results would suggest otherwise.  From 2000-2010 the company earned A$441m in revenue, and A$212 in net profit, all of which was paid out as dividends.  A 48% net margin is impressive, especially for a company selling at 60% of book value.

The reason for the company's discount is also their source of strength.  The company restricts trading in shares to sugar millers and sugar growers and related industry participants.  Their website has a list of criteria that an individual or company must satisfy to be allowed to trade in their stock.  If a shareholder ceases to qualify the company notifies them and they are required to sell their shares within a certain period of time.  If the shareholder doesn't sell their shares the company takes them and gives the shareholder their cash value.  I have no idea how the company policies their policies, or knows who active growers or millers are.

A company that's owned by its customers isn't completely uncommon.  A company that's owned by its customers and has an active trading market for the shares is very unusual.

Shares trade on the Australian National Stock Exchange, which appears to be the Australian version of the US pink sheets.  The stock trades for A$.65 a share and trades about eight to ten days a month.  The company's stock price has barely budged since 2009, yet since then they've paid out 50% of their share price in dividends.

If a market is made efficient by informed buyers and sellers Sugar Terminals is the exception to the rule.  Shareholders are active and extremely well informed participants in the sugar market.  They know the supply and demand dynamics, know the size and quality of harvest beforehand, and are privy to what might be considered inside information.  Yet with this sizable advantage the shares still trade at a depressed valuation.  The shares barely trade on price at all.  It's as if the market is only a means to exchange interests between owners.

Even though I don't meet any of the qualifications for ownership outlined in the company's FAQ I still attempted to trade the stock.  I contacted a broker in Australia with the hope of opening an account and purchasing shares.  I was informed that they don't open accounts for foreigners.  It's worth mentioning that I identified myself as an American.  Many (most?) financial institutions worldwide have begun to refuse to do business with Americans because of costly compliance the US government is trying to enforce worldwide.  It might be possible for a Canadian, or Brit to open an account without a problem.  I also inquired of only one broker, the only one that allowed online trading.  I don't have an interest in opening a full service brokerage account in Australia to hold one position.

Even though I haven't been able to find a way to purchase shares I still enjoyed reading the company's annual reports, especially their Chairman's annual letters.  The company is clearly run for shareholders, both in that the business services their needs, but also financially.  Management is concerned about costs and was able to replace their warehouse's roofs for less than they had initially estimated.  I can't remember the last time I read a press release where a company announced a project that came in below cost, usually it's the opposite.

I enjoy finding and reading about oddball companies like Sugar Terminals Limited even if I can't always invest.  Companies like this remind me that there probably exclusive ownership opportunities available to me that I might not know about or take advantage of.  Examples could include membership interests in local businesses, ownership in a co-op, or ownership in local teams.  Many of these mutual-esque holdings have characteristics similar to Sugar Terminals Limited, they are efficient, have high margins, and pay out significant dividends.  Sugar Terminals Limited might be off limits to most of my readers, but I'd be willing to bet that most if not all readers have something similar they could become a part of that they might not be aware of.

SWS Group, will they receive a higher takeover bid?

A company is worth what someone will pay, the ultimate cliche regarding fair value.  What happens when the price offered is far too low for the value to be received?  Investors love to purchase businesses at a discount in the market. Yet when a company makes an offer for another public company at less than book value we feel cheated.  "How can they do that?" "Don't they realize how low their offer is?" "This can't be happening.." If only the market were efficient and fair; this sort of thing would never happen.  Of course that means there'd also be no opportunity for a higher bid, which is what investors in SWS Group should be hoping for.

A week and a half ago investors in SWS Group (SWS) might have received what they wanted, a higher share price.  The higher price came in the form of an unsolicited offer to buy the company at $7 per share from Hilltop Holdings (HTH).  Hilltop Holdings is a financial holding company with subsidiaries that include: a bank, an insurance company, a mortgage origination company, a financial advisory.  Hilltop Holdings' businesses aren't that different from SWS Group's holdings.

SWS Group owns a bank, a retail brokerage, an institutional brokerage and a clearing company.  A change for readers of this site, the company is listed on the NYSE and has a sizable market cap.

Sometimes an unsolicited offer to purchase a company is completely unexpected.  A potential acquirer has a company on their radar for years and when an opportune time arises they pounce and make an offer surprising the target company.  I doubt that was the case with SWS Group and Hilltop Holdings.

SWS Group and Hilltop Holdings have a relationship dating back to 2011 when Hilltop Holdings extended a $100m credit line to SWS Group.  SWS Group down streamed some of the proceeds from the credit line to their bank to boost capital levels.  They also used a portion of the credit line to ensure their brokerage could operate without disruption.  As part of the financing deal Hilltop Holdings also received warrants to purchase up to 17% of the common stock, and a seat on the board.

Hilltop Holdings positioned their purchase offer as highly beneficial to both parties, and attractive at the most recent trading price.  SWS Group's businesses do seem like they'd be a good fit inside of Hilltop Holdings, but not at $7 a share.

I think the offer is low because it values a company with a $314m book value at $233m.  If the company isn't worth book value then maybe this is a fair offer.  Without too much investigation I think it's clear SWS Group is worth at least book value.

SWS Group breaks apart their subsidiaries into four reporting segments, retail brokerage, clearing, institutional brokerage, and their bank.  The easiest place to start in determining a valuation is with their bank.

SWS Group's bank, Southwest Securities FSB isn't going to break any records for profitability.  They earn a measly 3.71% on equity and have a lower than average net interest margin.  The bank is fairly well capitalized and their loan book is in relatively good shape.  I have included a snapshot of their current performance metrics as well as a quarterly income summary below.

View Southwest Securities FSB here: https://www.completebankdata.com/banks#details/bank/42671

The bank has only had one loss in the last nine quarters, and in the last nine years lost money in 2010 and 2011.  It's worth noting that they have a terrible efficiency ratio.  For every $100 dollars the bank earns in revenue $98.68 goes towards expenses, which is higher than average, and an opportunity for an acquirer.

The bank is profitable, with some cost cutting they could become even more profitable.  Their book value is $168m, or about $5.06 a share.  The bank valued at book value is 72% of Hilltop's offering price.  Readers can argue in the comments over whether book value is a reasonable take out value for the bank, but it's the peg I'm going to use.  If you haven't noticed there aren't many profitable banks selling for less than book value anymore.  Some might argue this bank is worth 1.2-1.5x book value, not an unreasonable assumption either.

If we subtract the value of the bank, $5.06 from the offer price of $7 we see that Hilltop Holdings is offering $1.94 or $63m for the rest of SWS Groups holdings.  To see if this is a fair price let's take a look at what the company's segments earned last year:



The company's institutional brokerage alone earned $20.8m, retail brokerage and clearing earned $2m combined.  Does 3x earnings seem like a reasonable bid for SWS Group's brokerage and cleaning operations?

One more factor to consider in the $63m valuation is that the Other Consolidated Entities segment holds SWS Capital, a dormant investment vehicle with $20m in assets.  Hilltop Holdings is attempting to acquire the brokers and clearing for effectively two times earnings.

Of course the elephant in the room are the expenses related to Other Consolidated Entities.  The company's Other Consolidated Entities is a catch-all for holding company level related expenses.  It appears based on my research into the bank that the company has classified some segment expenses in this category as well.

It's certainly a reasonable assumption that there are a lot of expenses that could be cut at both the holding company and subsidiary levels.  It's the valuable businesses and expenses waiting to be cut that Hilltop Holdings sees in SWS Group and is hoping to capitalize on.  It's possible that many of the expenses SWS Group's holding company incurs would overlap with expenses at Hilltop Holdings meaning potential synergies from this merger might be realized.

The fact that Hilltop Holdings is offering SWS Group shareholders less than book value for their shares should be the first sign that the offer is low.  If shareholders take a few minutes to evaluate what they own they'll find a lot of value simply beyond the company's book value.  Shareholders already appear to expect a higher bid with shares trading at $7.62, almost 10% higher than the latest bid.  If shareholders were to receive book value for their shares Hilltop Holdings would need to offer $9.52 per share, considerably higher than their initial offer.

Buying at the current price offers the opportunity for a sizable gain if a higher bid is received, and has a maximum loss of 8% if the offer is accepted.

Disclosure: Long SWS


How to become a better investor

I love to run.  I enjoy being outside, and pushing myself both physically and mentally.  Running fills both of those needs.  I'd like to become a better runner by increasing my endurance, and decreasing my times.  The only way for me to achieve these goals is to go out and run.  I sometimes read about running, and think about it, but the only way to improve is to actually run.

When taking up a new activity reading isn't the same as doing.  You can read all you want about the activity, read others' experiences, but you need to do it yourself.  I had a co-worker who was much more passionate about running than myself.  He would spend hours reading about the body mechanics of running and knew everything about various running gizmos.  Unfortunately all this knowledge didn't make him a better runner, it just made him a more informed runner.

Knowledge alone doesn't make anyone faster; to become faster requires practice.  Ultimately speed is determined by a mix of practice and genetics.  I'm a fairly average runner, I can run three or four miles at a seven minute mile pace comfortably.  I'm not fast though, the fastest mile I've ever ran was 6:09, and that was in high school.  On my high school cross country team I was one of the slowest kids, not something I'm proud of, but a reality.  I ran the same workouts as everyone else on the team, its just my body wouldn't move as fast as them.  No matter what I tried I could never get it to move beyond a certain limit.  Fortunately I haven't degraded much over time, in my 30s I can run at almost the same speeds that I did in high school.  If I continue to degrade gracefully I'm looking forward to my 40s and 50s where I'll finally be able to win a race in my age bracket.

I think the parallels to running and investing are very similar.  A lot of what applies to becoming a better athlete applies to becoming a better investor as well.

I receive emails from readers asking me the best way to learn how to invest, and become a better investor.  The best way to learn how to invest is to get started and invest money.  Just like with running, you can read a lot, and think a lot, but until the shoes hit the road, or the money hits the brokerage it's all just theory.  There is an emotional component to investing that you will never experience until you see your money, the money you worked hard to save move up and down with the market.

Becoming a better investor isn't a matter of building a better process, or from practice researching companies.  Becoming a better investor is done through the practice of actually investing.  There is a feeling investors experience when they see their money drop 10% that you will never experience if you just follow a company.  Yes, a market loss isn't realized until you sell, but it's an emotional gut check to see a loss and contemplate the things you could have purchased.  It's also euphoric to take action on a stock and see the stock react the way you expected.  The idea that money was invested and almost out of nothing new money appeared.  No products were sold, no services offered, just a purchase, a period of waiting and voila, more money.

Getting started in a new activity is difficult.  I remember the first time I ever ran, it was in 8th grade in the spring.  I made it maybe a mile and thought I was going to die right there on the sidewalk.  It was a terrible experience, I went home and told my parents I was going to quit the track team after my first day.  They encouraged me to stick with it and give it a try.  About a week later I remember running three miles, the feeling of accomplishment was incredible.  What was impossible a week before was now possible.

The beginning of anything is difficult, you're starting from a standing still position, there is no momentum.  Once you've started you build momentum, it's easier to keep moving with momentum.  Researching and investing in your first company is difficult, it's not as difficult to invest in your 200th company.

Once you've begun and have started to gain some experience flaws will start to appear almost immediately.  You'll notice things you missed, or things you're not good at.  Continue to practice, but with each new investment work on fixing those flaws.    Continually iterate, learn what went wrong, fix it and try again.  From the continual iteration you'll start to build a repeatable process.  An investing process is never finished, it's always a work in progress.

Another way to get started is by starting small and simple.  Just like a beginning runner wouldn't run a marathon as their first practice, an investor shouldn't be tackling AIG warrants as their first investment.  Start with simple companies where the accounting is easy to understand.  Once you understand the easy accounting slowly start to invest in companies with more complex accounting that stretches your skills.

This method of learning and extending could be applied to investing in new industries as well.  A common complaint I hear is that banks are too hard to understand and they're black boxes.  Often the complaint will mention a money center bank such as Bank of America or Wells Fargo.  Instead of trying to run a marathon first why not start with a very small and simple bank?  Small banks have simple accounting and are easy to understand.  I'm singling out banks because I'm familiar with the industry, but the same thing could be said for oil and gas, or biotech, or really anything.

Just like people naturally run at different speeds, people invest at different speeds as well.  Just because Warren Buffett reads, thinks, and invests doesn't mean that if I replicate his steps the result will be the same.  No matter how hard I try I will never break five minutes on a mile, my body is not built for it.  I'm too old and slow, but I'm aware of my ability.  We as investors need to be aware of our abilities and limitations as well.  Some investors, the Superinvestors perhaps, are naturally more gifted.  I can never match their ability, but that doesn't mean I can't enjoy investing, or work to maximize my own ability.

The best way to get better at anything is to do it.  Do you want to improve at sales?  Then sell.  Looking to improve at marketing?  Start marketing.  Want to improve as an investor?  Invest.

The formula is simple, almost too simple.  Yes we can learn from the mistakes of others, and the experience of others is valuable.  But the best experience is your own.  You will remember your own mistakes and experiences better than you'll remember someone else's.

ADLPartner, a Euro crisis recovery candidate with a 10% dividend

I wish every stock I purchased were like PD-Rx Pharmaceuticals.  They traded slightly below NCAV when I purchased them, and with cash backed out they were a profitable business trading at a few times earnings.  Not only that, the company's earnings have been growing, and continue to grow.  The investment has done well, when I see a stock like that I buy a larger than normal position.  The stock was both safe and cheap.

ADLPartner (ALP.France) shares some of the same characteristics of PD-Rx; there are a number of differences as well.  The company could be attractive to a very wide variety of investors: great company investors,  dividend investors, and even to investors with a preference for tangible assets like myself.

ADLPartner is a French marketing company that creates and manages advertising campaigns and loyalty programs for clients.  They also run a series of marketing campaigns themselves both through the mail, and through their website hello deal.  Their hellodeal website is a French daily deal website similar to Zulily or Groupon.

The Vigneron family owns 71% of the company, their voting control extends to 82% of the voting rights.  The family is slowly taking the company private through the use of share buybacks, most recently canceling 1.53% of their shares outstanding, or 8.5% of the float.

The company has a sizable cash position, €22.7m as of their midterm financials.  This represents slightly less than half of their market cap, giving them an enterprise value of €26.47.  The company earned €5.6m in 2012, making their P/E ex-cash 4.72.  They have similarly low EV/EBIT and EV/FCF values as well.  It should be noted that their cash isn't completely unrestricted, a large portion of it is required for the operation of their business.

Many investors might consider the company an asset-lite business, they have almost no fixed assets to speak of.  I think it's a misnomer to say they're asset-lite, the company still has significant assets, it's just they take the elevator and drive home nightly instead of sitting on a factory floor.

The company's balance sheet is straight forward.  Their largest assets are accounts receivable and cash.  Their largest liabilities are accounts payable, and personnel expenses.  Their stated book value is €13.6m, which is clearly understated.

If we used their book value to calculate a metric such as return on equity (ROE) we'd end up with 36% which is unusually high.  The problem is the company's equity isn't what's generating their returns, but rather their people, the asset that doesn't appear on the balance sheet.  Book value isn’t as stable for ADLPartner as it is for other companies, this is a result of their simple balance sheet.  If the company signs a number of contracts where receivables increase and payables don’t then book value increases.  Conversely in a quarter where timing mandates a decrease in receivables and an increase in payables book value might record a decrease.  Fortunately book value is a poor way to measure the company’s asset value.

Management seems attune to the problem of measuring asset value and has created their own NCAV calculation.  They take the value of equity from the balance sheet and add the value of their open ended client contracts.  The way management calculates the value of the contracts is through a discounted cash flow calculation.  As far as I can understand their open ended client contracts are contractual commitments from clients for services from the company.  When using this number the company has a NCAV of €113.5m or €28.73 per share, more than double their €11.75 share price.  I rarely if ever run a DCF calculation for any company, but when management provides one as their estimate of value I’m inclined to use it.  In theory if the company were to stop selling their services and simply fulfill their current contracts and liquidate they would end up with book value, plus the cash from their open ended contracts.

Management might be slightly generous with their NCAV calculation because if I understand correctly they are doing a DCF of their contracted revenues.  They company still incurs expenses related to these contracts such as employee expenses and other expenses.  The annual report notes show that management calculates the DCF of the contracts net of tax.  Unfortunately we don’t know what else is netted out to know what the true value of these contracts are to investors.

The good news for investors is that almost all of the income the company earns is passed right back to investors in the form of a dividend.  In 2012 the company paid out 79% of their earnings as a dividend.  At the current payout schedule the company yields a generous 10%.  The beauty of a business who’s assets are people rather than machines is that ongoing reinvestment is minimal meaning most of their income is available for ongoing distribution.  As a controlled company they are at the mercy of the Vigneron family as to whether the dividends will continue.  It appears the Vigneron family pays themselves via dividends distributed from the company, rather than through large salaries, which means it’s unlikely the dividend will be cut in the future.

With a 10% dividend yield the company doesn’t need to appreciate much to hit my target of 15% a year.  The company has steadily increased the value of their open ended subscription portfolio over the duration of the European crisis.  If Europe's economies ever recover ADLPartner could benefit from increase advertising and marketing spending.  If Europe remains depressed forever and the company's results remain steady I would still be happy to hold this company.

Disclosure: Long ADLPartner

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

Why Call Reports Fall Short

One thing that's great about banks is that they're regulated and that their regulator posts their financials online quarterly in the form of FDIC Call Reports.  No matter the size, large or small a bank's financials will be available to the public through the FDIC.  While this might seem like a great source of information for many investors it isn't without its risks either.  At best Call Reports might be the perfect source of information, or at worst lead an investor down the road of misinformation.

Federally insured banks are required quarterly to file a Call Report with the Federal Deposit Insurance Corporation (FDIC) with financial details pertaining to their most recent quarter.  The FDIC allows anyone to search for bank Call Reports through their website and download them for viewing in PDF or XML format.  A bank’s Call Report contains their latest quarterly financials and certain other information required by their regulator.

Many bankers, investors, consultants and other professionals depend on the data found in Call Reports to get their job done.  Call Reports are used because the information contained in them is critically important, although the format (PDF or XML) leaves much to be desired.   

One of the reasons we founded CompleteBankData.com was to solve three problems with call reports:  (i) the lack of a historic perspective, (ii) the lack of holding company data, and (iii) the inability to search through the data.

Call Reports are filed for a single quarter so a user wanting to see a year’s worth of data would need to download four reports to gather the information for this review.  The numbers then need to be organized in some fashion.  A user might need to put the numbers into a spreadsheet to view the entire year’s financials at once or to make it available for manipulation.

Unlike most financial statements, regulatory banking data is reported in cumulative amounts.  If one wanted to see how a bank performed in the third quarter they would need to download the second and third quarter Call Reports and subtract the second quarter numbers from the third quarter to isolate the third quarter results.  This process of turning cumulative data into non-cumulative data is necessary for creating statistics and quarterly metrics as well. 

Data management and manipulation of Call Report data is difficult, but can be manageable given enough time and resources.  The bigger issue with Call Reports is that vital data useful in making decisions is missing. 

Call Reports only contain financials from the most recent quarter for items that the FDIC has deemed necessary.  The audience for the reports are FDIC regulators, not other bankers or investors.  The fact that anyone else can use them shows the value of the data, but not necessarily the format nor does it imply that it’s complete from an investor’s standpoint.

A Call Report might be an accurate representation of a small bank with few branches that is not owned by a holding company.  Unfortunately that limits the number of banks for which Call Reports are useful to a very small subset of US banks.  Most banks in the US have been long owned by a bank holding company, which has its own set of financial statements that are separate from the banks.

A bank holding company might own multiple banks or hold financial assets at the holding company level.  Even more importantly a holding company can incur financial liabilities that only exist at the holding company level.  Unfortunately for users of Call Reports such information is not included therein.

It’s often easiest to understand some of these issues by looking at examples.  In the case of missing assets consider Hampden Bank, owned by Hampden Bancorp (HNBK).  The bank reports equity of $76.194m for Q3 2013 in their Call Report.  Investors purchasing shares of the stock are buying shares of Hampden Bancorp, which has an equity value of $83.984m in the same period.  The roughly 10% difference between the equity value reported in the bank’s Call Report, and the equity at the holding company, is explained by cash and other assets that the holding company carries on its balance sheet that the banking regulators have not required to be reported on the Call Report.

A 10% difference in the value of the holding company’s equity verses the bank’s equity isn’t just a rounding error.  Users of Call Reports could end up making a decision based on incomplete data.  It might seem like a holding company’s hidden assets are not such a bad thing, but consider the viewpoint of a competitor bank.  If a competitor bank is viewing Call Reports they might make an assessment of financial strength based purely on the Call Report and miss additional assets held by the holding company.  The competitor’s assessment would be incorrect; they would have incorrectly assessed the strength of their competitor by relying solely on Call Reports.

Consider a different scenario, a holding company that borrows money intending to pay interest on the debt from dividends received from their subsidiary bank.  The economy hits a rough patch and the subsidiary bank suspends its dividend to the holding company leaving the holding company with interest expense, but potentially no way to pay it unless they have other sources of income or assets available to be quickly sold.  It’s possible the holding company could declare bankruptcy leaving the subsidiary bank unharmed.  If one were only looking at Call Reports they would never know this situation was unfolding.  From the Call Reports the subsidiary bank might appear healthy while the problems of the bank’s holding company were masked.

Another scenario is one where a holding company owns multiple subsidiary banks.  A holding company can get into trouble by loaning dividend income received from their healthy banks to their underperforming banks.  It might be possible to reconstruct the flow of money between subsidiaries by extracting data from multiple Call Reports, but it would not be an easy task.  An investor or banker relying on Call Reports to assess an investment, or a competitor, might reach an incorrect conclusion for a holding company with multiple bank subsidiaries.

The last problem with Call Reports is they are inaccessible unless you know what you’re looking for.  The FDIC doesn’t provide more than rudimentary search functionality for its users.  If someone wanted to find all of the banks in New York with more than $250m in total assets that search would be impossible.  Let alone searching for a specific value in a past date period, or searching across multiple criteria.

The FDIC Call Reports serve one purpose and one purpose only, to provide data to their banking regulator.  

The issues with Call Reports are why we built CompleteBankData.com.  The site grew out of my desire to view banking financials in a format familiar to users of financial statements, not bank regulators.  We also wanted to provide advanced search, filtering and comparison tools over the data so time could be spent gathering insights from the data rather than searching for it.