Some of the allure to investing in dark companies lies in the hunt for information. Perhaps it’s our legacy hunter-gatherer instincts rearing their head. Not many investors, if any, have an informational advantage with large cap companies such as Apple, GE, Kraft or Microsoft. But with a little work any investor can have an almost unfair informational advantage for many dark companies.
Investors are sometimes like water in that they prefer the path of least resistance. There is significant resistance related to procuring Vulcan International’s financial statements and other related information, but stepping over that hurdle can be worth it, especially with what seems to be afoot at the moment.
Vulcan is a Delaware incorporated company with a $59.6m market cap. The company owns a rubber and foam manufacturing company located in Tennessee, a sizable securities portfolio and various real estate holdings including timberland. The company appears to believe that rubber and foam manufacturing is their main line of business. If one visits the Vulcan International webpage they are presented with a nice picture of the company’s facilities along with sub-pages detailing specific manufacturing capabilities at the Tennessee location.
Vulcan reports abbreviated earnings on the OTCMarkets platform for investors. If a potential investor were to examine Vulcan’s website as well as read their press releases they’d likely have the impression that the company was an overvalued manufacturer with some real estate interests. This is where public perception, created and nurtured by the company’s management over a long period of time, is divorced from the truth.
Now for a brief digression. There are three stages in a magic trick. The first is called the “pledge”. This is the setup of the trick where the audience is shown something ordinary. Think of Vulcan’s so-called reporting as belonging here. The second step is called the “turn” where the magician makes the ordinary act extraordinary. Management’s extreme efforts to block and obfuscate investors fall in this category. Finally, there is the “prestige” where the effect of the illusion is shown. Read on magic lovers.
Vulcan International is a holding company that primarily consists of bank equity holdings, including US Bancorp and PNC shares, as well as real estate interests in Ohio and Minnesota. Their small money-losing rubber and foam manufacturing firm in Tennessee which appears to the general public as the primary asset is in reality essentially an afterthought.
The company’s ownership is dominated by the Gettler family. Benjamin Gettler, the former CEO passed away in 2013. Gettler was well respected in the community. A Google search reveals numerous articles about his community contributions. At one point Gettler was Chairman of the Board of the University of Cincinnati. Gettler's stepson is the company President, and two of Gettler's other sons are on the Board along with his widow.
The company was an SEC reporting entity until they filed a Form 15 in September of 2005. At the time of their last quarterly filing in 2005 they had $58m worth of shareholder equity and assets of $85.74m consisting primarily of $72.6m in marketable securities, some cash and their manufacturing assets. On the other side of the ledger, the company had a $3.2m note payable as well as some deferred tax liabilities. It’s worth noting they are currently trading for only slightly more than their book value of 10 years ago.
Vulcan International at one point ran a large manufacturing operation that made bowling pins along with foam plants scattered throughout the US. Foreign competitors invaded Vulcan’s market and Vulcan’s formerly profitable operations began to lose money. The company sold off the majority of their factories except for one located in Clarksville, TN. Past SEC filings show positive income from continuing operations, but these numbers include securities gains as income. It’s my understanding that the Clarksville factory hasn’t operated profitably in decades if not longer, yet it continues on like some kind of undead creature.
After winding down their foam operations the company found themselves in a strange position. They had excess capital, but no real reason to exist. Management began putting their excess capital to work buying a portion of the Cincinnati Club Building in downtown Cincinnati, a second office in Cincinnati, as well as public bank stocks. It’s worth mentioning at this point that my brother-in-law and his wife held their wedding reception at the Cincinnati Club Building, the facility is beautiful and my guess is the balance sheet value for this asset doesn’t reflect its true value.
It was only a matter of time before the growing equity portfolio outpaced the shrinking manufacturing operations. At some point it became necessary to ask whether Vulcan should be classified as an Investment Company under applicable SEC rules and regulations.
Fortunately, someone did ask. That person was Lloyd Miller, Jr., the infamous activist small cap value investor. Miller owned a significant stake in the company in the 1990s and was on the Board of Directors. Miller and the company had a falling out and Miller signed a release related to his right to vote his then current shares. Miller then sold his stake over the next few years. Subsequently, Miller re-established a new position in Vulcan and took part in a rights offering.
Miller’s various legal filings have formed the basis of this article and they are worth a read. Miller filed one of the most comprehensive books and record requests (Section 220 demand) I have ever seen. Asking for access to everything from financial statements to board minutes, records related to sale or issuance of stock, as well as all material transactions with any subsidiaries.
Vulcan countersued Miller alleging that he broke his release agreement by acquiring more shares and attempting to exercise his shareholder rights; a view the court disagrees with. In the lawsuit Miller claims that Vulcan is an Investment Company under the Investment Act of 1940 and executives have engaged in insider trading. So far the SEC hasn’t acted in regulating Vulcan as an Investment Company.
All of this is interesting and most likely entertaining, but you’re probably thinking, “Why is this company even being written about?”
While there are some egregious corporate governance issues, the company is an attractive investment. An investor buying today is effectively purchasing PNC and US Bancorp stock at a large discount to their market prices.
I’ve noticed a strange and familiar pattern with investors who do obtain the Vulcan financials. They immediately become as guarded with the information as the company is so they can purchase as large of a stake as possible. I’ve also heard more than one Vulcan investor mention that this is one of the more attractive opportunities they know of. This is considerable given the types of investors who invest in Vulcan know the dark market very well.
Before writing this article I asked what a few investors thought the shares were worth. They all agreed at least double the current price if not more.
The problem is there are other dark companies trading for 50% of their intrinsic value with bad management. Companies like this aren’t value traps they are value graveyards. Places where investor dollars go to sit in the ground and disintegrate. What’s different about Vulcan? It seems investors have finally had enough of the Gettler black hole and there is a concerted effort to get the company to open up.
Management has been intentionally vague about the operating results at their Clarksville facility. This is presumably because they have close personal bonds with employees there, as well as the notion that owning a money-losing factory will somehow help them avoid the fate of being classified as an Investment Company. The reason Vulcan wants to avoid this classification is because if they were to be classified as an Investment Company they would suddenly be required to be more transparent as well as undergo regulation. Note that it is extremely difficult if not impossible for a long-standing operational company to comply with the requirements of being an Investment Company.
Management at many dark companies operate with their head buried deep in the sand blissfully unaware of anything outside of their small kingdom. Vulcan is the opposite. A Gettler on the Board acts as their outside counsel and is extremely savvy regarding shareholder rights and securities law. I have been told they play the clueless managers at company meetings, but they are far from it. This is also why the company vigorously countersued Miller in response to his record requests and various lawsuits.
If shareholders have their way Vulcan International won’t become a value graveyard. This is because a number of shareholders besides Miller have decided they’ve had enough with management and have decided to push for changes. The Gettler family controls the company, but without a shareholder register it’s unknown as to their ownership percentage, or how firmly they really are entrenched. Sometimes management at companies such as Vulcan will act as if they own a majority stake when they don’t actually own a true majority holding.
Management has responded with surprise that there are investors interested in the company. The CEO has mentioned that changes are underway towards transparency, although nothing has occurred to date and its ultimately it’s unknown what might happen.
Fortunately for shareholders, the Gettlers don’t need to be removed and a shareholder uprising doesn’t need to take place for value to be realized. Improved transparency is likely all that’s needed before Vulcan shares start to appreciate towards fair value. Sunlight often is the best disinfectant.
There is a very good reason that Vulcan is selling for half or less of its intrinsic value. They have a management team that has ignored shareholders and actively worked to block information from being released. Yet, value has a way of being realized, especially if the discrepancy between market price and value becomes too large. The gap between price and value has become large enough that a number of shareholders are interested in poking and prodding management until the gap closes. For investors who have a taste for the darkest oddball companies the market has to offer Vulcan International might be worth a look. If anyone is looking to purchase a sizable stake and help open this company up, please contact me and I can put you in contact with other Vulcan investors.