Another look at National Stock Yards

It's easy to follow a company when they release information once a year, and that information is a simple 12 page annual report.  That's the case with National Stock Yards (NSYC), a company I've owned a single share of since 2012. 

Since I last wrote about the company I've received an five additional annual reports.  That's 60 pages of reading material on this company, not much.  All of the information in those reports can be summed up in a simple statement "the more things change the more they stay the same." 

Here's the backstory.  A long time ago in a far away place there was a company that owned stockyards.  A stockyard is a place where cattle are auctioned off to buyers.  Ranchers drive their cattle by horse, or train, or truck to the stockyard at pre-determined dates when auctions are held.  Cattle buyers come and purchase the ingredients for your burgers and steaks and the ranchers return home without cattle, but with pockets full of cash.

The company was established in the 1870s in Oklahoma.  The date and place invokes images of cowboys and Indians, saloons and western movies.  Those days are long gone and the company now consists of three things, their Oklahoma stockyard that's still transacting cattle, a plot of empty land near St. Louis, and an ownership interest in a golf course.

When I last wrote about the company shares traded for $166 a share and the company earned nothing outside of real estate sales.  Last year the company reported an operating profit from their livestock operations.  For years they'd be talking about how the livestock herd in the US was decimated and that was the reason behind their losses.  In 2015 someone came up with the idea of raising prices and lo and behold they earned a profit, and volume didn't decline either!  On the back of continued price increases their livestock operations earned another profit in 2016.  And supposedly the herd is back to normal now.

The real asset isn't livestock, it's their St. Louis land.  The company owns 191 acres of empty land an "easy five minute drive to downtown St. Louis."  The land is carried at $2.9m on the books.  For years they've been chopping off small chunks and selling them for various amounts.  In 2016 the company sold 11 acres for $890,000.  The company seems to prefer to sell 10 acre lots for prices varying from $100k to the most recent $890k.

A danger with real estate valuation is extrapolating the price per acre from one sale across the entire land holding.  The company's sales history shows that not all of the land holds the same value.  On the conservative side we can assume the property is worth at least $10,000/acre, with some plots worth up to $89,000/acre. 

On the low side their 191 acres would be worth $1.91m.  This is an overly conservative value because management lets us know it is.  The property is held on the books for about $15,000 per acre.  But management notes in the report "Management estimates that the fair value of the Company's St. Louis real estate is in excess of its carrying value and demolition costs, and accordingly, the carrying value of the St. Louis real estate has not been adjusted accordingly."

Let's put the pieces together.  In 2016 the company earned $21.72 per share, and if you remove their real estate proceeds earned $13.52 per share from livestock.  Current book value is $7.7m including the St. Louis land.  If we remove that we get a book value of $4.1m for the livestock, or $94.03 per share.  The company's core business is earning 14% on its equity, a respectable return.

Stockyards aren't sexy like self-driving cars or internet advertising, so maybe their earnings only deserve a 10x multiple.  This would mean the core company is worth $135 per share.  Shares trade with a bid of $250 and an ask of $498.  Let's ignore the ask for a minute.

The market, and by market I mean some savvy buyer who's looking at the same material I am, believes the company's remaining real estate is worth $115 per share.  That puts the implied value of the St. Louis land at about $5m, or about 72% above carrying cost.  A $5m land valuation assumes acres are sold at an average price of $26,000.

Is this a reasonable valuation?  Maybe?  The math behind a $250 per share valuation seems sound, but it's interesting that there's a seller who is only happy to let them go at $498 per share.  A $498 per share value implies the non-operating assets are worth $8.3m.

What's great is that you can reduce National Stock Yard's valuation down to two variables, the value of their core business, and the value of their real estate.  Maybe the core business is worth 15x earnings.  If they were a compounder or outsider investors would be trampling each other to pay 30x earnings.  But instead it's a bunch of cowboys selling cattle in dusty Oklahoma warehouses.  Likewise the St. Louis land could be worth a small fortune, or maybe not.  That's up to the investor to decide.

It's also worth pondering that to most investors this is a dead company.  And the narrative is dead companies are dead money.  But it's worth pointing out that I purchased this for $166 a share in November of 2012 and there is an active bid at $250.  That's a 50% gain in about 4.5 years. The company has paid a sizable dividend per year, $20 per share the last two years.  I think I've received $60-70 in dividends bumping the return from 50% in 4.5 years to an 86% return in 4.5 years, or about 20% a year.  That's not bad for something left for dead!

You'll note that I never discussed the golf course outside of a mention at the top of the post.  It's because the company holds it at $0, and we don't know anything about it.  I consider it bit of a valuation bonus.  Maybe the golf course is worth an additional $10-20 per share.  If it isn't it doesn't change anything with the main thesis.

The investment outlook is as certain in 2017 as it was in 2012 for the company.  If the company's core business remains stable and they can sell their remaining St. Louis land then maybe shares really are worth $500 a share.  Until then I'll continue to hold my single share and watch from the sidelines.

Disclosure: I own a share

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