Pardee Resources in Oddball Stocks Newsletter ($PDER)

We've mentioned Pardee Resources (PDER) on the blog several times lately, and it's one we write about frequently in the Oddball Stocks Newsletter as well. We thought we would share a couple of excerpts from the Newsletter, so that blog readers who haven't experienced it can get a feel for the types of things we discuss in the Newsletter.

Issue 22 (November 2018)
On August 16th [2018], Pardee announced a self-tender for its shares. They offered to purchase up to 26,463 shares at a price of $188.94 per share, which represents a market capitalization for the company of $130 million. The share price was determined as the volume weighted average price over the ten days ended August 15th. We had just been asking “why buy table grape vineyards instead of repurchasing shares” and apparently the company has come to the same conclusion.

We recently obtained and read a copy of Calvin Pardee, 1841-1923: His Family and His Enterprises which is a family history written by descendants (and Pardee executives) C. Pardee Foulke and William G. Foulke. Copies of this are scarce and expensive because it was a small printing of a family history for a wealthy family. A certain number were given to outsiders and have ended up on the used book market. Ours was originally given to Manford O. Lee of VF Corp – a big deal apparel company both now and back when the copy was sent in May 1981.

The Pardee presence in America was founded by a Parliamentarian ancestor who came to New Haven during the English Civil War. During the 19th century a Pardee got interested in Lehigh Valley anthracite coal, and that is where the story of wealth starts. The one mistake they made, or the reason they did not become a household name like Carnegie, is that they did not follow the coal and steel industry west to Pittsburgh. (The reason for the westward shift was that steel-making using bituminous coking coal made more sense in Pittsburgh, nearer to deposits of that type of coal. Plus the market for steel rails was in the expanding west, not the east.)

Ultimately, though, Calvin Pardee did take the cash generated by the eastern PA mines and reinvested it towards the end of the 19th century in lands in Louisiana (timber, later oil and gas), West Virginia, Kentucky, and Virginia (the latter three all coal). The Louisiana lands that were bought based on timber value but proved to have oil were the big winner. That leaves PDER as a family owned resource company that has been mining coal, growing timber, and producing oil and gas for more than a century. I can't think of anything else quite like it. Texas Pacific Land Trust has been around since 1888 but is not actively managed.

Last Issue we also did a comparison of Pardee and Keweenaw based on implied timberland value, but of course the valuation of Keweenaw has fallen to $641 per acre for the timber. If you assumed, just for ballpark, that the acreage of Pardee was worth the same as KEWL, then the almost quarter acre per share of land at PDER would be worth $154 now instead of $192 when KEWL was trading at a higher price.

Inverting this calculation, the market capitalization of Pardee is about $789 per acre of timber, ignoring the value of the other resources. Given that Pardee has paid over $1,000 per acre for some of its timberland, why not up the ante on share repurchases? We'll see what the company does.
Issue 25 (June 2019)
We recently attended the 180th Pardee Resources annual shareholder meeting on May 16th [2019] at the top of the BNY Mellon Center building in downtown Philadelphia. While management was friendly, gave a very detailed presentation, took almost a dozen audience questions, and even served a (cold) lunch, we came away with a pessimistic view on the principal-agent problem that exists here.

[O]ne thing that has been bothering us recently are the paltry earnings from Oddball companies' timber holdings. In most investors' sum of the parts valuations of Pardee, timber is the single largest asset. If you value the timber at anything more than $704 per acre, it covers the entire enterprise value with the stock at $170 per share. However, with its 165,000 acres of timber, Pardee's timber division earned $2.1 million in 2018 and $2.9 million the previous year. In 2016 it earned $2.6 million. That is $15 per acre, average, per year. The company's land and timber is on the books at $45.2 million (which is $274 per acre). If you take those three year average earnings and capitalize them at a 5% cap rate it's $50 million; about book value. This is way less than comparable transactions for timber or the prices that Pardee has bought and sold timber, and yet... why would you want to pay more than this? At the $1,000/acre numbers that are bandied about, you get a 1.5% plus or minus inflation, very long duration cash flow that might be attractive to a college endowment or an insurance company, but how is it attractive to a micro cap value investor? (If nothing else, the timber could be dumped just as a way to get less long of long term government bonds.)

Sure, we believe that if all the assets of Pardee were sold the proceeds would be more than the current enterprise value. The shares might be worth double. Even selling the timber alone would probably result in proceeds greater than the current enterprise value. But management is not incentivized to do that, and the biggest shareholders (some of whom might be, if they knew) seem more concerned with keeping the company around as a family monument than maximizing their net worth. (If you want your descendants to maximize the value of a family business, leave your name off of it.)

Here is the problem with management's incentives. They have $189 million of assets at book value. The annual SG&A expense is $6.95 million which is 3.7% of this. If they were to sell land at anything over $700 per acre after tax, which they probably could, they could buy back stock at the current price of $170 and get the rest of their coal, oil, gas, solar, and agricultural assets for free. (Note that their current book value of land and timber is about $45 million, so a hypothetical sale of 165,000 acres of timber for after-tax proceeds of $116 million is not totally implausible.) But shrinking the asset base, and pre-SG&A operating income, would leave the company with a top heavy, too-high expense structure and overhead burden. A Pardee executive pointed out during the meeting that the company has only 26 employees, one fewer than 20 years ago. Unfortunately, it is also about the same number that Berkshire Hathaway has at the Omaha headquarters with 4,000 times more assets.

This incentive misalignment was made awkwardly clear at the meeting (which was the best attended we have seen this season, with some writers from Motley Fool, some institutional asset managers, and a number of private value investors). Many of these shareholders asked questions during the Q&A, and the questions fit into two categories: will you promise not to dabble in any more weird investments, and will you buy back more stock?

Two shareholders mentioned Texas Pacific Land Trust and its capital allocation policy that has consisted of dividends and share-cannibalization. The name did not seem to ring any bells with Pardee management, which is sad because it is one of the most successful non-operating resource investment vehicles of all time. The Chairman said that more money has been returned to shareholders than used to buy assets over the past five years, and they do not want to decapitalize the company by buying back “too much” stock. Also, and specifically regarding SG&A at 20% of revenues, the Chairman said that they still have the same expense base that they had when revenue was much higher, and they would rather have higher revenue than try to cut expenses.

So now we know why the company has been experimenting with solar and agricultural investments instead of dumping overpriced timberlands and returning that cash. The company has been forced out of its comfort zone with predictable results: as they said at the meeting “wild cards & skunks” like the mobile solar generator Ponzi scheme and the table grapes that had a $2.1 million loss because of unseasonably warm followed by unseasonably cold weather. (The CEO did say that they are going to “take a breather” and are not investing in subsequent phases of the grape and almond projects.)

Our current thought on Pardee is as follows. If management is not going to sell the timber at a once in a lifetime high valuation (due to low interest rates) then those need to be capitalized at a reasonable interest rate. Book value seems like a reasonably attractive price. If you make that assumption, then all of a sudden you really need to sharpen your pencil on the coal, oil, and gas assets. We did a little digging on Pardee's coal mines. The operator of their biggest tract actually went bankrupt, although is continuing to operate and made good on its royalties. But the West Virginia metallurgical coal is high enough cost that there is a risk that mining could one day stop.

Meanwhile, the SG&A burden ticks on. And the need to replace the asset base creates pressure to do deals – like the agriculture, solar, or the biggest recent one: the $54.5 million invested in oil and gas in 2013. That was year that crude hit $110, before collapsing into the $20s from the second half of 2014 through the beginning of 2016.
Keep in mind these excerpts are from a couple years ago. If you want to stay up to date with what's happening at Oddballs like Pardee Resources, join the Oddball Stocks Newsletter.

1 comment:

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