Oddball Stocks

Rockford Corporation Has Its "One-Day" $ROFO

This press release was published on Thursday:

Rockford Corporation (OTC Pink: ROFO.PK) announced today that it has signed a definitive agreement under which Rockford will become a wholly owned subsidiary of Patrick Industries, Inc. by merger. Patrick Industries (NASDAQ: PATK) is a leading component solutions provider for the RV, marine, manufactured housing, and various industrial markets – including single and multi-family housing, hospitality, institutional and commercial markets. Founded in 1959, Patrick is based in Elkhart, Indiana, with over 11,000 employees across the United States.

Shares were trading for around $10 last year (very thinly traded) but popped to $15.50 with the announcement.

According to a projection in the Notice of Special Meeting, common shareholders should receive an initial payment of $16.326 and a final payment (from a holdback fund) six months later of $0.331, for a total of $16.657 in consideration.

The purchase price of the company is $125 million. The most recent annual report we have is for 2018, below. Book value at the end of 2018 was $18 million, and the company had made $7.3 million of net income that year.

In 2021, ROFO paid $1.50 per share in dividends, $2.5 in 2020, $0.75 in 2019, and $1 in 2018. With 7.25 million shares outstanding, that was a total of $41.7 million ($5.75 per share) in four years.

Interestingly, it was trading for years on end at a dividend yield north of 10%. Dividend yield can be a very good indicator. Rockford had high free cash flow conversion on its earnings, greater than 100% of net income in 2016-2018 for example, and allocated this cash flow well. They simply returned it to shareholders.

Rofo 2018 Ar by Nate Tobik on Scribd

This is the Notice of Special Meeting that was sent to Rockford shareholders:

Rockford Corporation - Notice of Special Meeting by Nate Tobik on Scribd

Pardee Resources Shareholder Letter - February 2022

During 2021, the operating earnings of Pardee Resources Company benefited from the resilience and strength of all three of its primary markets, namely hardwood timber, metallurgical coal and natural gas. Commodity prices, which turned upward during Q4 2020, continued to improve throughout 2021, as the rebounding economy, combined with supply chain constraints, put upward pressure on prices. While the U.S. Federal Reserve is expected to increase interest rates as a means of containing overall price inflation in the economy, commodity prices remain strong as of early 2022.

The annual audit by Ernst & Young of the Company’s financial statements is expected to be completed in early April, after which we will be mailing you our 2021 Annual Report.

Your Board of Directors has voted to maintain the quarterly dividend at $1.80 per common share which will be payable March 7, 2022 to shareholders of record February 28, 2022

SHLTR_490641 by Nate Tobik on Scribd

DuArt Film Laboratories and "The Biggest Mensch in the Business," Irwin Young $DAFL

This is the only time we can think of that an Oddball company executive has been honored with a full New York Times obituary:

Mr. Young had a practical side as well. He made two investments in the 1970s that helped secure DuArt’s long-term future: He acquired the 12-story building in Midtown Manhattan where the laboratory had long been located, freeing it from the whims of a landlord; and he bought a two-thirds interest in a television station in Puerto Rico, which brought in a strong flow of revenue that helped improve DuArt’s bottom line. He also oversaw DuArt’s embrace of a process that benefited independent filmmakers: blowing up 16-millimeter negatives into 35-millimeter prints, which have a better chance at being commercially viable. And he added to DuArt’s photochemical film processing business by branching into film-to-video transfers and online video editing in 1970, and into digital work, including effects, titles and restorations, in 1994. But last August, Ms. Young, DuArt’s president and chief executive since 2017, announced that its business was being shuttered because it was no longer economically viable to stay independent. Its building was recently put up for sale.

DuArt Film Laboratories (DAFL) is well known by Oddball investors, although we have not mentioned it on the blog (except briefly). Nate first mentioned it in Issue 9 of the Newsletter, and we also published updates in Issues 36, 31, and 26. (The latter two are available à la carte if you are interested in giving the Newsletter a try.)

Bank of Utica - 2021 Annual Report and Shareholder Meeting Details

Bank of Utica (BKUTK) - Shareholder Letter - 02 01 2022 by Nate Tobik on Scribd

Bank of Utica (BKUTK) - Annual Report - FY 2021 by Nate Tobik on Scribd

Just Published: Issue 38 of the Oddball Stocks Newsletter

We just published Issue 38 of the Oddball Stocks Newsletter. If you are a subscriber, it should be in your inbox right now. If not, you can sign up right here.

Remember that we have made some back Issues of the Newsletter available à la carte, so you can try those before you sign up for a subscription: Issues 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, and 31. We lowered the price of most of our back Issues to $99 from $139. If you are curious about them, there has never been a better chance to try them.

We also published a Highlights Issue in February 2020. The Highlights Issue is available here for purchase for only $59 as a single Issue. If you have been curious about the Newsletter, the Highlights Issue is the perfect opportunity to try about two Issues worth of content (much of which is still topical and interesting) at a low cost.

Don't miss our recent blog posts on Oddball Stocks, some of which contain samples of Newsletter content:

Also, we tweet regularly from the @stocksoddball account on Twitter so be sure to follow us there.

Life Insurance Company of Alabama Repurchased More Stock ($LINSA $LINS)

We mentioned in November that LICOA's third quarter regulatory financials showed that the company repurchased a huge block of stock at an accretive discount to tangible book value.

We knew that on June 14th, a block of 205,221 LINSA (LICOA non-voting) shares had traded for $24 per share, and that the same block traded again on July 22nd for $32 per share. That amount of stock was a huge percentage (~20%) of the company. But we did not know who had bought for $24 (a $4.9 million purchase) or $32 ($6.6 million). Subsequently, we saw in the regulatory financials (which were released in November) that the company made a $6,576,662 repurchase of treasury stock, and presumed that they bought this block for $32.05 per share.

We have since learned that this block sale was between an investment bank and broker-dealer dedicated to the community banking sector (JWTT Inc.) and LICOA. We have also learned that LICOA bought more stock from JWTT on October 14th: a smaller purchase of $32 per share for 2,131 shares. So it would appear as though the company has an appetite to make repurchases at accretive prices now. (Meanwhile, very little stock has traded since a $24 print in early November. It is unclear whether the market is incorporating news of these repurchases yet.)

The information below is from a portfolio review of LICOA's investments dated as of September 30, 2021. Something interesting is that LICOA has significant unrealized gains in its investment portfolio (market value $11.7 million greater than book value), which comes from fixed income securities.

When looking at LICOA tangible book value per share, it may be appropriate to add back certain reserves in the statutory financials ("interest maintenance" and "asset valuation"), and also make a market value adjustment (less a reserve for deferred taxes) to the investment portfolio, in order to better approximate the GAAP book value. We will take a look at these calculations in the upcoming Issue of the Oddball Stocks Newsletter.

Also noteworthy in the table above is the income on the bond portfolio - about $3.5 million after tax. The company has earned far less than this in recent years. As an insurance company, it takes risk and uses leverage (from policyholder float), only to deliver income and rate of return that is less than the unleveraged income and return on the bond portfolio.

Hence the need for shareholder activism...

As the minority shareholders (who sued the company in the US District Court for the Northern District of Alabama in 2019) state in their complaint,

The economic purpose of an insurance company, from a shareholder perspective, is to raise funds from policyholders and invest them at a profitable spread. Using borrowed money (“Float”) from the insurance customers as leverage and investing it in a bond portfolio ought to offer shareholders a higher return on their capital. But because the controlling shareholders of LICOA overpay themselves and otherwise waste money, the return on equity that minority shareholders receive is lower than the underlying yield on the bond portfolio. The minority shareholders bear all the risk of an insurance company's financial leverage (where the total assets are approximately three times the shareholder capital) but without the benefit of any increased return.

Those shareholders are currently awaiting a ruling from the Court on the company's motion to dismiss the suit.

Previously, regarding Life Insurance Company of Alabama:

Be sure to check out the Concerned Shareholders of Life Insurance Company of Alabama website as well.

Paradise, Inc. Announces "Final and Liquidating Distribution," Falling Short of 2019 Estimate

Paradise, Inc. was a net-net idea that Nate posted way back in July 2012 - so seven years ago. At that point, shares were trading at about $18. We posted an update in June 2019 when the company announced plans to liquidate.

At that time, the company's estimate was that the "aggregate amount of distributions to shareholders as a result of the Asset Sale and Liquidation Plan will be between approximately $18.0 million and $25.0 million, or approximately $35 to $48 per share based on 519,600 shares outstanding".

The company just mailed an announcement (below) that the final distribution will be $4.50 per share. We thought it would be interesting to compare the distributions that were actually received with the estimate that was given in 2019.

The company distributed $10 in September 2019, $4 in July 2020, and $10 in September 2020. With this final $4.50 payment, it will bring the liquidation proceeds to $28.50. That is below the low end of the liquidation value estimate that the company published in its proxy statement for the plan of liquidation. There have been no communications to shareholders explaining the shortfall between the estimate and what has been distributed.

One issue here is that the company terminated its SEC registration in 2019 after approving the plan of liquidation, and has not subsequently provided any financial statements to shareholders. We don't know whether the shortfall was because of lower than expected asset sales proceeds... or higher than expected SG&A costs.

There were a couple of corporate governance concerns with Paradise even prior to the liquidation. On Twitter, "DoubleOak Equity" tweeted, "$PARF announced in Feb18 it was exploring strategic alternatives. Didn't disclose until 12/7/18 that it had entered into a retention agreement effective 10/31/17 with CFO with $75K bonus paid when company sold." In the proxy statement, payments of severance and a special bonus were projected to be an eye-popping $3.2 million - that is over $6 per share.

We've seen in the past with other liquidating Oddballs, there's a temptation for managements to stretch out the liquidation so that they can remain on salary, but this is bad for shareholders because it (obviously) reduces the eventual proceeds due to the overhead cost but also reduces the IRR of the investment due to the delay.

There are some Oddball investors on Twitter talking about this situation, if you're curious for more: (@OzzieCapital, @coleperkins121, @chrisvirnig, @doubleoakequity).

This case is noteworthy because investors tend to take the management liquidation estimates at face value - and they often are indeed conservative.

PARF - Final Liquidating Distribution - December 2021 by Nate Tobik on Scribd

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