| PART ONE: AN ASSET VALUATION
There are many different methods to value a business. Discounted Cash Flow, finding sustainable operating profit and applying a multiple, Price to Earnings ratio etc. All could be applicable at various times depending on what type of business you are trying to value. For example, for a bank we might look at price to book value or examining the equity and applying an appropriate rate of return on that equity. That’s actually what we used when we purchased Bank of America stock in 2010. We took BofA’s equity and applied a reasonable return on that equity of 12%. This gave us the amount that the company should earn in the future. We knew right then that the stock was extremely undervalued. Another way to value a stock is to look at the company’s assets and apply a fair market value to those assets. This is because many assets on a company’s balance sheet are recorded at historical cost not fair market value. It’s possible those assets have appreciated over the years. For example, Dillard department stores owns an extensive portfolio of real estate assets. For many years Dillard’s stock sold at significant discount to the value of its real estate assets. Several sources cited the fair market value of Dillard’s real estate to be $3-4B. This while the stock market valued of the entire company was less than $600m. In other words the liquidation value of Dillard’s was over 5 times the price of the stock. Not counting the inventory and the value of the ongoing business. This anomaly eventually corrected itself as Dillards operations improved and the stock went up nearly 20-fold. Of course, it wasn’t guaranteed that their operations would improve so dramatically. But in the meantime, you had one heck of a margin of safety in case operations went south. This is a great investment case study given that you not only had real estate value but there were many positive clues about operations along the way. It was there for everyone to see for 3 to 4 years. Including yours truly who studied the stock several times but just couldn’t pull the trigger. Mea culpa for that. One of my all-time mistakes of omission. At CSH we are always evaluating the financial statements. Balance sheets, income statements, and the cash flow are the primary sources of information for a company. Our first examination is always the balance sheet. In the case of Dillard Stores it was all we needed. We knew the stock was undervalued right away. Let’s move on to something more timely for another great example. MADISON SQUARE GARDEN SPORTS Value hiding in plain sight MSGS owns the New York Knicks as well as the New York Rangers sports teams. Yes, you too can own a sports team. The only other publicly traded sports ownership entity is the Atlanta Braves. MSGS has a long and storied history. The Knicks are one of the original NBA franchises and the teams play at the iconic Madison Square Garden. So how do you value a sports franchise? Well, Forbes prints an estimate of sports teams values every year. You can also look at recent sales as comps, just like a real estate appraisal. For example the Boston Celtics were recently sold for $6.1B which is the exact number Forbes cites. When asked where the buyer got his number? He said he read it in Forbes, and that’s what I offered. Today, Forbes estimates the fair market value of the Knicks at $7.5B and the Rangers at $3.5B. In addition, MSGS has a growing revenue stream. Events, media rights and sponsorships bring in $1B annually. And with new contracts and riders that stream will continue to grow over the next few years. Because of media packages the value of sports teams has risen at a 15% annual rate. And with even more ways to monetize sports teams these days it seems reasonable to assume they will continue to grow. The company has paid down its debt over the years which stands at $195M net today. So, if we do a little back of the envelope math we get Knicks value $7.5B Our intrinsic value calculation gives us around $450 a share double todays stock price. Of course this is a very simplistic valuation. In reality we would make some adjustments for taxes for imbedded value and appreciation but you get the idea. We want hurdles we can step over that any that require precision calculations. The next thing you have to ask yourself is why does this opportunity exist? The primary reason is ownership. MSGS largest shareholder is Jimmy Dolan. Dolan is not universally liked by fans or many investors. However, if you do some research this conclusion I believe is unfounded. Dolan has a track record going back to when he owned Cablevision. His shareholders did very well, and he does not have a record of engaging in transactions that profit just him. In short he treats his shareholders fairly well. We think there are levers to pull for Dolan to extract value. One, he could sell all or a portion of one or both teams, thereby establishing a clear market value. Or he could simply continue to run the teams and benefit from the increasing value of media rights or raising ticket prices. (ticket prices have only been raised about 20% over the last decade). In this case you have an asset that’s growing 8-10% annually and intrinsic value can contract leading to mid double digit returns. So in summary you have: 1) trophy assets that can’t be replicated. This is our kind of assets. Heads we win, tails we don’t lose much if any. Over the years at CSH Investment Management LLC we’ve done hundreds of asset value situations. From the simple to complex. If you’d like more information you can contact us at steve@cshinvestments.com. or call one of our offices at 217-824-4211 or 573-808-1959. |
