A Net-Net With a Catalyst
The stock is trading at 0.5x TBV with an 8x P/FCF ratio and a negative EV.
My favourite investor of all time is Walter Schloss.
The guy personified the deep-value approach and demonstrates how any normally intelligent, risk-averse person can succeed in this business.
His game was super simple.
He’d buy stocks trading significantly below liquidation value, and always hold dozens of them, for max downside protection.
He’d then cash out when they rerated back towards liquidation value and recycle the cash into the next one.
He outperformed the market for over 50 years, and became extremely wealthy.
To his mild annoyance, Buffett made him famous by naming him as a super investor in his famous 1984 article.
Ever since, the secret has been out, and normal people, like me, can confidently partake in the investment business, full time.
Today’s stock is a text-book example of a Walter Schloss style set-up.
Here are the ratios:
NCAV Ratio = 0.7
TBV Ratio = 0.5
P/5Y FCF Ratio = 8
The enterprise value is negative, so you get paid to buy the business.
All in all, there is at least 100% upside in this stock, depending on whether you value it based on its operating business or purely liquidation value.
It’s a solid business that the market is pricing below liquidation value, but that will likely continue operating for a long while yet.
FCF is lumpy and all over the place, but it averages out well enough over the last 5 years.
The business has lots and lots of cash with zero debt.
The tangible asset base is composed mostly of cash (52%) with another chunk coming from land and buildings (20%), and 13% in receivables.
In fact, the business holds almost twice the market cap value in cash alone.
The company also owns an operating facility, stretching to over 100,000 m2, noted on the balance sheet at historical book value.
The reports don’t provide any kind of current valuations, but after a bit of online digging it seems like this land alone is worth at least half (maybe even all) the market cap.
This is a completely hidden (off-balance sheet) asset that could provide the mother of all cushions in a real-world liquidation event.
The legacy business is in structural decline, but they already started moving into new business lines and acquiring new customers.
The catalyst for a rerating is already here, but the market hasn’t fully realised yet.
Let’s take a look…