Vulcan International (VULC): A Dark, Illiquid Company Planning to Liquidate its Portfolio of Bank Stocks and Dissolve
This is another “initial interest post”. I was looking at Vulcan International for the managed accounts I run. As a first step, I write up the company here and rate my interest in following up on the stock – as a candidate for purchase in those managed accounts – on a scale from 0% interest to 100% interest. I’ll reveal my interest level at the end of the post. Now, that I’ve got you hooked with suspense, let’s start the post off with a discussion of just what “dark” means here.
Vulcan International (VULC) is a dark stock. And here when I say “dark” I don’t just mean it doesn’t file with the SEC. I’ve mentioned Keweenaw Land Association (KEWL), Computer Services (CSVI), and OTC Markets (OTCM) before as “dark” stocks. In those cases, all the word “dark” means is that they don’t file with the SEC.
Those dark stocks present less information about some things than SEC filing companies. But, about other things – like appraisals of their land in the case of KEWL and long-term historical financials in the case of Computer Services – they sometimes provide as much or more information. For example, Maui Land & Pineapple (MLP) is listed on the New York Stock Exchange and files with the SEC while Keweenaw Land trades over-the-counter and does not file with the SEC. MLP isn’t really more forthcoming about the likely market value of their land, their plans to develop or sell land, etc. than KEWL is.
Vulcan International though is a truly dark stock. It usually tells the public nothing. In fact, some investors have only gotten information on the company after signing a non-disclosure agreement.
There are two reasons why a company might be extremely secretive. One, management is using being a “dark” stock and not reporting any information to outside shareholders as a way to strip the company bare. It could be that the CEO or controlling family is siphoning off assets and slowly converting shareholder wealth into management wealth. I’ve seen this before.
But, I’ve also seen a second reason for a company to be extremely secretive. Management knows they are valued in the stock market but they have no self-interest in their stock price getting more expensive. They are simply running the company for the long-term. As controlling shareholders, a board, etc. they can always realize the value of the business in a way minority shareholders can’t. Basically, insiders at a very valuable business can always elect to liquidate the business or sell it off to a 100% buyer. Unlike passive minority shareholders, the day-to-day trading in the stock isn’t the way they are going to get out of the business. So, the bid and ask prices you see in that public market just don’t matter to them.
Vulcan International is an example of reason #2. The company was sitting on assets that were very valuable and very underpriced by the market. However, in the last year or so – the market has greatly increased the value it put on Vulcan International. So, when I tell you the news that Vulcan has announced its plan to liquidate – this doesn’t necessarily mean there’s a lot of upside left.
Here is the most important part of this article. Read it carefully. Read it twice. This is the catalyst that investors have long been looking for in this stock. It’s the press release where Vulcan announced its intention to liquidate the company and distribute its assets to shareholders:
“…the Board intends to liquidate all corporate assets, and distribute all available proceeds to the stockholders, as far in advance of the expiration of the three-year winding-up period as possible. The Company intends to make such stockholder distributions as tax efficient to the stockholders and the Company as possible…”
As I’m writing this article – on Sunday, October 14th 2018 – Vulcan’s last trade price was $120 a share. The highest anyone is bidding is $118 a share and the lowest anyone is asking is $140 a share. So, we can say the stock’s “price” is somewhere in the $118 to $140 range.
Is the value of the stock in liquidation around that same level of $118 to $140 a share?
Before I try to add up the company’s likely value in liquidation – which others have done before me, I’ll be linking to their attempts in a minute – I thought we should stop a second and make sure we understand where exactly that value resides. It makes a big difference if this company has $100 million in cash, $100 million in 100 different stocks, $100 million in one single risky stock, etc. It may take them some time to liquidate. Or, they may be doing it already. We’ll deal with the timeline in a second. But, first I want to give you some idea of what proportion of the value we’re talking about is in what assets.
So, what assets does Vulcan own?
You can see the company’s balance sheet ending 2016 (so, almost 2 years ago). Marketable securities are 94% of total assets. Cash is 2% of assets. So, marketable securities and cash are 96% of total assets. Liabilities are very close to nil. There is a large liability item shown in that 2016 balance sheet. However, almost all of total liabilities on that balance sheet are deferred taxes. These are taxes that would be paid on realized gains in the marketable securities. That balance sheet – because it’s for the year 2016 – has about 35% of the unrealized gains in marketable securities shown as “deferred income taxes”. We can assume that if the company was applying the statutory federal corporate tax rate of 35% in 2016, we should now apply the new statutory federal corporate tax rate of 21%. So, the liability figure should be a haircut of about 21% of the unrealized gain in the marketable securities.
There are other aspects of that balance sheet that might be misleading in the sense that book value does not represent fair market value. Two items immediately jump out at me. One, we can see the company owns timberland. Marketable securities are carried on the balance sheet at their market value. However, timberland is not re-valued over time. And the same number of acres of timberland become more and more valuable in nominal dollars as time goes on. Therefore, the book value of timberland is almost always understated. So, timberland might be a meaningful asset here. But, meaningful in the sense it could be worth anywhere from like $1 to $10 a share on a stock we said is trading in the $118 to $140 range. In other words, timberland is a single digit percentage of the stock’s market value here. The company has also depreciated most of the value of its property other than land. You can see that the contra asset account under property, plant, and equipment equals a little over 90% of the asset line “gross property, plant, and equipment”. Basically, the company has completely depreciated any property they are allowed to depreciate. All that is left on the balance sheet undepreciated is stuff like timberland and other forms of land – not buildings – which can’t be depreciated.
So, what do we make of all this? I’d just say that the company owns some timberland, some land, some buildings, etc. But, I can’t see it making way more than a $10 or so per share difference on a $118 to $140 stock. In other words, everything other than the marketable securities portfolio is just a matter of whether the stock is worth 10% more or 10% less than what you estimate it is. Because of these items, two equally reasonable people looking at this stock with the same amount of diligence might vary in their estimates of liquidation value by 20%. Because of this fact, it would be risky to invest in Vulcan at 90% of your estimate of liquidation value. That’s even putting aside the question of how fast this liquidation happens. And, there’s always a risk something will come up to stop the liquidation from happening. So, you can’t have 100% confidence the liquidation will happen, you can’t know how quickly the liquidation will happen, and you have to assume your estimate of liquidation value might be off by 20%. As a result, all of the assets other than the marketable securities would be nice to have – but, all they give you is more of a margin of safety than a lot more upside you can count on. So, as a potential investor, I wouldn’t bother spending time trying to value any kind of land, property, or really any other kind of assets but the stocks.
Let’s get to those stocks then.
The way we’ll value this company is by simply totaling up all of the stocks the company owns and all the cash it has – or had on hand as of the end of 2016.
Before I go on, I’ll mention that I’m relying on the financial statement for the year ending 2016 quite a lot here. You can read that document here. Although this is a truly dark stock and I have no information between that 2016 year-end financial document and the press release put out announcing the liquidation – it’s a perfectly normal document that I’m seeing for the year 2016. It’s audited. The auditor is small, but they’ve been inspected by the PCAOB (Public Company Accounting Oversight Board) and while the sample size of that inspection was quite small, there weren’t important deficiencies detected in that inspection. What I’m saying – because I know a lot of people reading this are a bit scared of stocks that don’t file with the SEC – is that if all I knew about this company was those 2016 financials, those financials wouldn’t look questionable to me, overly aggressive, etc. That 2016 financial report doesn’t concern me as much as some documents I’ve read that were filed with the SEC by small companies on major exchanges. So, the darkness of this company is a concern. We don’t know a lot – and that’s the way management likes to keep it. But, what we do know isn’t especially concerning.
Okay. Now, it’s time to actually value this company. Here’s how we’re going to do it.
I’m going to apply a roughly 20% haircut (the corporate tax rate is now 21%) to the entire value of the stock portfolio. Why? There’s information in those 2016 financials that suggests that almost all of the value of the stocks is unrealized gains that haven’t been taxed yet because they haven’t been sold. There may be ways for the company to do this liquidation in a more tax efficient way than at 80% of the market value of the company’s securities portfolio. But, it’s unlikely that the liquidation would be done at a level – after taxes – that’s much worse than that. So, having me just total everything up and then multiply that figure by 0.8 to get the liquidation value seems like a conservative enough way of doing it. It’s not overly conservative though. It’s pretty close to what may turn out to be correct.
Let’s start with the market value of the securities at the end of 2016. Cash and marketable securities taken together were about $143 million. The company had a couple million in liabilities (other than deferred taxes). But, these were more than offset – at the end of 2016 – by assets (like buildings) held for sale and other property we now know the company will liquidate.
So, $143 million sounds like a good number. At the end of 2016, the company had 911,534 shares outstanding. I’m not 100% sure that number is still correct, because the company has a program that allows directors to buy treasury shares owned by the company for themselves. This would move shares from “treasury” to “outstanding”. I have no reason to believe directors used this program to buy a lot of shares. And, of course, the company would then have cash added to its balance sheet for those treasury shares. So, let’s go with 911,534 shares.
Our first estimate of the liquidation value of Vulcan International is now $143 million times 0.8 equals $114.4 million divided by 911,534 shares equals $125.50.
Now, let’s assume the bid price of $118 is how much you can pay to get shares. If you pay $118 now and receive $125.50 in one year – how much have you made?
About 6%.
The liquidation could happen a lot quicker than one year. Or, it could take as long as almost 3 years. Under Delaware law, the company must complete its liquidation payments within 3 years now that it’s given notice of its plan.
What’s the upside potential here?
Well, things like timberland could be worth something. I don’t have information on the exact amount of timberland the company owns. And I don’t want to repeat claims I have heard given without any supporting evidence. If the claims I’ve heard about what timberland the company owns are true – the sale of this timberland at what timberland in the same area is appraised at might potentially bring in up to another $12 in value for this stock. So, let’s pretend that’s true. Let’s pretend you could pay $118 today (the bid) and get $137.50 in a year. What kind of return would that be?
About 17%.
We are now talking about annual returns in the 6% to 17% range. And, of course, if the liquidation happens – or the first bulk of the payment happens – in closer to 6 months than 1 year, you’ve got a market beating type annualized return.
Is it risk free though?
No. The company owns stocks. And, in fact, most of the value of the marketable securities portfolio – and therefore most of the value in the company – is probably in just a few stocks. I say “probably” because I am going off old information about what shares the company owned. We can use Nate Tobik’s post over at Oddball Stocks about what shares the company owned and combine it with that 2016 balance sheet and see from those facts that the assumption Nate made that the company never sold these stocks is probably correct. Almost the entire portfolio shown in that 2016 balance sheet consists of unrealized capital gains. That wouldn’t be the case if they sold stocks and bought others. We have every reason to believe this is a total “buy and hold” type situation.
If that’s the case, then what assets does Vulcan International own?
At the time Nate wrote up the company’s stock holdings – earlier in 2018 – the portfolio looked something like this:
PNC Financial (PNC): 59%
U.S. Bancorp (USB): 24%
There’s really no point in going on beyond that. The #3 and #4 stock on that list accounted for something like 5% each. And, actually, we don’t know if assets like timberland and other real estate holdings the company has are worth less than stocks #3, #4, and beyond. So, in terms of “major” assets I would only say that PNC common stock and U.S. Bancorp stock are worth our time.
In fact, it’s likely that most of the assets that need to be sold off and/or distributed to shareholders are: PNC stock, U.S. Bancorp stock, timberland, other real estate, and cash.
PNC stock has declined since Nate wrote that post. But, let’s start by going with the marketable securities value he laid out and then adjust it downward as needed.
First, here’s Nate’s 2018 post on Vulcan International.
He gives a value on that stock portfolio of $163 million. If we apply a 20% tax haircut to that number we get $163 million times 0.8 equals $130.4 million divided by 911,534 shares equals $143. So, the upside there would be bidding like $118 for the stock now and getting $143 in the next 3 months, 6 months, a year, 3 years, etc. Let’s assume you can get the stock by bidding $118 and that you’ll receive $143 in liquidating distributions within 1 year. What would you annual return be?
It’d be a 21% annual return. And, if we assume the timberland, other real estate, cash, etc. adds another $12 or so after-tax you’d get a value of $155 in possible liquidating payments. Again, assume you can pay $118 and get back $155 at some point.
If you pay $118 and receive liquidating payments of $155 within one year, you’ve made more than 30% a year in this stock. If it takes 2 years, you’ve made about 15% a year. If it takes 3 years, you’ve made about 10% a year.
However, I do need to pause here and mention that PNC stock – which was believed to be Vulcan International’s largest holding – has dropped in price since Nate wrote that post. PNC stock is down 15% since Nate wrote that post. The drop in PNC stock would trim about $12 a share off the likely liquidation value of Vulcan International. That would bring us down to a liquidation value of around $143 if real estate, timberland, etc. is worth what I think it might be worth. You might be able to get down to a liquidating value of around $130 if those things aren’t worth anything.
But, it’s hard to get much below $130 in liquidating value. And it’s quite possible to get values of $150 a share or higher. Also, the vast majority of this company’s value is in the stock of very, very liquid banks. You could easily sell off $100 million worth of PNC bank stock – or, you could just distribute the stock to shareholders directly.
There are a lot of upsides I haven’t considered. Maybe there is a more tax efficient way – than simply selling the stock this company owns for cash and paying the federal government 20% of that sale price. And maybe – because you could just sell these shares in the open market tomorrow, or you could distribute the shares within a matter of months – the liquidation will happen faster than in one year.
Here’s one way of looking at it. This stock’s last trade price was $120. Most of the approaches I used to try to guess what the after-tax liquidating payments would be here were over $130. The liquidation could be mostly done in under a year (the company could make a really big payment very early on and then decide on the final, smaller payments much later). So, let’s take the bottom end of each of those estimates. Let’s say the liquidating payment isn’t more than $130 – it just is $130. And let’s say the liquidating payment doesn’t happen sooner than in one year. Let’s say it does happen in exactly one year.
Putting out $120 today to get $130 a year from now is an 8.3% investment return. That might not sound sexy. Maybe you have better ways to make more than 8% a year. But, the truth is that I don’t expect bonds, stocks, etc. generally to have a high probability of returning well over 8% a year. A small increase in the eventual liquidating payment or a small increase in the speed of when this liquidation will happen could get you higher returns. So, the reality may be that you could make anywhere from 8% to 30% annualized in this stock.
Would I assume it’ll be anywhere close to 30% annualized?
No.
But, would I assume that Vulcan has a better chance of being an 8% or greater return than any stocks, bonds, etc. I could buy with the planned commitment being a matter of months to 3 years top?
No.
This is a short-term “workout” as Buffett would say. Compared to interest rates and other opportunity costs – it looks like a reasonable place to park money for a few months to a few years.
If you want to learn more about Vulcan, these write-ups go into much more detail about the business, the people, and the past story:
Oddball Stock’s Original Write-Up (2015)
Oddball Stock’s Follow-Up (2018)
Jan Svenda’s Seeking Alpha article (2018)
So, what’s my verdict?
I can’t tell you what Vulcan will return.
But, at its last trade – $120 a share – Vulcan looks priced to return as much or more than the stock market with as little or less risk than the stock market. Remember, a 1-3 year bet on the stock market isn’t anywhere near a riskless proposition. And bonds maturing in 1-3 years don’t yield 8% or more.
That makes Vulcan a serious contender for my next stock purchase. This one goes to the very top of the pile of stocks I don’t yet own.
Geoff’s Interest Level: 90%