Posts By: Geoff Gannon

Standard Diversified (SDI / SDOIB): Get a Solid Tobacco Brand and a Solid Marijuana Brand at a 33% Discount to Their Market Value

Member Write-up by André Kostolany

Geoff’s Note: Standard Diversified also has extremely illiquid super voting shares that trade under the ticker SDOIB. SDOIB shares are sometimes available at a discount to SDI shares (for example: last week, 400 SDOIB shares changed hands at something like 30% less than the then current price of SDI). SDOIB shares have 10 times the votes of SDI shares and can be converted into SDI shares. Buying Turning Point Brands (TPB) directly is usually the most expensive way to get exposure to Turning Point Brands stock, buying SDI is often the next most expensive, and buying SDOIB is sometimes the cheapest. This is not always the case. So, make sure you always check the bid/ask prices of each of these 3 stocks against each other before deciding which of the 3 stocks to buy to get direct or “look-through” exposure to Turning Point Brands. SDI discloses it owns 51% of TPB. So, you can multiply the number of TPB shares outstanding by 0.51 and then divide that number by the combined number of SDI and SDOIB shares outstanding. This will give you the “look-through” value of SDI shares. Right now, I believe each share of SDI (or SDOIB) represents a “look-through” interest in about 0.59 shares of TPB. 

Standard Diversified Opportunities (SDI) is a HoldCo that is majority owned by Standard General. SDI has three operating subsidiaries: Turning Point Brands (TPB), Standard Outdoor and Standard Pillar. At this point the majority of SDI’s value is made up of TPB. With TPB stock currently at $40 SDI’s stake in TPB is worth about $23.67 per share. Standard Outdoor is worth about $1.07 per share at cost and Pillar General about $0.78 per share. Net debt is -$0.94 cents. In total, SDI’s per share NAV is $24.58, or about a 49% premium to SDI’s stock price of $16.50. The company’s slide deck also has good details on the SOTP. Having established that the stock is cheap to its NAV, let me try to explain why I like the underlying businesses.

SDI is controlled and majority-owned by Standard General. Standard General is a special-situations investor that tends to take highly concentrated positions in off-the-run situations. Standard General owns over 86% of SDI. Adding insider stakes this becomes well over 90% of SDI’s total ownership. Before taking over SDI, Standard General owned a majority stake of 9.84MM shares in TPB, which it has placed inside SDI. Basically SDI is now Standard General’s public vehicle through which it holds TPB shares and other long-term investments for an indefinite time horizon. The following company slide does a good job of illustrating the SOTP:

TPB

TPB is in the other tobacco products business. Their products fall into three categories: Smokeless, Smoking, and New Products. TPB’s main asset is ZigZag, which is the #1 premium cigarette paper brand with 33% market share. ZigZag has been the paper brand of choice for cigarette and pot smokers for decades now. The main thing to …

Northfield Precision Instruments Corporation (NFPC) – A Dark, Illiquid Nanocap at an Unlevered P/E of 6

Member write-up by LUKE ELLIOTT

Northfield Precision Instruments (OTC: NFPC)
Quote: $15.00

Let’s go ahead and get one thing out of the way. When I say nanocap and illiquid, I really mean it. Northfield has a market cap of 3.6 Million USD (234,237 shares x $15/share) and its 10/90 day volumes are 0 and 102 respectively. This is a tiny company and the largest daily volume (by far) of shares trading over the last year was 6,400 (around $95,000 USD). For some of you it probably doesn’t make sense to continue reading.

For some background, Northfield Precision was founded in 1952 by three men in Long Island, NY. The first products manufactured by the company were micro spin bearings, precision gear blanks, precision shafting, precision limit stops and miniature slip clutches for the electronic industry. The company went public in 1959. I was unable to determine what year the company stopped filing with the SEC, which probably means it was a very long time ago.

The company looks quite different now. None of the original founders are still at the company and they now manufacture air and diaphragm chucks. A chuck is just a specialized type of clamp. They’re typically used to hold or clamp a rotating workpiece that is being machined. Northfield supplies chucks to part manufacturers in a variety of sectors including automotive, aerospace, electrical/electronic, robotics, medical/optical, and machine tooling. It’s likely that their largest customers are in the aerospace and auto parts industries and in a nutshell, Northfield provides parts that are necessary to manufacture specific metal components for these industries (Examples include transfer case components, water pump components, crankshaft and driveshaft components). Depending on the complexity, one chuck is in the ballpark of between $2,000-6,000 which is typically less than 1% of the cost of the CNC (Computer Numerical Control) Mill or Lathe and typically a small percentage (thought not insignificant) of setting up a new process to produce an auto/aerospace component.

Because the company is dark and does not file with the SEC, I had to request the financials from the company directly and was provided with only the last 5 years. The company was unwilling to send financials further back than 2013. Based on 5 year numbers, durability can be difficult to determine from a quantitative perspective. Focusing on what we do know, we can say that the company certainty ticks the box from a longevity perspective since they’ve been around for 60 years. The company is certainly run conservatively, and like many small businesses (typically family owned), they carry no debt (besides some equipment leases) with a large amount of cash on hand.

Because the products the company sells are both competitively priced and such a small percentage of the total “new part” start-up cost for their customers, keeping the continuity of their customer relationships, timely delivery, and high product quality are what matter most for a company like this. Most customers are unlikely to switch from a supplier they’ve been using for …

Butler National Corp. (BUKS) : An Illiquid Ben Graham Style Mini-Conglomerate in Aerospace and Casinos

Member write-up by VETLE FORSLAND

Butler National Corp (BUKS) is a $14 million OTC stock that operates in the Aerospace Products industry and manages two casinos. The two unrelated businesses split revenues 40/60, respectively. It trades at an EV/EBITDA of 2.30 (while peers trade at around 10 times) and the company has net cash. While all this sounds attractive, it only gets better; a simple sum-of-the-parts calculation shows that the stock is trading at 29% of its intrinsic value.

The stock trades around $0.20 per share. It’s illiquid. And their assets shows great unrealized value for shareholders. However, the management has done a poor job at utilizing these assets. So, an activist investor or an acquisition may be necessary for the stock to reach its fair value.

About the business – Aerospace

BUKS was formed in 1960. It maintained electronic aircraft parts like switching equipment, navigation instruments, radios and transponders. It has since expanded its Aerospace Products segment. Today, Butler gets revenue from: system design, engineering, manufacturing, integration, installation, services and repairing products for business-sized aircraft. This part of the business has three subsidiaries, namely Butler Avionics, Avcon Industries and Butler National Tempe. The former subsidiary – Butler Avionics – sells, installs, and repairs avionics equipment (the electronic systems used in aircrafts) like airplane radio equipment and flight control systems. Avcon Industries modifies business aircraft mostly by modifying passenger-to-freighter configurations, adding aerial photography products to aircraft, and providing stability enhancing modifications. All of these are crucial parts of airplanes. Butler National Tempe is the defense-contracting part of the business. They focus on electronics upgrades for weapon control systems used by militaries. They also manufacture transient suppression devices and switching units for Boeing aircraft.

About the business – Casinos

In the early 1990s, the management at BUKS decided that they wanted to diversify their revenue away from the cyclical aerospace business. The Board of Directors at the time had contacts with American Indian tribes, so they went into the gambling business by managing two casinos: Boot Hill Casino (a state-owned Kansas casino) and the Stables (a Modoc tribe-owned casino in Oklahoma).

The management agreement with the Stables expires on September 30th, 2018 (less than two months from today). The company’s latest 10-K says ‘negotiations are underway to renew this contract’.

This segment, called Professional Services, is divided into two subsidiaries: Butler National Services (which provides management services to the two casinos) and BCS Design (which provides architectural services on commercial and industrial building designs). While the Aerospace part of the company originated three decades before professional services, 61% of the company’s revenue came from the professional part of the business in 2017, and 67% in 2016. Before then, the 6-year average had been 66%, while assets are always split 50/50 between the two segments.

Quality

There’s not much to say about the quality of the business, because it’s not as necessary as with other companies I write about. This is a value play. …

Kaanapali Land (KANP): A Super Illiquid Speculation on Hawaiian Land

Member write-up by DAVE ROTTMAN

Overview

Kaanapali Land LLC (KANP) is a business that owns land on Maui, one of the major Hawaiian Islands. Because Kaanapali is the name of the region of Maui that Kaanapali Land LLC owns land in, this report will refer to the business as KANP.

The island of Maui was formed by two volcanos that grew next to and eventually into each other. This is referred to as a volcanic doublet. The western part of the doublet is mostly mountainous forest reserves in the interior. Moving “makai”, meaning “towards the sea” in Hawaiian, the landscape changes to agricultural land.  Finally, the coastal areas are filled with residential and commercial activity. It is on the western coast of the west side of Maui that Kaanapali is located, minutes away from the Kapalua Airport.

KANP has a rich history going back over 150 years. In the beginning, the company was called the H. Hackfeld & Company and began as a general store opened by a German boat captain, only later branching into other activities such as sugar production land ownership. Through a series of events around the time of World War I, it became acquired by a group of businessman and was renamed American Factors and later Amfac. Amfac was one of the “Big Five” in Hawaii, a powerful group of corporations that controlled 90% of sugarcane production – a huge component of Hawaii’s economy – during part of the 20^th century. During this time, sugarcane production was Amfac’s focus, and at its peak it owned 60,000 acres of Hawaiian land. Because of their control over such a huge portion of the economy, the Big Five wielded a large degree of political clout. In the 1950s, political change and international competition damaged the economics of sugarcane production in Hawaii, and the Big Five entered a period of decline that was characterized by declining sugarcane production and diversification into other industries. In 1988, Amfac was bought out by JMB Realty for $920 million, a very large real estate developer based out of Chicago. During the continued period of sugarcane decline, much of the property related to sugarcane and other activities was sold off. In 2002, Amfac declared chapter 11 bankruptcy due to operating losses related to agricultural operations and to a lesser extent other smaller operations including golf course businesses, coupled with an unmanageable debt load. The business emerged from bankruptcy in 2005 as Kaanapali Land, LLC and is the reorganized entity from Amfac Hawaii and a few other entities. The stock became available over the counter in 2007. Today, KANP is focused primarily on land development, although it produces a small amount of coffee, too.

Before proceeding, it is relevant to mention that KANP is similar to another business that has been discussed on Focused Compounding: Maui Land & Pineapple (MLP). If you have not read the report on MLP, it is recommended you do so, as understanding MLP will help with understanding …

Maui Land & Pineapple (MLP): 900 Acres of Hawaiian Resort Land for $250,000 an Acre

Maui Land & Pineapple (MLP) owns real estate on the island of Maui (which is in Hawaii). The company has 22,800 acres of land carried on its books at prices dating back to the 1911 to 1932 period. So, book value is meaningless here. The total size of the land holdings is also meaningless here. Of the 22,800 acres, 9,000 acres are conservation land. That leaves only 13,800 acres of potentially productive land. Almost all of that (12,900 acres) is zoned for agriculture.

That leaves 900 acres zoned for residential use.

Let’s compare those 900 acres of land to the company’s enterprise value to get a sense of just how expensive this stock is on a price per acre basis. The company has 19.18 million shares outstanding. As I write this, the stock price is $11.40 a share.

Since we’re talking shares outstanding, I’m going to pause to discuss liquidity. I may run managed accounts focused on the most illiquid stocks out there (because I believe stocks with wide bid/ask prices tend to be less efficiently priced than stocks that trade constantly at almost no spread), but I know some members of Focused Compounding prefer more liquid investments. MLP should be liquid enough for everyone. The stock trades about $300,000 worth of shares per a day. It’s listed on the New York Stock Exchange.

Now, a bonus aside for those interested in ultra-illiquid stocks: if you’re interested in Maui Land & Pineapple after reading this write-up, you should definitely check out is closest “peer” of sorts – Kaanapali Land LLC (KANP). KANP is an illiquid (it trades about $2,000 worth of stock on an average day) over-the-counter stock. I’m not going to discuss KANP here. However, what land it owns – which I think is much more speculative and possibly worth much less than the land I’m about to discuss owned by MLP – is only something like 4 miles from the land we’ll be talking about here.

Now back to the enterprise value calculation. MLP stock is at $11.40 a share and there are 19.18 million shares outstanding. So, that’s $11.40 times 19.18 million equals $219 million. You can find the company’s 10-Q on EDGAR and decide how much net cash or net debt to add to that $219 million to get the correct enterprise value. There’s a tiny bit of cash, a tiny bit of debt, some retirement benefit obligations, etc. For our purposes, all balance sheet items excluding the 900 acres of residential zoned land are a rounding error. So, I’m going to round the market cap up from $219 million to $220 million and call that the enterprise value.

Now, we can calculate the price ratio that matters most here. It’s not price-to-book (meaningless because the land is carried at at 1911 to 1932 values) or price-to-earnings (also meaningless because it includes land sales which are very lumpy from year-to-year). It’s enterprise value per acre. So, that’s $220 million in EV divided by 900 acres of …