Posts In: Geoff's Writeups

Investors Title Company (ITIC): A Strong, Consistently Profitable Regional Title Insurer Trading at a Premium to Book Value

This stock was brought to me by Andrew. He wanted to know more about the title insurance industry. ITIC is a publicly traded (it trades on NASDAQ) regional title insurer. There are four large, national title insurers that account for 80-90% of all title insurance market share in the U.S. However, in some states – the leading title insurer is a homegrown operation. These companies are known as “regional” title insurers. ITIC was started by the Fine family in the 1970s (it became operational midway through 1976). By the 1980s, it became the largest title insurer in North Carolina. It has since expanded into other states – mainly Texas, Georgia, and South Carolina. Premiums in North Carolina, Texas, Georgia, and South Carolina account for 75-80% of the company’s premiums. ITIC writes mainly (but not totally) directly in North Carolina and through “issuing agents” (lawyers, bankers, basically anyone originating a real estate purchase or transfer or refinance) in other states. Generally, there is no commission associated with title insurance premiums written directly and slightly under a 70% commission rate for insurance written indirectly.

ITIC is a “primary” insurer. It does own a reinsurance subsidiary. And it both assumes and cedes some insurance each year. However, this has never been a material part of its business. As far as I can tell – and I only read the most recent 10-K from 2019 and the oldest 10-K from the mid-1990s – reinsurance has been less than 1% of revenues. My guess is that the reinsurance business is not for regulatory reasons. It probably has to do with the company’s choice to not retain individual risks in excess of a certain amount. For example – and this is just a hypothetical illustration, it may be close to the truth but is not something the company says explicitly – if someone wants $900,000 of title insurance, the company may take the first $500,000 and retain that risk in the usual insurance subsidiary and then pass the other $400,000 on to the reinsurance subsidiary. As of the 1990s, we know that this was not a requirement that state regulators in North Carolina put on the company. It was a choice the company was making.

ITIC’s financial position is strong. You can see it has an A.M. Best rating of “A” (there are only two notches above this: A+ and A++). In a podcast I did recently with Andrew, I mentioned that investors may want to look for an “A minus” or better rating from A.M. Best to know if there is anything about the company’s financial position that might be a concern in terms of the strength of an insurance subsidiary. Keep in mind that an A.M. Best rating is really an indication of insurance subsidiary strength as an insurer (safety for policyholders, ability to reinsure others, etc.) and not a credit rating. It’s certainly not a rating of the safety of the common stock or its dividend.

Having said that, I wasn’t surprised when …

Read more

Marcus (MCS): Per Share Value of the Hotel Assets

I’m revisiting Marcus (MCS) with an attempt to appraise the hotel side of the business. Andrew sent me some articles discussing property tax appraisal of Milwaukee hotels (including those owned by Marcus). I looked at some other property tax records. I looked at Penn State’s hotel value index. Andrew spoke with the CFO of Marcus. And I consulted a few other sources.

My best guess is that the pre-COVID fair value of Marcus’s hotel assets was around the $235 million to $400 million range. On a fully diluted basis (41 million shares) assuming that the convertible is fully converted – this is inaccurate, because it ignores the “capped call” Marcus entered into – that works out to between $6 and $10 a share from the hotel segment. Remember, Marcus has like $5 a share in debt. It has cash, tax refunds due, other assets it isn’t using etc. that might be worth around $2 a share. But, then this is a hotel and movie theater company. So, it’ll burn through some cash in the quarters ahead. Maybe it’s best to ignore the cash, tax refunds, excess land etc. and assume that Marcus will just need to use that stuff to fund cash burn through 2021. That leaves $6 to $10 in hotel value per share vs. debt of $5 a share. So, hotel value net of debt is $1 to $5 a share. Marcus stock is at $11 a share right now. So, the stock is pricing the theater chain at like $6 to $10 a share. In a normal year – like 2022, maybe (certainly not next year) – I wouldn’t be surprised if Marcus could do $1 a share in free cash flow from its theaters alone. So, that’d mean the stock is now priced at like 6-10x free cash flow from the theaters.

What’s MCS stock really worth? Probably more like twice that amount (14-20x free cash flow) if it was priced like a normal business.

How solid is this $6 to $10 a share (after the conversion adds to Marcus’s shares outstanding) in hotel segment valuation?

Not very. Hotels are pretty difficult to value in the sense that they bounce around a lot like stocks do. Cap rates are important. If yields on other assets are very low, hotels will rise in price. If debt is widely available, hotels will rise in price. And then these are cyclical assets. If you look at the year-by-year figures for hotel values on a per room basis – each year is priced a lot like the market is just extrapolating the present into the distant future. Hotels may have fallen like 30% or something in value during COVID. But, this isn’t really relevant on an asset like this. And I’m going to ignore 2020 values for hotels even though they are our most recent valuations. I’m not going to value hotels in 2020 for the same reason I wouldn’t value a stock portfolio using early 2009 prices. They clearly …

Read more

Marcus (MCS): A Movie Theater and Hotel Stock Trading for Less than the Sum of Its Parts

Marcus (MCS) is not an overlooked stock. Despite having a market cap of around $300 million – the level usually defined as the cut-off between a “micro cap” and a “small cap” stock – well over $10 million worth of this company’s stock trades on some days. The stock is liquid. And most of that liquidity is probably highly speculative activity. This is typical for the industry. You can see similar amounts of high share turnover, high beta, etc. at other publicly traded movie theater companies like Reading (RDI) and Cinemark (CNK).

A major reason for that is COVID. I’m going to ignore COVID throughout this write-up. If you’re a long-term investor looking to buy a stock and hold it for the long-term, COVID may influence your appraisal of a company a bit in terms of cash burn over the next year or so. But, aside from that, it matters very little in predicting where a hotel or movie theater stock will trade within 3-5 years. Also, due to the value of the real estate Marcus owns, I don’t foresee meaningful bankruptcy risk here compared to other hotel and movie theater stocks. Most companies in the movie theater and hotel businesses own virtually none of their locations – Marcus owns the majority of the properties they operate in both segments. In fact, Marcus is remarkably overcapitalized compared to its peers in these industries.

And, despite not being overlooked, Marcus may actually be cheap. The company is made up of two businesses. One business is the fourth largest movie theater chain in the U.S. The other business is a collection of hotels. I’m most interested in the movie theater business. So, I’ll start by trying to get the value of the hotel division out of the way.

Marcus manages around 20 hotels. However, it only has ownership stakes in less than half of those. It owns 10% of one hotel. It owns 60% of another hotel. And then it owns 100% of a hotel where the property is held under a long-term lease (instead of outright ownership). To simplify, I’m going to ignore all the hotels Marcus only manages, the hotels where there is a different majority owner, the hotels where there is a different minority owner, and the hotel where the property is held under a long-term lease. In reality, some of these hotels have value. But, we’ll ignore all that.

This simplifies the hotel division’s assets down to 6 fully owned hotels. Those 6 hotels are: the Hilton Milwaukee Center (729 rooms), Grand Geneva Resort & Spa (355 hotels), Pfister (307), Lincoln Marriott Cornhusker (297), Hilton Madison Monona Terrace (240 rooms), and Saint Kate (219 rooms).

This adds up to a total of 2,147 rooms. Generally, these owned hotels are somewhat upscale and somewhat urban (though they are in relatively less densely populated Midwestern states like Wisconsin). I don’t know enough about hotels to be able to appraise these hotels accurately. When I say they are upscale – they …

Read more

Hingham (HIFS): Good Yield Curve Now – But, Always Be Thinking About the Risk of the Bad Yield Curve Years to Come

I’m writing again about Hingham (HIFS), because someone asked me this question:

 

I was wondering how long it would take Geoff to talk about Hingham savings, seems to tick all his boxes – very low cost of funding on the operations side and a capital conscious manager with Buffett fetish. What more could you want ?

 

It does have a very low operating cost. But, it doesn’t have a very low interest cost. It does now that rates have been cut to nothing. But, it probably got down to about a 2% net interest margin just before the end of the housing bubble about 13-14 years ago. It had a very rough 2006-2007.

 

So, the bank is set up very differently than most banks I would be interested in that I’d consider very safe. Hingham is running some serious risks by being 100% real estate focused. This is because you end up with almost no “self-funding” of your lending, because your borrowers are going to be small to mid-sized (and maybe a couple big sized) relationships where they just want a lot of money all the time to invest in more and more real estate. They aren’t going to deposit a lot of money with you. Compare this to something like the C&I side of Frost where it is going to be about 100% funded by an equal amount of deposits and borrowing coming from your customers on the commercial and industrial side. So, something like Hingham is going to need to use CDs and FHLB borrowing to operate. It is going to be very, very sensitive to cost of liabilities on the very short-term. What it is basically doing is borrowing short wholesale and then lending long against real estate. That’s very good right now. It’s just gotten to be a lot better business, because the cost of its liabilities has dropped to close to 0% with Fed Fund Rate cuts in the last year. But, that is going to be a temporary situation.

 

So, what more would I want to know?

 

Does the bank understand how it is running a unique business model that has unique risks in terms of liquidity. Like, do they understand that they can have almost no credit losses and the lowest operating expenses in the banking industry and STILL face some risks? If they said to me: “Oh. We don’t really worry about that liquidity stuff. There’s always been funds available to borrow. Etc.” Then, I might worry.

 

I kind of follow the Buffett approach that Alice Schroeder has talked about where I START with asking “what’s the catastrophic risk here?” and then go from there. So, if I think there’s a meaningful risk of catastrophe – then, I might pass on an idea right away that looks like it might have good risk/return odds in most environments, but could go broke in unusual circumstances.

 

What are the unusual circumstances that are a risk here?

 …

Read more

Hingham Institution for Savings (HIFS): A Cheap, Fast Growing Boston-Based Mortgage Bank with a P/E of 9 and a Growth Rate of 10%

This is the one “higher quality, more expensive” bank I mentioned in the podcast Andrew and I did where we talked about like eight or so different U.S. banks. Hingham’s price-to-book (1.7x) is very high compared to most U.S. banks. It is, however, quite cheap when compared to U.S. stocks generally. This is typical for bank stocks in the U.S. They all look very cheap when compared to non-bank stocks. There are many different ways to calculate price multiples: P/B, P/E, dividend yield, etc. The easiest way to calculate a high quality, stable, growing bank’s cheapness or pricey-ness is simply to take the most recent quarterly EPS and multiple it by 4. You then divide the stock price into EPS that is 4 times the most recent quarterly result. The reason for this is that bank’s aren’t very seasonal. But, sometimes events – like COVID – and normal growth (HIFS is a fast grower) can cause the full past twelve month earnings figure to be out of date So, how cheap is HIFS?

“Core” earnings per share in the most recent quarter – I’ll discuss what “core” means at Hingham later, but for now trust me this is the right number to use – was $5.68. Multiply this by 4. We get $22.72 a share. That’s our 12-month look ahead “core” earnings. The stock now trades at $206 a share. So, $206 divided by $22.72 equals 9. Hingham is trading at a “forward” P/E of 9. The “PEG” ratio (price-to-earnings / growth) here may be around 1 or lower. Hingham compounded book value per share by 15% a year over the last 5 years. Growth rates in the 10-15% range have been common since this bank’s management changed about 30 years ago. A lot of balance sheet items – like total assets, loans, and deposits – all grew about 10%+ over the last 12 months. So, a growth rate of about 10% and a P/E of about 9 seems likely here. One thing to point out is the high return on equity. Core return on equity is running at about 18% here. If ROE is about 15-18% while growth in loans and deposits and so on is in the 10-12% range, then the bank will eventually need to pay out one-third of its earnings as dividends and buybacks. Historically, it has not done this. It has found ways to grow much faster than the area (Boston) in which it operates and much faster than the balance sheets of its existing clients. Usually, that kind of thing can’t be kept up forever. Once that kind of growth can’t be kept up, the bank either becomes overcapitalized or it pays out a lot more in dividends and in buybacks. This brings up the other way we can look at a bank like Hingham. We can think in terms of dividend yield and growth. So, let’s say the dividend yield is 1%. The question then becomes how much do we think that dividend …

Read more

Luby’s (LUB): Luby’s is Liquidating – What’s the CAGR Math Behind Possible Payouts and Timing?

This is a simple situation. But, you’ll want some background info before reading my take on it.

Information you might find useful about this one can be found at:

Clark Street Value

Hidden Value

Seeking Alpha

And my comments in this podcast (starts at 31 minutes)

The stock is Luby’s (LUB). It is liquidating. The company estimates it could make liquidating distributions of between $3 to $4 a share. It doesn’t set a timetable for the distributions. However, elsewhere in the proxy statement a period of 1-2 years is the estimate given for when they will get an order for the Delaware court that would provide them the sort of safe harbor they want to make distributions. As soon as they got that order, they might make the first of the distributions. I suspect they will make no distributions before getting the order. So, the company is saying it expects to pay out $3 to $4 per share no sooner than 1-2 years from now. The stock is at $2.58 a share.

Let’s just do the math with those numbers: $2.58 price today, $3 distribution, or $4 distribution, 1 year, or 2 years from now. I don’t necessarily believe some of these numbers. But, let’s put that aside for now, because these are the actual sort of company estimates we see in the proxy statement instead of guesses made by me or others.

Buying at $2.58 and getting paid $3 in 2 years is an 8% annual return.

Buying at $2.58 and getting paid $3 in 1 year is a 16% annual return.

Buying at $2.58 and getting paid $4 in 2 years is a 25% annual return.

Buying at $2.58 and getting paid $4 in 1 year is a 55% annual return.

So, if you really expect to be distributed $3 to $4 per share within 1-2 years, you should buy the stock. The expected return range is 8-55%. If we take the middle of both price and timeline – that is, $3.50 in 18 months – that’s a 23% annual return. Which is really good. And if you assume the downside here really is something like earning 8% a year for the next 2 years – there’s no reason to assume you can do better than that in any index, any safe form of bond, etc. Stock pickers might be able to do better than 8% a year over the next 2 years. Your opportunity cost could be a lot higher than 8%. But, the certainty might be higher here.

Also, I have not presented the real upside here. The $3 to $4 estimate presented by the company in its proxy statement is not the actual estimate of the liquidation distributions provided by the company’s financial advisors. Like most companies considering “strategic alternatives”, Luby’s formed a special committee which then hired a financial advisor. The financial advisor – Duff & Phelps – came up with an estimated range for the liquidating distributions that would be paid to shareholders.…

Read more

Flanigan’s (BDL): A Cheap, Complicated Restaurant Chain Focused on South Florida

Flanigan’s (BDL) is a nano-cap full service restaurant and discount liquor store company. All of its locations are in Florida. And all but one of the locations are in South Florida. The company’s ticker – “BDL” – comes from the name of its liquor stores: Big Daddy’s Liquor. Meanwhile, the company’s name – Flanigan’s – comes from the name of its founding and still controlling family. One family member is directly involved in the business – as the Chairman and CEO for the last 18 years – and his brothers who serve on the board and also own entities connected to the company. There is a family trust as well. Altogether, insiders of some sort own about 50% of the company. Although I referred to this company as being both a full service restaurant chain and a chain of discount liquor stores – the discount liquor stores mean very little in an appraisal of the company. About 90% of the company’s EBIT comes from the restaurants. So, less than 10% of earning power comes from the liquor stores. Also, the returns on capital in the restaurant business are much higher than in the liquor stores. If you don’t adjust for leases – which changes the calculation of ROC with the new accounting rules adopted in the last few years – the restaurant chain’s returns on capital are probably around 25% pre-tax (so, high teens after-tax) while the liquor stores are more like 7% or so pre-tax and maybe 5% or worse after-tax and in cash. Restaurants are often valued on EBITDA or EBITDAR (EBITDA before rent) instead of EBIT. So, if anything, I’ve used a somewhat more conservative measure. Most importantly, though, is that the company says it doesn’t intend to open more liquor stores. It is going to use some space that had been planned for a restaurant expansion to instead do an additional liquor store. But, overall, the company doesn’t intend to put more capital into the liquor store business. Since the liquor store business is less than 10% of earning power here already and the company intends to re-invest free cash flow in additional restaurants, but not additional liquor stores – there’s really no point in an analyst wasting their time worrying about the value of the liquor stores, their competitive position, etc. I will just mention two synergies here. The liquor stores are often co-located with the restaurants. Not always. But, often enough to make it worth mentioning. And then the other synergy would be liquor sales at the restaurant. Flanigan’s restaurants get about 75% of revenue from food sales and about 25% from bar sales. Gross margins at the restaurants are very high (compared to other restaurants) at around 65%. The fact the company is buying so much alcohol so frequently from the same distributors in the same region of the same state suggests that ownership of the liquor stores may help increase buying power, lower costs, and thereby achieve higher margins at the …

Read more

Libsyn (LSYN): CEO’s Departure Makes this Stock Even More Interesting

This is a follow-up article on Libsyn (LSYN). In my initial interest post on the company I talked a little about the fact that company’s CEO was named in an SEC complaint. That complaint was directed at the former CFO of the company and the current CEO of the company. I can now say “former CEO” of the company. Libsyn announced that this CEO was resigning from his position as CEO and also from the board. This was – to me – a very big deal. To the market, it wasn’t. Libsyn stock barely moved on the news. That makes this stock a lot more interesting to me now.

However, the CEO was not the only issue I had with Libsyn. As discussed in my earlier article on Libsyn, I do have some concerns about the company’s level of technological sophistication versus some of its newer competitors. Libsyn has a business model that is probably – most of the other companies in this industry don’t really release any sort of financial info that can give me certainty on this – a lot more durable than competitors. Libsyn has two business segments. One is “Pair”. This hosts websites – especially WordPress websites. It also does domain registration. The other is the namesake Libsyn business. Libsyn’s business model consists almost entirely of collecting revenue in 3 forms: 1) Fees paid by podcast producers (people like me and Andrew), bandwidth fees (again paid by people like Andrew and me based on number and size of downloads of a podcast each month), and premium subscriptions (Libsyn takes a cut of the premium fee – for example the $7.95/month subscription service Andrew and I do – and the podcast producers take the remaining amount). These 3 things taken together account for virtually all of Libsyn’s revenue. It also has some ad revenue – but, this is small.

Competitors like Stitcher – which owns an ad company called Midroll – probably rely more heavily on a combination of ad revenue and premium subscription revenue. Libsyn also does not have a premium podcast network like some competitors. So, something like Stitcher – previously owned by E.W. Scripps, but recently announced to be sold to Sirius/XM – brings in revenue sort of like a hybrid TV broadcaster / cable channel. You pay a certain amount each month for a subscription to Disney Plus, HBO Max, etc. People pay for a “Stitcher Premium” subscription and get access to premium features (like behind a paywall episodes, etc.) of the various podcasts on the network. Libsyn’s tiny amount of “app” revenue (it’s like 3% of recent revenue, maybe as high as 5% in some quarters where ad revenue is real low) comes from specific show-by-show revenue. It comes from taking a cut of people who signed up just for the specific premium content of a podcast like Focused Compounding. So, it is single podcast specific revenue. There are reasons why I think that makes more sense than a paid network. Ad …

Read more

Libsyn (LSYN): A Pretty Cheap and Very Fast Growing Podcasting Company in an Industry with a Ton of Competition

This is a complicated one. So, I’m going to do my best to boil it down to the things that really matter. That’s a judgment call. And it means I may be focusing on the wrong things. I may not be telling you enough about some things that do matter a lot and fixating instead on some stuff that turns out not to matter as much as I think.

Libsyn is one of the biggest and oldest companies in podcasting. It has been there since the beginning of podcasting basically. And unlike almost every other company in the industry – it’s profitable. It’s been profitable for a while. And it’s likely to continue to stay profitable. This company (Liberated Syndication – ticker LSYN) also owns another Pittsburgh, PA company called “Pair”. Pair is a website host (and domain registrar) that is also very old and also profitable. Pair has been around since the mid-1990s. Libsyn has been around since the mid-2000s. Both have basically been there since the start of their respective industries. As I write this, Libsyn (the podcasting company) accounts for maybe 60% of the gross profit, EBITDA, etc. of the combined company and Pair for the other 40%. However, I’d personally appraise Libsyn as much more than 60% of the combined company’s intrinsic value, because I think it’s likely to be a fast grower.

Why?

Podcasting is a very, very fast growing industry. It’s hard for you to realize just how fast growing it is. As investors, we’re used to thinking in dollar terms. We look at revenue and gross profit and so on in terms of dollars. We aren’t managers and often don’t see the underlying unit growth. Unit growth is the physical – of course, in this case it’s actually intangible – growth in the industry. The number of podcasts, podcast episodes, monthly audience figures, etc. is the “unit growth” in this industry. It’s the growth independent of pricing. Most industries in the U.S. – if they are growing at about the same rate as the overall economy – only grow at a rate equal to population growth plus output per person. So, before inflation, an industry that’s growing at a healthy rate might be doing 3% unit growth a year. This means it will double in real size about every 25 years. A fast growing industry – something more like electric vehicles and hybrids and so on – might be growing at like 7% a year. This means it will double in real size about every 10 years. Podcasting is growing much, much faster than that. In recent years, most of the key metrics that Libsyn tracks have been growing at about 20% a year. This means it doubles in real terms about every 4 years. To put that in perspective, at the rate podcasting is growing in terms of number of shows, number of episodes, number of monthly listenership, etc. we are talking about something that will double in size by 2024, quadruple …

Read more

Avalon Holdings (AWX): An Unbelievably Cheap Controlled Company that Might Stay “Dead Money” For A Long Time

I’ll be doing write-ups on Focused Compounding more frequently now. This means that the quality of the ideas will be lower. Previously, I’d tried to focus on writing up just stocks that looked interesting enough to possibly qualify as some sort of “stock pick” from me. Now, I’m just going to write-up ideas I analyze whether or not they turn out to be anything approaching the level of an actual “stock pick”. So, keep that in mind. Some of these write-ups – and I’d say Avalon falls into this category – are going to be in more of the “not a stock pick” category. Actually, though, Avalon is a really interesting situation – just, a really interesting situation I’m not at all sure I’d actually recommend.

Avalon is a nano-cap stock. I’ve followed the company in some form for over a decade. It’s often been cheap. But, it’s rarely been as cheap as it is now. Avalon does a bunch of things. It owns some salt water injection wells. Those have been shut down and written off. There’s a ton of info about the court cases around these wells in the 10-Q, 10-K, etc. I’ll leave you to read those for yourself. I’m going to just say the wells are not worth anything positive or negative for the purposes of this write-up. Avalon has a waste management business. There are two parts to this. One is a “captive landfill” run for a customer (on that customer’s land) in Ohio. This is only about 5% of the waste management division’s revenue. And it is just one customer. There isn’t enough info given by the company to evaluate this captive landfill business in any depth. The other thing Avalon owns is a “waste brokerage” business. This is big. Revenue from this is like $45 million. It seems to be about 60% recurring revenue and 40% project revenue (in many years). This waste brokerage business is the source of Avalon’s earnings. In fact, earnings from the waste brokerage business often exceeds reported earnings of the entire company. This is due to losses in the other segments (salt-water injection wells and the “golf” business). Most of the company’s assets are in something it calls the “golf” business. This is potentially a bit of a misnomer. It should just be called “country club”. The company owns 3 golf courses and leases a fourth (Avalon has the right to exercise extensions on that leased property to keep it through 2053). The 4 golf courses are located in Northeastern Ohio and Pennsylvania. The towns they are in are: Warren, OH; Vienna, OH; Sharon, PA; and New Castle, PA. The sites at Warren and New Castle are being renovated right now. New Castle is a new acquisition and very run down. Warren is the company’s oldest location – it’s where the corporate HQ, the hotel, etc. are – and the renovations are to make the resort hotel even more impressive. To the extent Avalon is an asset play …

Read more