California Water Rights

I have found a few more data points to add to my list of water rights sales in California and Arizona.

Some snippets:

1) “This year the market is unbelievable,” said Thomas Greci, the general manager of the Madera Irrigation District, which recently made nearly $7 million from selling about 3,200 acre-feet. “And this is a way to pay our bills.”

2) “Now everyone’s mad at me saying I increased the price of water. I didn’t do it, the weather did it,” said Etchechury, who manages the Buena Vista Water Storage District, which netted about $13.5 million from the auction of 12,000 acre-feet of water.

Disclosure: No position.

Investing at Any Price

“There are no bad bonds, only bad prices.”  So says the old and odd adage that gets kicked around trading floors from time to time.

Of course, once you start there, the adage subtly twists upon itself, becoming “there are no bad assets, only bad prices.”  Or perhaps worse, “there are no bad stocks, only bad prices.”

The truth that lurks somewhere therein is uncontroversial.  For any asset worth X (i.e., its “intrinsic value”), investment returns increase as the discount from X increases.  Perhaps more interestingly, the increase is not linear.

However, our seemingly innocuous adage seems to hide the way in which it breeds and feeds confidence and security.  The inner monologue quickly follows: “as long as I buy a security at a big enough discount to X, I’ll make money.”  Subtly the mind fixates on the discount, and comfortably takes the X as a given.

Given the prevalence of the adage, and the investment justifications it seems to elide, I was ever so grateful to stumble upon Robert Vinall’s May presentation, entitled “Mistakes of Omission.” (Hat Tip to ValueInvestingWorld)

It would be hard to overstate the profound elegance of the presentation, but even the barbarian would appreciate the simplicity of slide 14.

To me, it seems to suggest that there is no price too low for some equities, and conversely, almost no price too high for others.  The crux that differentiates the two–the quality of the underlying business.

Thoughts?

Activism Simplest

Joseph Stilwell’s proxy campaign continues with Harvard Illinois Bancorp ($HARI), and May 22nd is the date set for the annual meeting.

As well-meaning as my previous commentary was, it now appears premature–for Mr. Stilwell’s latest letter to shareholders takes the written word down to three sentences, from seven.

Oh, but note, this time a picture is included.  And you know what a picture is worth…

April 7, 2014

Dear Fellow Shareholder,

Below is a picture taken at last year’s annual shareholder meeting of our Bank’s Chairman.  None of the other board members bothered to wake him up.

If you, like me, believe it’s time to bring a fresh influence to our Bank’s board of directors, please vote the GREEN proxy card for Mark Saladin.

Sincerely, Joseph Stilwell 

So for today, I will dub this–“activism simplest.”  Hopefully this moniker lasts longer than my last attempt.

Disclosure: No position.

Activism Made Simple

Activist investors deploy a wide range of public and non-public forms of persuasion to compel change in their targets.  Insofar as they take to the airwaves, their message–for better or worse–enters into that domain the ancients called “rhetoric.”  And were we to visit them awhile, they would tell us that there are at least three means of persuasion: via 1) the speaker’s credibility, 2) the emotions of the audience, or 3) the grip of the argument itself. (Stanford EoP)

Some activists, perhaps those most enamored with their rhetorical flair (or rather, more generously, those gifted to entertain), take the complex route, weaving an elegant and elaborate discourse of personal anecdotes and earnest appeals.  Yet, there is another way.

Stunningly simple, a written letter, seven sentences.

“Dear Fellow Shareholder,

HARI has publicly reported six full years of financial information. In each of the three years before its IPO, it reported a net loss. Since the IPO, our Company has produced subpar returns in each of the years for which financial results have been reported.[1] In every year for which information has been publicly reported except 2012, the CEO’s pay was greater than the earnings of the Bank.[2]

It is our belief that subpar returns are symptomatic of a poorly-run company with a board that does not hold its management team accountable. We believe it is now time to find a better-run community bank to buy HARI in an effort to maximize shareholder value. Our nominee, Mark Saladin, a partner of Zanck, Coen, Wright & Saladin, P.C., understands management responsibilities first-hand and will utilize his experience to push HARI’s Board in this direction.

Sincerely, Joseph Stilwell”   [Preliminary Proxy]

Simple, yes–but rather potent.

Disclosure: No position

Seanergy’s Unrealized

Q: What do you call a $SHIP with no ships? (PR)seanergy maritime

A: A company “…now focused on pursuing growth through accretive transactions.”

Since the Seanergy saga made an appearance here in the past (1/21/10, 6/7/10), I suppose I feel compelled to mark its ending.

Good night, and good luck.

Disclosure: No position.

Norfolk Southern Capex

NorfolkLogoI spent some time today with Norfolk Southern’s recently filed 2013 10-k.  With a $28 billion market cap and 6.7% trailing after-tax earnings yield, it bears a striking resemblance to that former target of Mr. Buffett’s “elephant gun“.

Now suitably reloaded, it doesn’t require much imagination to see how elegantly the Norfolk lines would fit with Burlington’s.

Norfolktrack

Of course, one should not let the imagination linger too long, for regulators have effectively preempted such a union, noting in 2001, that any future merger between Class 1 railroads would “bear a heavier burden to show that a major rail combination is consistent with the public interest.” (546)   Most simply, the STB merger policy “disfavors mergers that reduce competitive options for shippers absent substantial overriding public benefits.” (550)

So let us assume then that Mr. Buffett’s elephant gun is safely stowed.  The question remains–should we take aim, particularly since Mr. Buffett might be similarly inclined, but cannot?  After all, imitating or “cloning” has served many investors well.

Norfolk’s financial performance over the last three years has been strikingly consistent–revenue ton miles between $186 and $194 billion, freight train miles between 74.8 and 76.3 million, and revenue per ton mile between $0.0581 and $0.0595. (K5)  Those loads were good enough to produce $3.1-3.2 billion in net cash from operating activities in each of the last three years. (K46)

And where did the money go?  2011 saw $2.16 billion in capex, $576 million in dividends, and $2.05 billion spent repurchasing stock (extra debt was raised that year to fund the excess).  2012 saw $2.24B in capex, $624MM in dividends, and $1.29B spent on stock (again, extra debt was raised).  2013 saw $1.97 billion in capex, $637MM in dividends, and $627MM spent on stock.

So I guess that you can see the theme.  Norfolk’s business gushes cash at a remarkably consistent rate, but every year, nearly two-thirds of that cash is just as consistently reinvested in capex (i.e., track, railroad ties, locomotives, freight cars, etc.).  In itself, that fact is not necessarily bad, for reinvested cash may create opportunities for growth and productivity improvements in the future.  However, in the case of railroads (or at least, Norfolk), it just seems that desired future never arrives.

To be fair, cash flow from operations has grown at Norfolk over the last decade.  In 2004, cash flow from operations tallied $1.66 billion.  Recall that 2013 saw cash flow from operations of $3.08 billion.  So growth of $1.4B.  But to get there, Norfolk had to invest $13.32 billion over the last nine years, or roughly $1.5B every year.  So there was a return on all that capex, and not an indecent one.  After all, everyone knows that railroads are capital-intensive businesses, and a regulated “utility” of sorts.

Yet, it is a bit surprising to see free cash flow at Norfolk in 2005 at $1.08 billion, and to see it at $1.11B in 2013.  After all, it almost sounds like a boast when I see Mr. Buffett write: “We are not, however, resting on our laurels: [Burlington Northern] will spend about $4 billion on the railroad in 2013, roughly double its depreciation charge and more than any railroad has spent in a single year.” (2012 Letter to Shareholders)

Perhaps tomorrow will shine brighter on the railroads than today.  Then at last, the seeds of yesterday’s capex will fully blossom.  Until then, count me as too impatient or unimaginative, or worse.

Disclosure: I own shares of Berkshire Hathaway.

Alaska Airlines and Rewards

Alaska Air Group filed their 2013 10-k yesterday, and even that fickle Mr. Market seems impressed.

2013 saw Alaska Airlines expanding rapidly into new markets, acquiring nine new aircraft (“new 737-900ER’s with the Boeing Sky Interior”), buying back $159 million in stock, increasing their social engagement (“We saw healthy increases in both of our primary social communities with Facebook growing by 45.9% and Twitter by 43.2%”), and enhancing their culinary flair [ok, that last one is a project for 2014].

From my seat, I was struck by the huge growth in per-share GAAP earnings (from $4.40 per diluted share in 2012, to $7.16 per share), as well as the large proportion of those gains attributable to a “one-time, non-cash Special mileage plan revenue item.”  As they advise:

“Our consolidated net income for 2013 was $508 million, or $7.16 per diluted share, compared to net income of $316 million, or $4.40 per diluted share, in 2012. Significant items impacting the comparability between the periods are as follows:

• Both periods include adjustments to reflect the timing of net unrealized mark-to-market gains or losses related to our fuel hedge positions… 

• In 2013, we recognized a one-time, non-cash Special mileage plan revenue item of $192 million ($120 million after tax, or $1.70 per diluted share) that resulted from the application of new accounting rules associated with the modified Bank of America Affinity Card Agreement, and the effect of an increase in the estimate of the number of frequent flier miles expected to expire unused.” (p. 29)

Of course, I mean not to suggest anything nefarious here, and their disclosures are quite consistent and explicit.

However, the gears of the mind begin to turn, for it reveals that the most impactful thing an enterprising airline executive could do in 2014 to boost GAAP earnings would be to modify their reward program.  In fact, if one were clever, such modifications–suitably tempered–could be a consistent, recurring, valuable treasure trove.  You could take $192m today, though would it not be more useful to take 40m each year over the next 5?

Disclosure: No position.