JetBlue: A Stock All Value Investors Should Consider

All value investors should pause for a moment and consider an investment in the airline industry. JetBlue Airways (JBLU) has done an outstanding job of building a niche franchise in a miserable industry. Very few investors seem to understand the unique franchise that JBLU has built. Selling for less than a pretty clean book value, and with a balance sheet that is better than it appears, I believe JBLU is a stock that value investors should own.

After a brief review of my sanity, I will explain some of JBLU’s unique characteristics, review its current valuation, and discuss a few miscellaneous topics.

THE WORLD’S WORST INDUSTRY

“It just might be a lunatic you’re looking for” – Billy Joel

Let’s answer the most important question first. Would any sane person invest in the airline industry?

-the big airlines have lost roughly $55 billion in the last ten years

-all the big airlines (except for Southwest Air (LUV)) have gone through bankruptcy

-Warren Buffett said, “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” – Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.

As a generalist value analyst for the last 30 years I must admit I seldom wasted a minute looking at this industry. Even though many of the stocks were often statistically very cheap, other than an occasional glance at LUV, I always had better things to do.

What changed? In a desperate search for new ideas, I reviewed the portfolios of professional investors who I have great respect for. One whom I particularly admire is Donald Smith & Co. This firm manages over $3 billion in institutional money using a strict discipline of investing in only the bottom 10% of price/book value stocks. Looking at their portfolio, I think they really understand this unique universe. Smith & Co. has owned JBLU since 2008, and they are now the largest shareholder with just over 10%.

It is also worth noting that the guys at PRIMECAP Management own 8% of JBLU and 11% of LUV. These guys are too growth oriented for me; they own things like Google and Amgen. Even the well respected John Hussman started a small position in the last quarter.

Have these apparently smart investors all gone mad? When I spent some time looking at JBLU, I must admit I was surprised by what I found.

The complete article can be found here on Seeking Alpha.

Please contact us for a copy of our report.

WPX Energy Trades Below Tangible Book Value, Smart Investors Are Buying

A few months ago, we looked at the merits of Rosetta Stone (RST), the investment idea presented by David Nierenberg of D3 funds at the Value Investor Congress in Las Vegas. In this article, we are going to examine, WPX Energy (WPX). The idea was presented by Guy Gottfried of Rational Investment Group. The presentation can be found here. Readers will have to scroll down the page to find it. What intrigued us about WPX initially was that at the time it was presented it was trading for 66% of TANGIBLE BOOK value. While that might be expected if the company was a bank or insurance company or had a huge debt maturity looming, it is rare for an E&P company to trade at less than even 1.5X book.

Using reasonable estimates for the value of the company’s oil and gas reserves, WPX appears to be even more undervalued. In this article, we will expand on Mr. Gottfried’s analysis to show that WPX appears to have considerable upside with a reasonable margin of safety for investors. We  also like it when other value investors whom we respect come to similar conclusions on valuations and investment thesis. In addition to reading company annual reports, we read the reports and commentaries of mutual fund companies such as FPA, Third Avenue Value, GMO and Aegis. Many times these funds go into detail on an idea and the methodology used to analyze a company. In the first quarter Aegis Fund quarterly commentary, the portfolio manager Scott Barbee makes his case for WPX in the following excerpt. Mr. Barbee also expands on the thesis a bit more in the latest Value Investor Insight publication.

(click to enlarge)

Source: Aegis Fund Q1 Shareholder Letter.

Here is a summary table of his valuation metrics. Please do not let the precision of the numbers give you a false sense of certainty in them.

Aegis Value Fund Valuation Price per Unit Value ($M)
Nat Gas Proved Reserves (TCF) 4.1 $1.25 $5,130
Bakken Oil (MBBL) 68 $20.00 $1,360
NGLs (MBBL) 132 $6 $792
Undeveloped Bakken/Marcellus $450
Total $7,732
Net Debt $1,500
NAV $6,232
NAV per share $31.16
Current Price $19.00
Upside 64%

 

This was the starting point for our analysis. Our entire report can be found on Seeking Alpha, here. Please email us if you want a copy of the report.

 

Dick’s Sporting Goods: The Catalysts are Here – Take a Position before Analyst Day

We are posting a report by Shaun Currie, a former co-worker. Shaun’s work has been featured before and believe he is a good example of how a young analyst can improve his skills over time with a modest amount of mentoring. We encourage other young analysts to read his reports and follow his progress. He has started a research firm that you can find with this link.  Young investors should develop their own process and analytical style by exposing themselves to a multitude of investors and deciding what fits their personality and mental make up. Value investing takes a certain type of personality and mental outlook and isn’t something that everyone can succeed at. The wide variance in styles of successful value investors (Schloss, Gabelli, Tweedy Browne, Buffett, Whitman, etc.) shows that there is a place for many types of personalities.  At Investing 501 we try to encourage individuals to think for themselves, but try to focus that effort with examples and concepts we have found personally helpful.

Dick’s Sporting Goods: The Catalysts are Here – Take a Position before Analyst Day

Dick’s Sporting Goods recently presented at the Goldman Sachs (GS) retail conference, and the stock responded quite positively (up 10% since the presentation). But, with an investor day only a week away, there are plenty of catalysts to take the stock 20% higher. Catalysts Include:

  1. The new Field and Stream concept
  2. 2014 guidance is possible at the analyst day, and the company has a low bar to beat
  3. Increased guidance on store expansion makes the original 900 store goal more feasible
  4. The company is testing smaller store concepts, which has been something investors have been hoping for
  5. The company has a plan in place to reach double-digit margins
  6. The company is growing their e-commence and omni-channel platform, while increasing margins in the business at the same time
  7. The company is investing in more employees, which investors have been hoping for
  8. The company is taking share through their store-inside-a-store concepts with the major apparel companies

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Crimson Wine Group: You can buy the wine for a 20% discount, but not the stock.

In the past few years, investors have come to understand the investment opportunities that corporate spin-offs can provide. The successful five-year track record of the Guggenheim Spin-Off ETF (CSD) has highlighted this opportunity. This article is going to examine the investment merits of Crimson Wine Group (CWGL), which was spun out of Leucadia National (LUK) earlier this year at around $7.30 per share. The company is not followed by Wall Street and keeps its conversations with investors to a minimum. Company does not issue earnings press releases, doesn’t hold conference call and doesn’t give guidance or much detail about the operations of its business. Most of the information about the company has to be gleaned from SEC filings and outside sources. Information voids such as this can lead to opportunity for diligent investors.

Before going any further we think it is important to repeat what Ian Cummings wrote about the wine industry in a past LUK annual report:

“We repeat our mantra on the wine industry: Even in good times, it is difficult to make estate wineries profitable, though as real estate investments they are good inflation hedges. The entire industry suffers from oversupply and intense competition from home and abroad. The sheer number of brands, combined with owners having to sell out last year’s vintage at (or below) cost, is a constant anchor on price. Estate wineries have high fixed costs and require large marketing dollars, making volume the key profit driver. We need more volume to make our goal of consistent, yearly cash flows a reality.”

There seem to be two basic investment angles that investors are considering when evaluating CWGL. The first is that the current book value of the assets on the balance sheet understates their current value and the second is the potential for the company to expand its current operations and to roll-up wineries to boost case sales, leverage costs and produce free cash flow. Even though there is much to like about CWGL, we find it hard to make a case that it offers a compelling valuation with a sufficient margin of safety at its current valuation.

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Central Garden and Pet: Every Dog Has It’s Day

With the markets at all-time highs, it is becoming increasingly difficult to find many potential investments while perusing the new lows list. Most companies on the list are either mortgage REITS or have some connection to mining raw materials. One of the few companies on the list that doesn’t fall into that category is Central Garden and Pet.

The clever descriptions of the company’s current state of affairs, (like the one in our title) are endless. As we have said many times before, most stocks that show up on value screens are cheap for a reason, or perhaps many reasons. Central Garden and Pet certainly fits that category. We wrote an analysis of some of the things that may go right in the future and posted it on Seeking Alpha. The article can be found here for the next 30 days.

What we find interesting is that the typical response we get from readers of our analysis is that it is interesting, is “cheap”, but there are no signs that any of our analysis is coming true or will come true.  Their conclusion is usually, “I want to wait for signs of improvement before I take any action.” It has been our experience that investors who wait for signs of improvement end up paying a much higher valuation for the company and therefore have a lower expected return than investors who took a “leap of faith” and bought at a lower valuation, but with much less clarity. Warren Buffett is often quoted as saying “investors pay a high price for certainty.” The implied message being that investors will get better returns by paying a lower price for uncertainty. Yet when those situations seem to present themselves, few investors actually put their money where Warren’s mouth is.

Here is the basic premise:

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Texas Pacific Land – The Ultimate Buy And Hold Stock

We continue to publish articles on Seeking Alpha to build awareness to our website. We have been fortunate that SA has recognized the quality of our work and has made this article part of their subscription service Seeking Alpha Pro. Unfortunately, the article will go behind their subscription wall in 30 days. But for now here is a summary of our article and a link to it.

Texas Pacific Land – The Ultimate Buy And Hold Stock

Warren Buffett has been quoted as saying his favorite holding period for owning a stock is “forever.” In this article we are going to analyze Texas Pacific Land (TPL), a company that an investor just might want to hold “forever.” In what could be called the “ultimate stock buyback program,” TPL is using multiple income streams to eventually repurchase all of its outstanding shares. Texas Pacific Land Trust is a passively managed liquidating trust that was established in 1888 as the result of the bankruptcy of Texas & Pacific Railway. It was granted over five million acres of land in Texas to build a railroad from Marshall, Texas to San Diego, CA. Ever since, the company has been slowly liquidating its land holdings and buying back the sub-shares of the Trust. For a more detailed summary of the history of TPL, readers can go here

The stock has increased 10 fold in the last 10 years and is not a typical type of investment we would discuss. But the uniqueness of the business model, the hidden value of the land on the books and the incremental benefit shareholders receive from higher oil and gas production and prices make it worth writing about. The company is currently buying back around 3-4% of its shares each year and under our base case scenario it appears as though the company can sustain a 2% buyback rate. As some point things will change and stocks will sell off. Many reasons will be given for the proximate cause and most will sound plausible and may actually be true. TPL stock may decline in value as well. Oil prices may plunge on China or European disaster fears or some other reason. But investors who stay focused on the long term strategy of TPL and view price declines as an opportunity, not a risk, should enjoy the benefits of buying low and holding “forever,” thus eventually being rewarded for their patience.

Live Nation- Everybody Wants to Rule the World

Date: May 2, 2013 Price: $12.50 Mkt. Cap.: $2.4 billion

An investment in Live Nation (LYV) provides investors with an opportunity to buy into a unique set of assets that provides an ecosystem to maximize that amount of revenue and profits available in the live entertainment industry. Unlike most of our typical investment reports which focus on free cash flow utilization, net asset value investing, mean reversion of margins or special situations, this report will look at the investment merits of a company that generates little free cash flow at the moment and is somewhat of a growth investment if company management is successful in achieving its objectives. Their dominant size is a competitive advantage and the presence of a significant, value creating long-term investor (Liberty Media)  provides additional margin of safety from a liquidity standpoint. The strategy is not without risks and we will discuss those as well.. What follows is our analysis of the merits of Live Nation’s three year plan to grow its Adjusted Operating Income (AOI) by 30-35%.

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