PICO Holdings (PICO)

[benhacker]

 

I'm not sure if this has ever been brought up here before, but here is a quick rundown:

1) Little conglomerate that does some a) Water Production b) RE Development and c) Insurance Runoff / Investing

2) They own about a 1m acres in Nevada and have a few operations in Colorado/California as well

3) Runoff operations have only ~10-13m in reserves left

4) Holding company appears liquid with $30m in bonds, $120m in stocks (global Graham style names), $96m in cash.

 

Key value here is in the real estate / water rights.  RE + Water assets are listed at $271m... I have not done any work here yet, but management seems to have a decent paper trail (and certainly talks the talk...) when it comes to book value growth.  Valuation right now is just over book, but throwing some numbers around on land values it would be easy to say *real* book value is maybe 50-75% higher (I'm not saying this, but I see the appeal).  Also, as a wild card they just capitalized a sub to go buy distressed developments in middle Cali… should be ripe pickings for those with patience.

 

Some questions and several commens to put out there (and feel free to chime in anybody):

 

1) Does anyone know of any good (even dated) research report on this name?

2) I’ve attached the NAIC investment filing for the larger of their two runoff companies.  Holdings aren’t crazy.  They own a bunch of liquid stuff, some HRPT bonds, some Jeffries bonds, and then some small cap stuff hyper illiquide… anyone know their history here on the investment side?

3) Interestingly enough, they do have a small ($2m) investment in Boswell which is a illiquid OTC water play as well (I’ve done no work there)

4) They own a reasonable chunk of CTO (big enough that they actually have filed with the SEC on it)

5) They own some LAACZ which looks intriguing upon a 15 second inspection (Public storage company with a fitness center and hotel subsidiary (LA))

 

Anyway, some interesting ideas in there, and I like the look of the company on the surface.   Salaries are higher than I like for a few guys, but intriguing idea to me.

Can anyone add anything here, any thoughts on the possible value of the water/land assets?

 

http://www.picoholdings.com/core-businesses.html

http://www.unioncommunityllc.com/

http://www.nlrc.com/

 

Anybody follow this or have anything to add?  No position for me yet, just started digging...

[louisdog]

Ben-

 

I would recommend checking out http://stocksbelowncav.blogspot.com (Since he doesn't tag his posts you can use this link http://tinyurl.com/muftpjto see a google search result for his site/PICO.)  He has written about both Boswell and PICO a decent amount (more on PICO).  I would also recommend reading the past chairmen's letters on their website, they talk about some of the investment successes that they have had and their views on water.

 

Hope that helps.

 

I would love to hear your opinion.  I'm long.

 

 

[benhacker]

Apologies for the slightly incoherent original post and accompanying typos... >:(

 

Appreciate the links as well as a private email on the company.  My interest here is gaining steam, and my basic focus is pretty simple:

 

1) Decent capital allocators are rare, and PICO on the surface seems like it may fit the bill.  Buying great capital allocators at 60% of fair value seems to be a good path to wealth, so I'd like to add PICO to my watch list if they are legit.

2) Diversification - their assets are reasonably non-correlated with what I own on an economic basis.  This is attractive to me.

3) Investment ideas - Any *true* Ben Graham style investor with talent is interesting to follow because you never know when you'll find some gem of a bank trading for 0.25x book or something rediculous.

 

Those are my interests in this name... I'll try to do some more work and report back here.  Water does seem like a potentially nice utility type income stream, and having a capital allocation team with a difference focus than my other investments will be good.

 

Thanks,

 

Ben

[bargainman]

If you look at this link:

http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=6315174&format=PDF

 

and get to page 38 there's some interesting reading.  I tried to copy it here but the PDF is protected.  Basically they manage the insurance investments Graham and Dodd style, and claim that since 2000 to 2008 while the Wilshire 5000 has dropped 25%, their portfolio has gone up 44%, while the equity portfolio section going up by 109%.  If you don't count 2008, the total return was 75% vs 244% for their equities.  So they are at least reasonable value investors, even if 2008 smacked them up.

 

[bookie71]

It's been awhile sine I looked at one, but the Vickers report showed quite a bit of insider buying.

[Mungerville]

How much is quite a bit?

[Packer16]

This is an interesting company.  The big upside is in the water rights and real estate.  Most of it is in Nevada  The model for the rights is to get the rights, build infrastructure to transport/distribute the water and provide the rights to developers who have to purchase them to build houses.  The model is similar to Colorado.  There is a firm Pure Cycle (PCYO) that is doing a similar type of work in Colorado.  I have some transaction data from some water rights work I did last year.  I can provide an old analyst report & some rights data tommorow.

 

Packer

[OracleofCarolina]

I am concerned about the long-term value of the water rights

In that access to water is a political issue and PICO

may be forced to sell at an unfavorable price. And according to the annual letter, their equity positions lost

41% last year.

 

I like the concept of what PICO is doing but

not in love with it yet. There was a NYT article recently

on the water issue in Las Vegas and PICO was mentioned.

I have not found the link yet, but if i recollect; there

were lots of issues and bickering

[Packer16]

What PICO and PCYO are doing is paying for the development of the water infrastructure in exchange for these rights that certain states (NV and CO) require for development.  This is a cheap way for states to provide water infrastructure and I think it will be needed more as more states run into fiscal problems.

 

Packer

 

[benhacker]

I wanted to follow up here.  My final takeaways after looking into this was mixed.

 

1) Salaries are pretty wild for my tastes... really makes me want to walk away.

2) After we started this thread, PICO chose to dilute shareholders via a secondary of 20% of the common @ $27.  While there may certainly be great ideas for this new money, this was a big turn off.

3) Much of the value in the Vidler subsidiary is really tied to Nevada (probably half the value of the company) and I just don't see the long term potential.  As our country moves toward sustainability, I just don't see the population growth increasing in the desert.

 

I think there is a real investment thesis here, and if I was forced I would definitely be long.  I got my hands on a fairly nice report from Think Equity that values up all the parts of PICO and comes to a valuation of ~$47 ($80m write up in UCP, and >$350m write up for Vidler).  Of course, this report was made 2 months before the massive secondary was pushed through... underwritten by Think Equity.

 

I like the companies moves in the portfolio, but we have covered the dual taxation layer ad nauseum with the likes of FFH and others, and I'm not sure I'd put out hope that PICO guys can overcome the tax friction long term.

 

Overall, the positives I originally liked seem to be pretty solid.  I think I could get comfortable saying this thing probably has hidden value in the CA RE and Water division of maybe ~$200m, but that brings adj. book to ~$660m or $28.50/share.  That's probably conservative, and I'd probably be looking to scrape up a few shares under $22, but I'm not jazzed at these prices.

 

Interesting company, but I'm not interested enough at today's prices.  Could be a home run though, but a lot of ifs for me.

 

Ben

[Guest kawikaho]

I've looked at PICO 3-4 years ago when a friend of mine and I were looking for water infrastructure companies.  On further inspection, I realized it's tough, for me anyways, to figure out when water shortages will make a drastic impact on civilization.  Besides, drinkable water can be created by various cheap means.  So I tossed the idea away.  It's not like oil, where you can't actually manufacture it cheaply.  Water can be piped in from lots of places, and mother nature does a good, and free, job of reproducing it.

[locutusoftexas]

I looked at this in some detail around two years ago.  As much as I liked the sound of it and the discussion value investing by management, I decided that these guys were not oriented toward the shareholders. In the end, I decided that I could not trust them to treat the shareholders as part owners or even to treat them as they would their lenders. My take was that it could be a great investment but that this outcome would occur in spite of management. So I had to pass.

 

Best wishes,

Tex

[Guest Dazel]

 

http://finance.yahoo.com/news/ucp-looking-raise-125m-ipo-165521970.html

 

 

This ipo should go soon....I would think...interesting the spin off could be worth as much as the current market cap. I like the water assets.

 

Dazel.

[Guest Dazel]

http://www.reuters.com/article/2013/07/08/us-ucpinc-ipo-idUSBRE9670FY20130708?feedType=RSS&feedName=innovationNews&rpc=43

 

Pico looks like at 50 cent dollar based on their assets...real-estate, water and real-estate, agriculture and software.

 

Disclosure.

I own it.

 

Dazel.

[fareastwarriors]

Dazel,

 

Can explain further your thoughts on PICO?

 

[Guest Dazel]

 

 

Sorry I do not have more time to go into detail.

 

Real-estate division UCP is going public so you will have a liquid asset + water assets that also hold significant real-estate ( there is significant upside here...look at the last deal they signed + agriculture division canola processing plant ( the market has not realized that crushing margins have quadrupled in the last 2 months) this division has been the drag on the stock and now it will be a cash cow...they have some cash (sold their insurance division this year and a software company as well.

 

50 cents dollar...it is worth around $40 but the market has forgotten about it.

 

Dazel.

 

[LC]

Dazel, are you valuing PICO on a sum of the part basis?

 

Selling their 42% stake of UCP at 15/share values all of UCP at $275m....more than half of PICOs current market cap and more than twice of their carrying value of UCP.

 

Additionally their canola plant has a 5 year sales agreement with Land o Lakes to sell their canola at market price. Market price for canola oil and meal is at all time highs (source: http://www.canolacouncil.org/markets-stats/statistics/current-canola-oil,-meal,-and-seed-prices) although as you mention actual margins were squeezed recently.

 

I haven't even begun to look at their water business and I'm not sure at what level their canola plant is operating at, although PICO is thinking about opening up another plant.

 

On a quick glance this evening, provided the UCP IPO goes through, I'm thinking PICO is probably worth more than 500m...

[Guest Dazel]

Lots in California are going up 2% a month...UCP should trade at a market cap of about $400m. We have done our homework on the water assets which have been forgotten. It is very tough to get comps as they are a unique asset and as I said they own significant real-estate in the Vidler water company...the water deals are not regular and usually fairly large deals that take a longtime but if look at he latest deal signed you can see what the future of the assets could be worth. So yes sum of the parts for now but the agri division will be cash flowing well at recent margins. The was a worry that Pico would have to burn it's cash on the Agri division because of compressed margins the market has not priced in the rebound in margins which allows them time to monetize the other assets. I see the UCP ipo as the catalyst for the market to look at the other assets. They ought UCP in 2008-2011 buying subdivision loans and bank loans when the world was on fire. Tremendous guts and brains as we all know that we should have bought U.S real estate. This is a chance to go back and buy it at Pico's prices. The water assets are tied to real-estate prices.

 

 

[maybe4less]

Dazel,

 

Do you have a link to what crush margins are currently at? ICE appears to only quote it using soybean oil and soybean meal prices. I'm having trouble finding what actual canola crush margins are, let alone up-to-date canola oil and canola meal prices.

 

Thanks

[Guest Dazel]

https://www.theice.com/marketdata/reports/icefuturescanada/ReportContent.shtml?canolaCrushMarginReport=

 

The margin calculation is explained at the bottom. I have checked using the western producer website and other articles....it appears that the ice calculation is pretty close to what the actual margin is. It is only a bench mark however, and hedges, what the Canola contract purchased was etc will play into it. Pico is not hedged and do not have many forward contracts as per their quarterly report. So the most recent contracts should likely be used in estimating their margin. As you can see they were at$20 a ton in April and today they are at $92 a ton.

 

I think that it was this division that has been the drag on the stock since it is a highly leveraged asset that was not making money. Pico added money into it because of this...however, they should be making good cash-flow now. Most of the loans are non recourse to Pico. The brand new crushing plant could also be sold at the right price. I have experience here as I owned Viterra when it was bought out by Glencore.

 

 

 

 

 

[Guest Dazel]

 

 

http://www.producer.com/daily/record-canada-canola-crop-seen-biggest-wheat-output-in-17-years/

 

 

This is excellent news for Pico's Agri business because Canola is their biggest cost...prices are falling on the record crop in Canada. They are strategically built close to the Canadian border which makes easy access for Canadian Canola. Their margins should expand greatly in this environment.

 

Our old Viterra holding will do very well here...Glencore got a deal.

 

 

[Guest Dazel]

http://finance.yahoo.com/news/us-homebuilder-confidence-sales-outlook-140143172.html

 

 

[maybe4less]

 

Selling their 42% stake of UCP at 15/share values all of UCP at $275m....more than half of PICOs current market cap and more than twice of their carrying value of UCP.

 

Note that the Pico is not getting the cash from the IPO; UCP is keeping the majority of it.

 

When I account for the cash,  I calculate that the IPO price is really ~1.30x UCP's book value, not >2.0x.

[maybe4less]

What are you getting for the earnings of the canola plant?

 

If I annualize the expenses from Q1, I get $34.7M. But even at $90 crush margins, processing 365,000 tons of canola seed per year only gets you $32.85M in gross margin. Maybe there is a mistake in my calculations, but it seems unbelievable that they wouldn't be making money at such high crush margins.

 

Are there large one-time expenses in Q1? I don't see anything obvious in the 10-q or press release to suggest that is the case.

 

 

[Guest Dazel]

 

On the expense side is depreciation in your calculation? Annualized that is $10m non cash expense.

 

The key is in their cost of Canola purchased vs. What they get in sales...so the margin is tough to calculate until we get their numbers of what they paid and what the got back.

 

Ie the cost of Canola has dropped because the crops look to be good this year...that is many multiples of the expenses of the plant and distribution etc. And the "key" to their profitability.

 

we will get more color on August 7....however, we know that if you use the market margin's...then their cash margin should have improved significantly while operating expenses will have remained constant because they are producing the same amount of canola oil.they can also ramp up production to 1500 tons a day with environmental improvement. They will do this when they have confirmed the record crop in Canada.

 

So the moving parts are the sales vs. Canola costs...and we know they are 4 times better in the market then quarter one so we will see how they did...but more importantly if the crops remain where they are projected we will be an extended period of greatly improved margin for sometime...

 

The last two crop seasons have been bad...but it looks like 2014 crop year that starts in August will by excellent...This is very fortunate for Pico.