Special Situation Investing

Monday, October 30, 2006

Altria (MO) Spinoff of Kraft Moving Along

Conglomerate, Altria (MO), most famous for it's cigarette business, has announced that it is closer to finalizing it's spinoff of Kraft foods. From the article:

Earlier, the New York company announced it plans to finalize its decision, including the precise timing, of its distribution of its 88.6% stake in Kraft at its Jan. 31 board meeting. That announcement came in conjunction with the release of the company's third-quarter results.

Altria faces Massive law suits over it's tobacco business. This has caused the decision to be delayed thus far due to concerns over litigators rights to MO's assets. Of course, the lawsuits should have no bearing on Kraft once separated.

Traditionally you would expect Kraft to be a good spinoff (generating short-term institutional selling and a good buying opportunity) as it is a markedly different business from it's parent company. However, I believe you will see the opposite in this case as MO's lawsuits are likely holding the valuation of the Kraft business down.

One final comment, MO has been cited as 1 of the best-performing long-term stocks ever (over a 46 year time span). This is just another example of how vice can sometimes pay, and one of the reasons I am still holding my Take Two Interactive. If you are interested in the reference, before you click on the link, I warn you that it goes to the Motley Fool. I couldn't find the stat anywhere else. Link here.

Wednesday, October 25, 2006

BancInsurance Corporation (BCIS) - Pure Value Play

For a value investor, now is a sad and depressing time. Most companies are at or near 52-week highs and you need to look at next years earnings to get a reasonable PE. Even companies which are in the dog-house still look ugly when viewed over multi-year levels. However, I believe I may have found something worthwhile in the insurance industry.

BancInsurance Corporation (BCIS) is a specialty insurance company, primarily in the property/casualty field. With a market cap of $30 mil it is not for the bigger fish out there. I like that though, I can't help thinking it is keeping the price down.

What is interesting about this company is that it is selling for just under tangible book value (~$32 million) while still earning substantial profit. The valuation is due to a messy expansion into immgration and bail bond reinsurance. It ended poorly in 2004 when the company discontinued the business. The combined ratio got nailed 129% (this means the cost of providing the insurance was 29% higher than the premiums paid), audtiors quit, financial reports were delayed and the company was delisted from the NASDAQ. Subequently investors fled. There is still some overhang from these events as legal proceedings continue. Essentially, 1 company is attempting to recover losses related to the reinsurance from BCIS, while BCIS is attempting to recover losses from 2 other companies. I am not a legal expert but the size & scale of the reinsuracne operations do not seem adequate for the current legal issues to warrant the large-scale selloff that has occurred in the stock.

In spite of these events, the company was profitable in 2005 and quite profitable in 2006. Insurance produces fairly lumpy results due to changes in investment gains but the company will probably come in with a P/E of 5-6 in 2006.

I have to give credit where it's due, this idea was sparked by another investing block, Rational Angle. I recommend if you are still interested in the stock that you check out Rational Angle's post here.


The key question is where can the company go and how far? Assuming no more disasters it will probably trend slowly higher. If management writes bad insurance, of course the stock will get hit but you are already buying at book value which will provide some support. Insurance companies don't command the huge book value premiums of other businesses so don't expect any miracles.

If the company can grow modestly (high single-digits), and appreciate to 1.5 times book (slightly below peers), you would be looking at 70-80% over the next 2-3 years. On top of that there is always the chance of relisting on a major exchange, completion of legal proceedings, acquisitions, buyout of the company by another firm, or just enhanced organic growth. Don't fool yourself, it is not a perfect play but I view the risk/reward at this price, as excellent.

Finally, as always, do your own research. This blog, all blogs, in fact all financial analysis, should be used to generate ideas not used as your final source of knowledge on a stock.


I own shares in BCIS.

Tuesday, October 17, 2006

Wendy's (WEN) Large-Scale Share Repurchase Program

Hamburger retailer Wendy's (WED) caught my eye today when they announced that they will attempt to repurchase ~ 19% of outstanding shares in a modified Dutch auction tender. Wendy's closed trading at $34.57, whereas the Dutch auction will occur in the $33-$36 range. I do have to wonder what kind of message their management is trying to send by setting the repurchase range largely below the current price. Perhaps there are some large institutional holders looking to bail? However, ultimately I like the Dutch auction program as it tends to be an equitable and relatively efficient (e.g. cheap) way for the company to distribute it's capital to investors. In this case, assuming the price hasn't been tampered with pre-announcement, it would seem that holders as opposed to tenderers are getting the better deal. In short, if Wendy's was correctly priced based on it's fundamentals then this deal only strengthen's non-tenderers position.

This is not the first major strategic move by Wendy's either. They have recently spun-off their Tim Horton's chain and sold Baja Fresh Mexican Grill. (As a side note, to give you an idea of the popularity of Tim Horton's, there are rumors going around that the company puts cocaine into it's coffee to enhance it's addictiveness.) In addition, the company has announced plans to spend $525 million renovating and repurchasing franchised restaraunts. The company is playing perfectly to shareholder-friendly, refocus -on-the-core principals and investors are rewarding it for it's efforts.

OK, but is it a buy now? Well for that we will need to look at some numbers. The company has revenue of $3.8 billion and 117 million shares outstanding. After the dutch auction, assuming all 19% are repurchased, the company will have ~95 million shares outstanding. This gives a figure of $40 revenue per share. Of course revenue is a meaningless figure in itself, how much profit can they draw from it? Historically not much. Last fiscal year, excluding non-recurring costs, operating income was around 10% of revenue, net income was around 6%. I am not sure if it is a fair comparison but McDonals had operating income of 20% of revenue last year. In fact, McDonald's net income relative to rev. was even higher at 13% than Wendy's operating percentage. Of course, we are not here to talk about Mickey D's, I am just trying to establish that Wendy's certainly has some room to run as far as operational improvements go. This in turn would lead to higher earnings. Another point to note is that even if the share repurchases are financed completed by debt (they won't be, WEN has $1.2 billion in cash compared to $800 million in expected share repurchases) Wendy's will still have less debt relative to revenue than McDonald's. If Wendy's was even able to earn 8% net of revenue, you would be looking at $3.1/share in earnings and a very reasonable share price.

Given their shareholder friendly management, strong financial position (I didn't really cover this in enough detail but take my word for it or look at their latest 10-Q), and potential for operational improvements the company does seem like a good deal. You are not going to get rich off of it, but given the valuations I am seeing on other companies right now it appears an attractive place to park some money.


I intend to buy shares in Wendy's.

Saturday, October 07, 2006

Webzen (WZEN) Value Play

Korean online video game producer Webzen (WZEN) is getting pretty cheap these days and I have decided to bite. The company has produced a number of online games, with flagship MU having been a hit a couple of years ago. Their fortunes have taken a turn for the worse lately but this is over-reflected in the current stock price. The company is currently selling for just over book value, and in spite of this is in no danger of bankruptcy for at least a few years. All it will take is one successful offering and the price will soar.


WZEN is an ADR (it primarily trades on the Korean stock exchange) trading on the Nasdaq. It's quarterly financials are not readily available from yahoo or google finance so I went straight to their web-site for the quarter ended, June 2006 numbers. As a side note, in terms of news coverage I would recommend google finance for this particular company, as they have a great deal more coverage. I am not affiliated with either google or yahoo in any way. In general I prefer yahoo finance.

For reference, 1 USD = 949.2 Korean Won according to yahoo finance. I have taken the liberty of converting WZEN's financial statements to US dollars.

Balance Sheet

Current Assets: $114.9 M
Tangible Fixed Assets: $53.6 M

Liabilities: $17.4 M

Tangible Equity: $151.1 M

Income Statement

Revenue: $6.7 M

COGS: $3.0 M
SG&A $15.2 M
Other Expenses: $2.0 M

Net Income (loss): $(15.5) M -- okay, I know this doesn't exactly add up based on the other items but since it is actually LESS than the numbers I added I decided not to fault them.


Webzen currently has a market cap of ~$171 million dollars. I am pretty sure that is the correct number. It is not so much that I am confused or haven't done my research but there is a lot of conflicting data about something so simple as the companies market cap. Yahoo says it's $47 million, Google says it $476 million, quotes.nasdaq.com says that no in fact it's $14 million. Well I went to the company's website and according to their numbers, the company adds up to ~$171 million US. If I'm wrong feel free to correct me but don't just point to yahoo finance please.

At any rate, assuming my market cap is correct the company is selling for just over book value. Revenue & expenses of course are the real problem. Revenue has been very low recently, below historic norms. SG&A was very high in the last quarter so it looks like the company is bleeding to death. However, even if we were to assume that these results may be repeated (I don't think they will), the company would still have some 2.5 years before it even needs to worry about refinancing. This company will not be going bankrupt anytime soon.

The Situation:

Webzen needs a hit. This is how video game developers make most of their money. It is similar to the movie industry in that a single popular title can far exceed the development costs. However, online-game companies are dissimilar to the movie industry in that their revenue stream from a hit game can go on for years, as the company upgrades it's graphic/software engines, redistributes to new regions, rebrands to cover additional demographics, etc. Basically, if Webzen can deliver a hit or two (we'll get to this momentarily) all past sins will be forgotten and the street will love them again. People start to look at not how quickly it is going to go bankrupt and start focusing on how much money it might earn. That is where P/E expansion comes in and that is the primary reason why I exclusively buy beat-up stocks. 1 or 2 hits and you make a fortune. If the hits don't materialize there is still enough booty in the bank to cover next years attempts.

Of course this entire argument is just wishful thinking if you don't have reason to believe that WZEN might actually produce something. Here is how I look at it:

1) They produced MU in the past which was a big hit and had their stock soaring for awhile. So they are certainly capable of producing a popular game. I have some faith in their management.

2) The company has a slew of games under development. Soul of the Ultimate Nation, Parfait Station, Project Wiki, Huxley, APB (All Points Bulletin). Now I don't really play games anymore so I can't comment on their quality and release schedules but barring some sort of disaster at least 2 or 3 of these games will be released over the next year. Probably the releases will be quicker than that but I like to be pessimistic. I don't know that any will be hits, they could be but I can't make that call. I do know that APB is being created by the developer of GTA (Grand Theft Auto) which was a HUGE hit in it's time and to some extent still is. Given the current valuation I don't feel that the potential for these products to catch on is being fully integrated into the stock price.

3) North Korea has the bomb. Well at least the North Koreans say they do. They certainly have something. Some seismologists thing they have the bomb and some don't. Maybe they have a big pile of TNT. I don't really care. If anything actually happened in this regard, then the reprecussions would extend far beyond South Korea. People don't think that way though, they just get scared. They hedge their bets. As a result, I believe that North Korea's testing has had at least some impact on the stock. On Monday when the initial announcment was made, the stock was down over 8%. I view this, on top of everything else, as a buying opportunity.

4) Webzen is hiring. In spite of all the terrible things people think are going to happen to this company, they just hired 4 new senior types in the US. This brings us to the next point..

5) Webzen is expanding. Previously competing chiefly in Asia, the company is refocused on North America and is talking about Europe. Even the company's vision statement drones up about the importance of gaming for everyone. While games don't exactly port effortlessly from 1 culture to the next, certainly the cost of rebranding a successful game is far less than doing it from scratch.

6) This is a weak point and hard to substantiate but I believe the company's founders are passionate about the company. Just a hunch and I could be wrong. I can't find it anymore but a year ago when I first started looking at WZEN I remember reading a quote from the CEO to the extent that their primary mission was to make great games. Not get rich, not dominate market share, make great games. To me, this is exactly what the company needs to focus on. Think of Google for instance. Why is it so popular? They are the best at what they do. Flat out, everybody knows it, don't even argue with me on this, google is the best at search. When the company was being created that is the only thing the founders tried to do. They didn't even try to incorporate any type of revenue for about 3 years. They just tried to make it better. Did it payoff? Now Webzen is certainly not a Google and maybe they really, truly aren't dedicated to being the very best but as point of reference, at the very least, passion in the founders is a good thing to have.


I own shares in Webzen. I bought them on Monday. I might buy more.

Do your own research and beware, this could go several different ways.