Alexander and Baldwin (AXB) Looks Compelling Here

I didn’t think I’d ever get another shot at A&B shares below $35, let alone in the low $20’s. But the unthinkable has happened this year in many areas of the market, and I’m pleased to find “bargains” (that’s a dangerous word for value investors) galore these days.

Honolulu based Alexander and Baldwin (AXB), books the majority of its revenue, ($1 bln out of $1.7bln in 2007) by providing ocean transport services between the US West Coast, Hawaii, and other Pacific destinations through its Matson Navigation subsidiary. Matson happens to be the primary carrier between the US and Hawaii, typically not a bad little business. However, the fuel required to operate Matson’s fleet of containerships and barges is of massive proportions; during 2007, the company burned 2.3 million barrels, the equivalent of 1/10 of one days US consumption. Matson paid between $41 and $87 per barrel during 2007, and the threat of sustained $140+ oil this past summer seemed potentially disastrous for the company’s shipping business. Little did we know at that time that oil prices were the least of our worries, as world economies sank into recession. Since September, A&B’s shares have been cut in half, and it had nothing to do with oil.

What is perhaps more interesting about Alexander and Baldwin is the company’s real estate. The company owns a portfolio of approximately 1.4 million square feet of leasable space in Hawaii, plus another 5.2 million square feet in the continental US. Add to this 89,000 acres (nearly 12 square miles) of land in Hawaii (carried on the books at next to nothing), some of which is currently under residential development, and you’ve got a potentially very interesting real estate play. Perhaps that portfolio is not as valuable as it was a year ago, but longer term, I believe its value will be recognized.

Recent financial results weren’t bad, all things considered. Third quarter sales rose 5.9%, although net income fell 25% to $36.8 million, as container shipping volume fell 5%. Still, that’s an 8% net profit margin.

Currently trading at about 7 times earnings, just .5 times sales, and about .8 times book value, A&B currently yields a fat 5.1%. Management increased the dividend 8.6% this past April, and I, for one, am happy to collect it while we all wait for the sun to rise again.

Jonathan M. Heller, CFA

Long Alexander and Baldwin

If you’ve ever perused the Cheap Stocks website (http://stocksbelowncav.blogspot.com), it’s obvious that we are enamored with one of Ben Graham’s most fascinating (to us, anyway) investment techniques, that being the pursuit of companies trading below their net current asset value.  Indeed, we’ve taken some liberties with Ben’s formula, a necessary evil in this day and age.  (Ben’s formula sought companies trading at less than 2/3 NCAV, while we typically look for less than one times NCAV).

We’ve researched and written about the concept for years (yours truly published a handful of pieces on the subject during my time at Bloomberg), but only recently took it a step further.  In February, we rolled out The Cheap Stocks 21 Net Net Index, the first index of companies trading below net current asset value (that we are aware of, anyway).

It’s been an interesting experiment to date, and since inception the index is up 7.54% percent versus
-.38% for the Russell Microcap Index, the closest benchmark to this combination of down and outs, ne’er do wells, and potential bankruptcy candidates.  Don’t get us wrong, there are probably some gems in the mix, but companies don’t typically trade so cheaply relative to assets unless there’s either a very good reason, or the market is just not paying attention.  Nonetheless, the concept of building a “passive” index of net/nets is at the very least intriguing.

Below is more about this index, its construction and constituents:

The Cheap Stocks 21 Net/Net Index is a market cap weighted index comprised of companies that met the following criteria at index inception on Tuesday, February 12th, 2008:

•Market Cap is below net current asset value, defined as:
Current Assets – Current Liabilities – all other long term liabilities (including preferred stock, and minority interest where applicable)

•Stock Price above $1.00 per share

•Companies have an operating business; acquisition companies were excluded

•Minimum average 100 day volume of at least 5000 shares (light we know, but welcome to the wonderful world of net/nets)

*Index constituents were selected by market cap. The index is comprised of the “largest” companies meeting the above criteria.

The Index is naïve in construction in that:

•It will be rebalanced annually, and companies no longer meeting the net/net criteria will remain in the index until annual rebalancing.

•Only bankruptcies, de-listings, or acquisitions may result in replacement

•Does not discriminate by industry weighting—some industries may have heavy weights.

Cheap Stocks 21 Net/Net Index Constituents and Weights (%, rounded):

Adaptec Inc(ADPT)18.72%
Computer Systems

Audiovox Corp(VOXX)12.20%
Electronics

Trans World Entertainment(TWMC)7.58%
Retail-Music and Video

Finish Line Inc(FINL)6.30%
Retail-Apparel

Nu Horizons Electronics(NUHC)5.76%
Electronics Wholesale

Richardson Electronics(RELL)5.09%
Electronics Wholesale

Pomeroy IT Solutions(PMRY)4.61%
IT

Ditech Networks(DITC)4.31%
Communication Equip

Parlux Fragrances(PARL)3.92%
Personal Products

InFocus Corp(INFS)3.81%
Computer Peripherals

*Renovis Inc(RNVS)3.80%
Biotech

Leadis Technology Inc(LDIS)3.47%
Semiconductor-Integrated Circuits

Replidyne Inc(RDYN)3.31%
Biotech

Tandy Brands Accessories Inc(TBAC)2.94%
Apparel, Footwear, Accessories

FSI International Inc(FSII)2.87%
Semiconductor Equip

Anadys Pharmaceuticals Inc(ANDS)2.49%
Biotech

MediciNova Inc(MNOV)2.33%
Biotech

Emerson Radio Corp(MSN)1.71%
Electronics

Handleman Co(HDLM)1.66%
Music- Wholesale

Chromcraft Revington Inc(CRC)1.62%
Furniture

Charles & Colvard Ltd(CTHR)1.50%
Jewel Wholesale

*Renovis was acquired on 5/5/08; the allocation to that company in our index model remains in cash

Jonathan M. Heller, CFA

*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.