Professional Documents
Culture Documents
financial
November 2014
Chris Mayer
Editor
Issue 101
w w w. ag or a fi n a nci a l .com
Alfalfa Speak
Alfalfa is indigenous in the Middle East, where it grows yearround. It is nondormant. However, varieties of alfalfa grow in cold
climates by going dormant when it gets cold. The industry ranks
dormancy using a scale from 1 to 10. The lower numbers are
dormant, the higher are nondormant. The number usually reflects
the number of cuttings a farmer can get out of it each year. S&W
focuses on the nondormant market, best suited for dry climates.
But it has a development pipeline including other varieties.
Alfalfa seed production is not easy. It is a demanding process.
You have to stress the plants just so to get the most flowers
and seed. At the same time, you have to get rid of weeds so
you can pass certain purity tests. Then there are the bugs.
There are always bugs lygus bugs, especially. You have to
get rid of them without harming the bees you need for pollination. After you get all that right, you have to desiccate the
fields. This removes much of the moisture. You must harvest
quickly thereafter.
Thats why there are professionals who focus on nothing but
producing the best seed. And thats why those who produce
that best seed make good money. S&W contracts out seed
production for most of its seed and also grows its own.
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($ in millions)
$50
$37.3
$40
$30
$20
$10
$14.2
$6.7
$3.6
$0
2010
2011
2012
2013
2014
$2,240.4
($ in thousands)
$2,000
$1,500
$1,055.0
$1,000
$612.3
$0
($500)
($,1000)
($1,139.4)
2010
2011
2012
2013
As is, the stock trades below book value of $4.44 per share.
Thats based on 11.6 million shares outstanding. There are
1.5 million warrants, but the strike price on those is $13.75.
They are so far out of the money it seems absurd to include
them. If you did, book value per share would still be almost
$4 per share. The stock is $3.
Farming is, of course, volatile. There are all kinds of variables
that go into the demand and pricing for seed. There are many
other risks beyond the companys control, such as the weather.
In any particular quarter, you could see wide variations
in results. On the last conference call, Grewal conservatively
called for 10% organic growth in 2015. That would put sales
at closer to $60 million. And that includes no potential
acquisitions or new initiatives.
Quarter to quarter, I have no idea what may happen. But
I know that seed companies are valuable properties. One
way to see this is to look at transactions in which acquirers
bought seed companies whole. I looked at a June report by
Piper Jaffray that reviewed dozens of transactions going back
to 2008 on an EV-to-sales basis.
EV stands for enterprise value. It is the market value of
the stock minus cash plus debt. It is the price the market
puts on acquiring the whole company. (Think housing.
You dont sell your house based on the equity. The value
of the mortgage plus the equity equals the price.) S&Ws
EV is about $40 million. Thats less than 1 times its 2014
sales of $52 million.
So the question is how to get a sense for what a DuPont, a
Land OLakes, a Monsanto or a Dow AgroSciences might
pay for S&W Seed? The Piper
Jaffray report found that seed
Mean
5.9x
companies go for about 5
Median
4.7x
times sales. Here are the stats:
As I mentioned, S&W Seed sells for less than 1 times sales.
Even a multiple of just 3 means S&W more than triples. Im
not saying S&W will get bought out tomorrow. But it is a
clear bargain in an overpriced market. Its in a business with a
clear story to tell investors, and it has motivated insiders.
$1,199.5
$500
($1,500)
TTM Mar 14
this to work, and a track record, too. Id bet the Wild Ass
of the Desert will find a way and S&W will be a big winner
in 2015 and beyond.
I think its speculative, so buy accordingly.
Recommendation: Buy S&W Seed (SANW:nasdaq) up
to $5 per share.
The oil and gas sector has been nasty, as I am sure you
know. The market has not spared CanElsons stock. Its
40% off its highs as the market chopped about a quarter
off the price of oil. Bearishness on the price has set in.
I have no idea where oil will go. But I think CanElson is in
great position to profit from the budding Mexican oil boom.
And the market sell-off in oil-related stocks has created an
opportunity to get shares at a good price. On a free cash
flow basis, CanElson is a bargain compared with its Western Canadian peers. See the chart below.
20%
CanElson
I heard Ackman talk briefly about it at Grants conference. I had long ignored the drama around this idea,
but his comments piqued my interest again.
15%
10%
5%
Quarter
Q2/14
Q1/14
Q4/13
Q3/13
Q2/13
Q1/13
Q4/12
Q3/12
Q2/12
Q1/12
Q4/11
Q3/11
Q2/11
Q1/11
Q4/10
0%
The idea is to buy shares in the Federal National Mortgage Association (FNMA) and/or the Federal Home Loan
Mortgage Corp. (FMCC). You know them as Fannie Mae
and Freddie Mac. (I can hear you screaming in horror.)
These government-sponsored enterprises (or GSEs)
provide guarantees on trillions of dollars of mortgages.
$17 bn
(2)
$15
P/E
Illustrative Future Value
14.0x
$206 bn
9.0
$23
6x
$165 bn
Portfolio Review
Four Sell Recommendations
Every year around this time, I look to trim names from my
list. It is a painful but necessary weeding process. It really
forces me to think about every name in the portfolio. I try
to keep the list focused on what I think are the best ideas.
What are the best ideas? The best ideas are the ones that
combine the most upside with the least downside risk and
pay off in the shortest amount of time. I look at all three
elements. People often forget the third, which is important
in producing a high annual return on your portfolio.
Each of the four stocks Im parting with here is a stock
that I still like. I know that sounds weird. But remember,
the idea is to focus on the very best. You may choose to
continue holding these names if you want. Ill give you
some guidance.
Mongolia Growth Group (MNGGF:pink sheets): I have
to face it. My thesis is not working here so far. The stock
is down 60% since I made it an official recommendation
in April 2012. Every time I talk about it, the stock just
goes lower.
I love the Mongolia story. I really like Harris Kupperman
and his team. My original thesis was to hold it for 10 years
and let it play out. I think that will probably still prove
right. But its a long haul. I see more certain and quicker
turns in our other names.
So Im throwing in the towel, probably at the bottom. There
is no rush to sell this one. In fact, if you have more patience
than I, you should wait it out. Down 60%, though, is enough
for me.
Dolphin Capital (DCI:lse): This one is in the same
boat as MGG. It is another property company in a tough
market, Greece. I like the story here. We have a strong
ownership group with a lot of stock and a deep discount
to net asset value.
As with MGG, the payoff will take place over several years.
And were down 30% already. Again, when I compare it
with what else we own, Id rather own those other things.
If you are more patient than I am, this is one you may
decide to let ride.
COMPANY
DATE RECD
RECD PRICE
CURRENT PRICE
COMMENTS
RECOMMENDATION
7/15/11
7/15/11
12/21/12
12/21/12
12/21/12
3/14/13
7/11/13
4/14/14
7/28/14
$10.47
$11.64
$15.19
$10.65
$13.25
$11.47
$10.45
$11.46
$12.19
$14.00
$16.84
$19.07
$11.16
$15.54
$14.11
$11.14
$12.84
$13.57
Connecticut thrift
Illinois thrift
Nebraska thrift
Pennsylvania thrift
North Carolina thrift
New Jersey thrift
Georgia thrift
New Jersey thrift
Massachusetts thrift
12/6/10
6/30/14
9/12/14
$23.55
$9.67
$32.25
$74.36
$19.40
$28.00
Hold*
Hold
Buy up to $36
C$24.75
C$1.89
$4.18
C$4.37
$6.32
$9.19
$5.08
$8.99
39.50p
$18.11
$18.19
$12.92
$7.70
$10.48
$17.42
$7.02
NEW
C$26.82
C$3.09
$1.45
C$5.66
$14.25
$11.25
$8.40
$8.88
28.25p
$18.71
$16.25
$11.43
$7.75
$8.72
$15.65
$7.41
$3.07
Buy up $25
Buy up to C$3.70
Sell
Buy up to C$6
Buy up to $14
Buy up to $10.50
Buy up to $8
Buy up to $10
Sell
Buy up to $20
Buy up to $20
Buy up to $18
Buy up to $9
Buy up to $11.50
Buy up to $21
Buy up to $8.50
Buy up to $5
$25.17
$9.67
$18.51
$7.93
$32.51
$18.25
$17.27
$8.15
Thrift Conversions
United Financial Bancorp (UBNK:nasdaq)**
IF Bancorp (IROQ:nasdaq)
Madison Country Bank (MCBK:nasdaq)
Malvern Federal Bancorp (MLVF:nasdaq)
HomeTrust Bancshares (HTBI:nasdaq)
Northfield Bancorp (NFBK:nasdaq)
Charter Financial Corp (CHFN:nasdaq)
Clifton Savings Bank (CSBK:nasdaq)
Blue Hills Bancorp (BHBK:nasdaq)
Hold
Hold
Hold
Hold
Buy up to $16
Buy up to $12
Buy up to $11
Buy up to $12
Buy up to $12.50
Spinoffs
Madison Square Garden (MSG:nasdaq)
Northstar Asset Management (NSAM:nyse)
Rayonier Advanced Materials (RYAM:nyse)
Owner-Operators
Classic Values
EMC Insurance Group (EMCI:nasdaq)
NorthStar Realty (NRF:nyse)
Blue Capital (BCRH:nyse)
Chambers Street Properties (CSG:nyse)
1/14/13
7/11/13
11/6/13
5/12/14
Sell
Hold
Sell
Sell