Potlatch Corporation (PCH)

Potlatch Corporation is organized as a real estate investment trust (REIT) which owns 1.44 million acres of timberlands located in Arkansas, Idaho, and Minnesota. Potlatch derives its primary income from investments in real estate, sale of standing timber, and the operations of five wood products manufacturing facilities which produce lumber and plywood. Can you guess where I am going with this one?

What really caught my eye with this stock is its huge land holdings. Whenever I see a large amount of land holdings, I automatically think that the land probably isn't valued accurately on the balance sheet because GAAP requires companies to record property, plant, and equipment at historical cost. Because Potlatch was formed in 1909, there is a big chance the land is horribly undervalued.

Conveniently, Potlatch maintains an updated website for all of their land listings for sale. This gives a great way to figure out what this land is actually worth. I went to the website and averaged the price per acre of over 100 available land listings and created a nifty spreadsheet. This really piqued my interest, especially because Potlatch is currently trading for $34.11/share and the land alone is worth $66.06/share.

As a prudent investor, it's always a good idea to check out the income statement, statement of cash flows, and balance sheet, just to make sure everything checks out. As a side note, I do read the entire annual report, the latest quarterly report, any recent 8-K's, and any other relevant filings, and I recommend you do the same.

Now we need to quickly look at the balance sheet just to make sure liabilities don't totally cancel out our newly valued land. Just for a quick back-of-the-envelope calculation, we will be including all assets and liabilities, excluding timberlands obviously because we have our own, hopefully more accurate valuation. We find that Potlatch reports $3.34/share in current assets, $3.76/share in PP&E excluding timberland, $1.92/share in current liabilities, and $13.05/share in long term debt. Put together, we get a $7.87/share deficit in value, which we have to subtract from our land valuation. Doing that we find that Potlatch is worth $58.19/share, well above the $34.11/share it is trading for currently. This gives a sufficient margin of safety and looks like a buy to me. 

Disclosure: Long PCH

Keweenaw Land Association (KEWL)

Keweenaw Land Association (KEWL) traces its roots all the way back to the mid-1800's. After the Civil War, the Portage Lake and Lake Superior Ship Canal Company (PLLSSCC) started work on the ship canal across the Keweenaw Peninsula in Upper Michigan and was given a 400,000 acre land grant by the U.S. Government. When PLLSSCC came into financial difficulties, the assets were transferred to the Lake Superior Ship Canal Railway and Iron Company (LSSCRIC). In 1909, after the canal was completed, LSSCRIC transferred the land assets to its successor, Keweenaw Land Association.

KEWL owns and manages 161,531 acres of land in the Upper Peninsula of Michigan, including 153,074 productive acres of timberlands, four miles of inland lake frontage, four miles along Lake Superior, and 30 miles of frontage along major rivers. Also included are 2,500 acres of commercial, recreational and city properties. KEWL derives primary sources of revenue from log sales, land and developed lot sales, gravel royalties, and lease income.

Timber is a particularly interesting asset class because trees increase in value as they age and grow larger. If the timber market is weak for a few years, the timber company may decide to not sell any timber and allow the trees to grow and increase in value, thereby getting more money for each tree in the future. The point is that the company doesn't necessarily have to sell trees constantly in order to achieve value for investors. The value is, as they say, "in the trees."

Valuation time. Once again, the value is not where most people look: the income statement. Let's dive into the balance sheet and see what kinds of assets and liabilities KEWL has.  We will add up all assets but exclude other non-current assets and properties, because we will assign our own value to the land. Total assets per share excluding land gives us $4.27/share. Total liabilities per share gives us $1.76/share. Subtracting total liabilities from total assets gives us $2.51. Given that KEWL is trading for $75/share currently, we are clearly missing something.

Now to see what all the fuss is about. In their 2011 Annual Report, KEWL outlines in their Real Estate Program section all of their recent land sales. This gives us a good indication of what the land may actually be worth. From the annual report, we can confidently determine that there are clearly two types of land, recreational land and timberland, with timberland making up the vast majority. There are 2,500 acres of recreational land and 153,000 acres of timberland. Given that recreational land is developable, it is worth much more than the timberland. Based on recent sales, I determined that on average, recreational land is worth $1,600/acre and timberland is worth $800/acre. Multiply acreage by price per acre and divide by shares outstanding and we get the total land to be worth about $98/share. We can see that balance sheet values are once again totally useless. $2.51 is pretty much insignificant in terms of this land valuation.

As value investors, we are always looking for a "margin of safety." My personal criteria is to buy a dollar for fifty cents. In this case, because KEWL is currently trading for $75/share, this does not provide a 50% margin of safety, so I won't buy at these prices. When and if KEWL trades somewhere around $50/share, I will consider purchasing.

Texas Pacific Land Trust (TPL)

Texas Pacific Land Trust is a company that was created in 1888 that owns 926,535 acres of land, comprised of numerous separate tracts, located in 19 counties in the western part of Texas which were previously the property of the Texas and Pacific Railway Company. The primary revenue of the company is derived from land sales, oil and gas royalties, and grazing leases. In this case, as with most of the stocks I write about, the value is not in earnings or growth potential, but in cold, hard land.

The interesting thing about TPL is that the company consistently purchases shares back every year. From 1994 to 2010, common shares outstanding decreased from 15,376,525 shares to 9,548,444 shares, declining at a consistent rate of approximately 360,000 shares per year. This is great for shareholders because the value of your shares increases every year. However, because the company sells land every year, this acts to stabilize the value of the shares because assets are continually decreasing. But, when the company deems it is not in their best interests to sell land at a particular time because of low land prices, the company can opt not to sell any land.

Ok, onto valuation. It turns out that compared to the land, the items listed on the balance sheet are pretty much insignificant. Total assets account for $2.98/share and total liabilities account for $0.75/share. This gives a value of $2.23/share just based on the balance sheet. However, this is not where the value lies. 

Texas Pacific Land Trust conveniently lists in their annual reports how much land they sold each year and how much they sold it for. Averaging the price per acre for the last 18 years, we can get a good, normalized value for how much the land is really worth. I calculated that on average, each acre is worth about $500. Multiply $500 by the number of acres owned, divide by the shares outstanding, and you get that the land is worth about $50/share. Now you see why the balance sheet is useless in this instance.

Interestingly, TPL is currently trading at $56.78, more than acknowledging the fair value of the land. TPL is fairly valued to overvalued at the moment. However, two years ago this company was trading for $25/share. If this company falls somewhere below $30, I would consider this a great buy. Keep this company on your watch list!

Disclosure: No position in TPL at time of writing.

Consolidated Tomoka Land Co. (CTO)

Consolidated Tomoka Land Co. is a company that owns approximately 11,600 acres of prime Daytona Beach land, including commercial and retail sites. Although the company owns 26 retail income properties with tenants such as CVS and Walgreen, the hidden value is really in the 10,500 acres of essentially vacant agricultural land. 

Just based on the balance sheet adding Cash + Investment Securities + Refundable Income Taxes + Golf Buildings, Improvements, and Equipment + Income Properties + Other Furnishings and Equipment  - Total Liabilities, we get $14/share. This does not include any vacant land whatsoever. We can use the value listed on the balance sheet for Income Properties because these properties were recently acquired and for the most part represent fair market value. I did not include intangible assets and some other assets because there is no concrete way to value these items.

At the current stock price of $30/share, CTO is valuing each acre at approximately $8,722/acre.

$30/share - $14/share = $16/share

($16/share x 5,723,980 shares outstanding) / 10,500 acres = $8,722/acre

Recent comparable land sales in the area give per acre values of anywhere between $20,000 and $100,000/acre. Conservatively, if we value each acre at the low end of $25,000, we would value the company at double the current market price at $60/share.

(10,500 acres x $25,000/acre) / 5,723,980 shares outstanding = $46/share

$46/share + $14/share from above = $60/share

I believe $60 is a very conservative value for this stock and possibly a more realistic value might be closer to $90/share. This stock is a simple case of hidden assets where the balance sheet does not accurately reflect the value of the assets. Investors will eventually realize the the hidden value and the stock price will reflect this.

On June 22, 2012, the company sold 16 acres of land to P&S Paving for $600,000. This values each acre at $37,500. If we extrapolate this to the entire land holding, we would value the entire company at  $83/share. Given that land prices are depressed at the moment in Florida, I see land prices increasing in the future.

Some negative aspects of the company are that the golf courses have consistently lost money and the general real estate market in Florida has been severely depressed as a result of the economic downturn. I believe that land prices will return eventually. I expect this to be a very long term investment and the price may not move for a number of years.

One positive is that the Wintergreen Fund owns a large amount of the stock and has been actively pushing management to unlock the value in the company. Also, the company pays a dividend and should increase as revenue increases.

I will be holding onto CTO for the long haul and I will be adding to my position should the price fall in the future.

Disclosure: Long CTO

Intro

I will be presenting stock investing ideas based primarily on the value of the assets of a company. Little attention will be paid to earnings or growth potential. I will essentially be using the techniques and ideas of Benjamin Graham.

My goal is not to present highly detailed analysis with specific price predictions, but to present back-of-the-envelope calculations that will guide a stock selection. I have learned that it is better to be approximately right than precisely wrong.

Most every stock I write about I will already own or plan on owning. These posts do not represent investing advice and any investing by the reader should be based his or her own thorough analysis.

I gladly welcome comments and feedback from readers and investors.