3rd quarter numbers were, as expected, ugly. The low capacity utilization management had prepped us for last quarter translated into top line sales of only $22.6 million – the lowest in the six quarters CRP has owned Riverland Ag. Although there were underlying positives, such as “trading” gains that helped boost the gross margin to 21.5% (including this quarter, gross margin has averaged 14.3% in the six quarters since CRP purchased Riverland Ag), the bottom line remained negative with a loss of $0.11 per share.
More important to our investment thesis – the Net Current Asset Value (NCAV) of CRP dropped from $5.69 per share last quarter to $5.29 on 12/31/11. The biggest influences on this drop were an $8.4 million decline in “Due from brokers” (perhaps a result of the trading gains noted above?), a $5.0 million drop in Portfolio Investments (partially attributable to a $3.3 million mark-down due to “Change in fair value of investments”), and a $1.4 million drop in Accounts Receivable. An increase in cash and a decline in total liabilities (paydowns of debt and payables) were insufficient to offset these current asset declines.
Since my last CRP update, when the stock was trading at $5.00 (right before it dropped as low as $4.20), the stock has rallied back above NCAV to $5.90/share:
In effect, CRP is no longer offering “free money.” We now have to assume at least some value in the Property Plant and Equipment to justify the current share price. Specifically, we need to assume $0.61/share in long-term asset value to justify the current price ($5.90 – $5.29). With 55 million bushels of storage capacity and 14.691 million shares outstanding, this equates to $0.16 per bushel of storage capacity. Last fall, CRP management communicated to me that they feel elevator storage capacity is worth ~$1.10/bushel and they cited purchases by Bunge and Gavilon to justify this level. Are the elevators of Riverland worth $1.10/bu? I honestly don’t know.
I am more familiar with the country elevator system (Riverland has a mix, but the company’s focus seems to be on end-market and transport terminals). In the country elevator system, we are in the midst of an “upgrade” cycle. Older terminals are being refurbished, repurposed, or even abandoned as elevator companies move toward the economic advantages of shuttle loaders (elevator’s capable of loading 100-110 railcars within 15 to 18 hours). Of the 9 Riverland Ag facilitates listed on the BNSF.com website, only one – the 10.85 million bushel WB Duluth Storage facility – is shuttle capable. Will the same upgrade cycle hurt end-market and transport facilities? Or, is this phenomenon specific to country elevators, where it is easier to relocate a facility and you are more captive to rail shipments? I honestly don’t know.
What I do know is that today, even with the recent recovery in price (back above the NCAV), the gap between CRP’s share price and book value remains wide at nearly 50%:
At this level of discount, to earn a 10% return on our investment we need CRP to generate an ROE of just 5.4% (0.54 P/B x 10%). This equates to annual EPS of $0.58 ($10.83 book value x 5.4% ROE). Put in terms of profit per bushel of storage capacity, Riverland would need to earn $0.155 per bushel of capacity. Is this doable? Yes. Will CRP be able to accomplish the feat? Time will tell.
For now, I remain invested and am willing to give management the benefit of the doubt. Management owns in aggregate ~22% of the outstanding shares, which should give them plenty of incentive to be good stewards of our (their) capital.
With the stock trading at just 54% of book value (albeit a likely inflated book value), revenue and capacity utilization coming off very low levels, an inverted Minneapolis wheat futures, and even a small equity option through the Stewart Southern Railway, I’m willing to hold CRP for the interim.
For a good write-up on when to sell a net-net, see Geoff Gannon’s recent article “How Long Should You Hold a Net-Net?”
Full Disclosure: Long CRP
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