Paul Senior,
Excellent points!
Another stock you may want to consider is "IPK". Tilson, a Buffet disciple, and manager of a hedge fund wrote a column on "IPK" and related "CPC" management moves:
tilsonfunds.com
fool.com
Tilson has a carry over article onto the Value site (it may be closed now -- I have posted it below.)
Basically "IPK" is undervalued, a small cap, management is buying back stock agressively, and has management in place from "CPC". Tilson makes some interesting comparisons between "CPC" and "IPK".IPK Valuation Metrics:
3/26/01 10:49:00 PM IPK ($20.05) <Imperial Parking Corp > by wrt233 Rating 7.1 (6 users)
Description:
Imperial Parking is the 4th largest parking lot operator in North America. Based in Vancouver, the company operates more than 1,450 parking locations, containing more than 260,000 parking spaces. The company dominates the Canadian market, in which it has operated since 1962, with approximately 50% market share. Imperial was spun off by a REIT a year ago and now trades on the American Stock Exchange under the ticker IPK.
While one might think that the parking lot business is a terrible one, think again. There’s no technology risk, little real estate risk, and the business actually requires very little capital to grow, as almost all lots are operated under a management contract or lease, rather than being owned. This is NOT a real estate play. And with little in the way of accounts receivable and inventory, and plenty of accounts payable, rents payable, and deferred revenue, the business has a wonderful, large negative cash conversion cycle.
The company was poorly managed until early 1999, when a new CEO and a new Sr. VP of Operations were hired, both of whom were seasoned executives from Central Parking Corporation, the largest parking lot operator in North America. They have had great success hiring top-notch people away from Central Parking and the other large, badly managed competitors, and Imperial now boasts the best management team in the industry. This is key in an unsophisticated, relationship-based, execution-oriented business.
The company’s strategy is to make the Canadian operations a cash cow by eliminating unprofitable locations and cutting costs (under prior management, the company was run for market share, not profit). Simultaneously, the company aims to grow organically and via acquisition of smaller operators in the much larger, higher-margin U.S. market. (The U.S. market currently accounts for 25% of revenues, and the company projects that this will rise to 50% within a few years.) Imperial also seeks to leverage its pristine balance sheet to sign more leases, which allow the company to keep more of the excess profit it typically generates when it takes over a lot. (Currently, management contracts account for 65% of Imperial's lots, with 35% under leases; the long-term goal is a 50/50 balance.)
Imperial is benefiting from the fact that its major competitors are struggling to digest large acquisitions and have antitrust problems that are forcing them to sell certain operations. Also, Imperial is small enough to fly under the big operators' radar screens and cherry pick their best lots, especially in vulnerable cities.
Imperial is making rapid strides expanding into the U.S. market: after establishing a beachhead in Minneapolis in 1989 (where it now operates 40 lots), it signed an agreement in 1998 to manage the 4,900-space parking lot at the new Pacific Bell baseball stadium in San Francisco (which opened for business in the summer of 2000), moved into Seattle in 1999, acquired a local company in Cincinnati in 2000 (see below), and recently began operations in Cleveland and New York City (Imperial's CEO used to run the New York region for Central Parking, so this is a particularly promising area). Imperial plans to expand into two new U.S. cities annually for the foreseeable future.
CINCINNATI CASE STUDY
Imperial acquired a small (16 lot) company in Cincinnati that was run by an unsophisticated yet experienced and well-connected operator for $1.6 million (equal to 6.5x EBITDA of $250,000) (25% of the amount paid was in the form of a three-year earn-out). Less than a year later, Imperial Cincinnati has grown to 31 lots and generates $600,000 of annual EBITDA.
FINANCIAL RESULTS
Imperial's results are impressive. In Q4 00 vs. the same quarter in 1999, revenues rose 10.2%, EPS rose from -$0.36 to -$0.01 (the winter is a weak period for the parking lot industry, especially in Canada), and EBITDA rose 254%. For the year, revenues rose 14.8%, EPS rose from -$0.39 to +$0.64, and EBITDA rose 111%. Cash net income (net income plus goodwill amortization) was +$1.71/share vs. -$0.17 in 1999.
Return on equity (after deducting from equity goodwill created during the spin-off), was 19% in 2000, based on $3.6 million of cash net income. Deducting year-end cash of $8.3 million yields return on invested capital of 34%. These numbers are likely to rise as the turnaround under new management continues.
The company's stated goal is to grow EBITDA at 15% annually, but this appears to be quite conservative, especially given last year's 111% increase.
VALUATION
The latest announced share count, reflecting recent buybacks, is 1.81 million shares. At $20.05 (3/26 close), the market cap is therefore $36.3 million. Cash net income was $3.6 million for 2000, so that's a multiple of 10.1x.
While this may not sound super cheap, consider that Imperial has $8.3 million in cash ($4.59/share). In addition, while it operates almost all of its parking lots under management contracts or leases, it owns some real estate which is conservatively worth $10 million according to the CEO ($5.53/share). Thus, the enterprise value is $18.0 million ($9.94/share). This is equal to only 5.0x trailing cash net income and 3.6x trailing EBITDA less cap ex. Any way you look at it, this stock is very cheap.
WHY IS IMPERIAL SO CHEAP?
Imperial was an indirect subsidiary of First Union Real Estate (NYSE: FUR) until its shares were distributed in a 1-for-20 taxable spin-off last March. Note that the most inefficiently priced spin-offs tend to be have high ratios like this (as opposed to 1-for-1 spin-offs, for example) and are taxable, which can lead to tax-loss selling. Also many mutual funds that owned First Union Real Estate were REIT-focused, and thus were forced to sell their Imperial shares. There was (and still is) no natural constituency of buyers.
Also, put yourself in the shoes of a shareholder of First Union -- a stock that had declined over about two years from more than $16 to less than $4. Let’s say you owned 1,000 shares and all of a sudden the stock dropped by 23% overnight. As compensation, you were given 50 shares, worth less than $1,000, of some tiny Canadian parking lot company. What would you do? Try to figure out the company by wading through a 121-page Form 10-12B/A filed with the SEC, or dump the turkey? This is a classic example of a mispriced spin-off.
Not surprisingly, Imperial's stock, which began trading above $19, quickly fell to as low as $11.50, which is right about where I started buying. While the stock has risen 65% since then, I think it may be even MORE undervalued today because of the many favorable developments.
The stock remains very cheap I believe because: 1) it’s very thinly traded (on an average day, only 1,000 shares trade hands; some days, not a single share trades); and 2) no-one has heard of it. Wall Street doesn’t cover it and there was no road show associated with an IPO. Neither of these factors are likely to change much in the near future -- though I understand that management will be making efforts to introduce the company to at least some appropriate money managers in the near future.
FINAL CONSIDERATIONS
- Imperial is signing many new leases, which depress profits initially, but which are typically very lucrative in subsequent years.
- Imperial has the infrastructure in place to support a much larger company, so there are likely to be nice economies of scale.
- Imperial has developed proprietary technology (now part of a wholly-owned subsidiary, City Collections) that allows it to operate 70% of its Canadian lots unattended, which reduces costs as well as labor and union problems. While uncommon in the U.S., Imperial believes that unattended lots can work here too, which would further increase the company's profitability.
- Imperial has strategic value to a potential acquirer due to its size, geographic scope, quality of its management team, and dominant market position in Canada. It would take a great deal of time and money to replicate what Imperial has built since 1962.
- Board members own a great deal of stock and are smart capital allocators.
- The company and insiders have been buying heavily. Over the past four months, the company has bought back 14% of its shares, and the investment firm controlled by Imperial's chairman has increased its stake from 13% to 25% over the past year.
Catalyst:
Potential catalysts: 1) an acquisition; 2) a road show is planned, aimed at value-oriented small-cap investors (it won't hurt that Imperial has operations in the money centers of New York City and San Francisco, so investors can easily visit some sites); 3) valuation.
I believe that as long as the company continues to grow profitably over time, the stock will take care of itself. |
