7/16/2017

Patriot Transportation is a Forgotten Undervalued Spin-off




Patriot Transportation (PATI) is a top tier regional tank truck hauler servicing the southeastern United States. FRP Holdings spun-off Patriot Transportation during January 2015 and began trading under the symbol PATI. However, they began as a premier bulk tank carrier in 1962 under the name Florida Rock and Tank Lines. Florida Rock and Tank Lines continues its growth as an industry leader in the southeastern United States, transporting petroleum and other liquid and dry bulk commodities in tank trucks.










Patriot Transportation (PATI) operates under their one subsidiary, Florida Rock and Tank Line. They specialize in hauling petroleum (82% of revenue), dry bulk and other liquid commodities(18% of revenue).








The tank lines transportation business is highly fragmented. This attribute offers PATI exciting growth opportunities with its strong balance sheet, free cash flow, clean capital structure and committed bank financing to benefit from industry consolidation. Ranked #12 in US by revenue per the 2013 Bulk Transporter's Gross Revenue Report. Number one of the top 3 tank truck haulers in the markets they generate 66% of their revenues.
 
   Current Valuation:

















Patriot Transportation is a value outlier based on asset reproduction and earnings power. They have 21 terminals, 9 satellite locations,488 Tractors and 563 Trailers located in Florida, Georgia, North Carolina, South Carolina, Alabama, and Tennessee. Terminals owned in Florida (Jacksonville, Panama City, Pensacola, Tampa, White Springs) Georgia (Albany, Augusta, Bainbridge, Columbus, Doraville, Macon) and Tennessee (Chattanooga, Knoxville). Additionally, the company owns 468 tractors and 561 tank trailers. During fiscal 2016, the Company purchased 78 new tractors and 24 trailers. Further, its current financial position reports 6.87M cash, 6.44M current account receivables, for a total current asset value of 17.95M. Gross PPE of 102.19M or net value of 41. 38M.The total equity value is 45.82M or $13.89 per share with no debt. 

Insider buying from original founders of Florida Rock / Patriot Transportation, John Baker. The Baker family owns 37% of PATI. Edward L. Baker 5.14%, John D. Baker (Chairman) 13.39%, Thompson S. Baker (President and CEO)5.69%, Edward L Baker (Chairman Emeritus) 1.227%.
John D. Baker (Chairman) purchased 10,000 shares during June 2017 for $179,662 or 17.97 per share. During 2016 John D Baker purchased 6,233 shares for $121,712 or 19.53 per share.


Value institutions holding shares at higher prices are Royce Associates, PVAM Perlus Microcap Fund, T. Rowe Price Associates, Hyman Charles D, Willis Investment Counsel, Rutabaga Capital, Cove Street, and Teton Advisors. 

Nine of their top 10 largest volume customers serviced over 10 consecutive years. During the past five years' annual revenues grew 54.60% with these loyal customers. This supported by consistent double digit return on capital, TTM ROIC is 12.17%. Trading near tangible book value recorded below fair market value, EV/EBIT = 7.18, and EV/revenue of .45.



Historical Value Improvements















The stock is down -18% over the past 52 weeks. Off its 52 high of $27.32 versus the $17.95 closing price on 07/14/17. Revenues decreased slightly year over year. But, profits reported with growing net cash, equity and reduction of liabilities and enterprise value to revenue and EBITDA.




Trucking Industry Comparisons (18 Companies)






I ran a screen for companies in the trucking industry and excluded OTC listed. My final but not perfect industry peer group is 18 companies. Many competitors are smaller private and not reviewed.

After doing the industry comparisons, Patriot Transportation is a strong value outlier with the these attributes. Ranked highest for financial strength, lowest for EV/EBITDA at 3. Percentage above historical low, P/Book, EV/Sales, EV/EBITDA ranked lowest. PATI has the smallest market capitalization, enterprise value, and short as a percentage of the float. The negative 18% stock return ranked 3rd lowest in the group.



Risks:

Thinly traded with no Wall Street Coverage

Loss of major customers from under biding by a larger competitor or bankruptcy.

Lack of Wall Street Coverage.

A continued labor shortage of available qualified drivers.

The increasing costs of worker's health care, fuel prices, insurance, equipment, taxes, tolls and regulations.

Reduced demand for hauling petroleum products from overcapacity or industry / economic trends.

Liabilities from environmental costs related to the hazardous materials delivered.




Opportunties:

Future acquisitions coupled with Wall Street coverage and continued profitable growth. 



Long: PATI

7/04/2017

VAALCO Energy: Ugly and Ignored Attributes Creates an Undervalued Opportunity



VAALCO Energy (EGY) is a tiny independent energy company with a ~ 53M market capitalization. It specializes in oil producing properties in Gabon, West Africa, and Angola. Specifically, activities include production, development, exploration, and acquisition of oil and natural gas properties. EGY manages exploration as an operator in Gabon, Equatorial Guinea, and West Africa. Therefore, its intrinsic value linked with oil prices. Being that, each $5/barrel improvement in oil price increases annualized cash flow by ~$6MM per management's public guidance. At December 31, 2016, VAALCO had 2.6 MMBOE of proved reserves related to their property in offshore Gabon Africa. Their U.S. property ownership and interest are in North Texas and Montana, now its not a relevant oil producer. VAALCO incorporated in 1985 with 104 employees.

The enterprise and market value for VAALCO (EGY) dropped 89% since 2012, 84% from 2014. In contrast, an exceptional TTM financial performance reported with a reasonable and improving balance sheet. Enterprise value to operating income over the TTM is 2.49, EV/OI = 2.49, EV/GP = 1.21, EV/EBITDA = 1.86, and EV/Sales = .62. These measures support the deep relative and historical bargain price thesis. For these reasons and others EGY now attracts quality longer-term value institutional ownership. Further evidence of the market’s overreaction to the downside is the declining inconsequential short balance (1.20% short float) coupled with modest positive insider activity with no sales.

Insider transaction summary: April 2017 50,000 shares or total of $47,000 purchased for $.94 per share. The fiscal year 2016 recorded 60,000 shares purchased for an average price of $1.08. During 2015 159,317 shares purchased for an average price of $1.68, a total of $267,219.


If the favorable TTM results continue Vaalco Energy offers at an extreme discount to current operating performance and proven reserves. Then, the future stock price moves much higher.

Vaalco just published their June’s lifting results, 629,246 Bbls. These bullish production results have not been exceeded since 9/25/2015. click to view historical liftings detail.
























The table below highlights and comments on historical 2012 to current deep and mean reverting valuation discounts.































Relative industry valuation analysis started with 413 companies in the Oil Gas Exploration / Production industry. The list cut to 45 by filtering for a market capitalization between 10M and 300M.Then, removing per share price less than .50 and OTCPK exchange listed companies.

This list of 45 first analyzed for insider transactions and institutional ownership. EGY, PQ, GST, and AREX are the only companies with 2017 positive insider activity.  I went further looking at the number shares purchased to total shares outstanding as a measure of conviction. EGY ranked second most favorable behind PQ. Further, institutional activity for the quarter ending 03/31/17 and total ownership analyzed for the 45 companies. The best results are shown for EGY. PQ placed second for value institutions adding to existing EGY position during the quarter ending 03/31/17. Specifically, for EGY the Tieton Capital Group a small value investment firm added 1,102,610 shares to increase its ownership to 2,244,631 shares. LONE STAR Value Management, Wilen Investment Management, and Renaissance Technologies also adding to existing position during the most recent reported quarter.




The table below compares the group of 45 competitors to Vaalco (EGY). It highlights EGY's valuation advantages.




















Risks:

"In a commodity type business, you're only as smart as your dumbest competitor". Warren Buffett

Declining oil prices is always a possibility with multiple competing sources.

Reverts to its unprofitable negative cash flow impacting access to financing.

Unexpected operational accidents. Litigation and disagreement with local African governments.


Opportunities:

A strong production update published in June's lifting results, 629,246 Bbls. These bullish results not exceeded since 9/25/2015. click to view historical liftings detail. Furthermore, strong reserves reported at December 31, 2016. VAALCO had 2.6 MMBOE of proved reserves related to offshore property at Gabon Africa.

An experienced small team has years specializing in African oil production. Management's public commentary and investor presentations show a deep, detailed understanding of the operational and financial levers needed to drive its stock's value higher. The recent strong operating and financial results show an improved company versus multiple negative quarters fighting lower oil prices and operational challenges.

Clean capital structure with the financial strength this quarter to secure access to $4.2 million of added funds for financial flexibility and help execute strategy.

The strong financial results over the TTM if followed by another one or two quarters will move the stock price significantly higher.

No real institutional coverage. But, "National Securities reaffirmed a "neutral" rating and issued a $2.00 target price on shares of Vaalco Energy in a report on Wednesday, March 15th, 2017".

Reversion to the historical and industry mean valuation

Long: EGY

6/20/2017

The Rubicon Project: Who and why selling is creating a bargain price?


If profit is investors motive. Why or who sells a stock worth a dollar for 50 cent? This is an enormous and exciting topic. Charlie Munger's sage advice, "think forwards and backwards - invert, always invert". Focus your efforts capitalizing on overlooked yet simple investing techniques.Why bargains happen is too vast and intricate a topic for complete coverage in a blog post. Instead, this post will cover one significant driver of this price inefficiency. Rule-based institutional transactions are often the catalyst of a stock's inefficient price. The financial entity's investment charter often drives irrational buying and selling.

The topic of who sells a dollar for 50 cent can include overreaction to changing fundamentals, drop in stock value (fear/greed), career risk, liquidity requirements or a financial institutions' investment charter. An investment charter includes style (growth, value, market size, specialty) that if violated the stock sold regardless of positive exceptions. There exist over 7,000 mutual funds, near 2,000 ETFs and approximate 11,000 hedge funds. The investment behavior of these institutions covers a large part of the buying and selling volume. So, this activity creates short and medium term buying or selling opportunities. Investors can exploit these price inefficiencies.

"There's only one reason a share goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you've got to look for where the public is most frightened and pessimistic." Sir John Templeton



This brings me to an oversold idea, The Rubicon Project (RUBI). It fell victim to institutional selling based on growth attribute noncompliance. Rubicon's sales growth missteps forced their original institutional base to sell. Also, recent brokerage sentiment reinforced RUBI is no longer a growth story at least in the short term. At first, value institutions sat on the sidelines. But, they are trickling back.

No credence is given to Rubicon's beneficial exceptions. Or, the mean reverting -60% 52-week price change. Rubicon's favorable exceptions ignored by selling growth institutions include the strong financial position with 3.88 per share in cash, no debt, positive cash flow, high gross margins versus the current $5.55 price or $1.77 enterprise value per share. Last week on 06/07/17 the stock closed at $4.69, 68% off its 52-week high of $14.79 and 75% from the all-time June 2016 high. The stock has drifted 15% higher over this past week to close on Friday, 07/16/17 at $5.55. RUBI still warrants a closer look.


The Rubicon Project (RUBI) sells a technology solution to automate the buy and sale of a wide range of advertising units for buyers and sellers. 

Valuation






















Relative Valuation





















Rubicon's stock price crashed 60% over the past 52 weeks. The price drop relates to the YOY 30% decline in revenue. The revenue decline is the direct results of Rubicon's slow transition to change its advertising technology as customers shifted towards alternatives. But, the board quickly addressed revenue decline. CEO and co-founder Frank Addante replaced by an industry veteran Michael Barrett during March 2017. Addante will stay on the board as chairman and founder. Before Barrett's arrival, Rubicon laid off around 19% of its workforce or 125 employees including senior management at the end of 2016. Further, RD spends over the TTM is at a historical high since the 2014 IPO showing their commitment to any industry's technology shifts.

Barrett industry reputation is for cleaning and selling the business. Before Barrett's arrival, Rubicon was for sale. January 2017, The Wall Street Journal reported that Rubicon Project "is exploring strategic options, including a potential sale, with the help of Morgan Stanley. After Barrett's recent arrival he stated: "the company is not for sale". But industry rumors continue around the possible Rubicon sale.



Long:RUBI


6/06/2017

Unique Value, No Catalyst, Net Cash 64% of Market Cap, Insider Buying, 52 WK low: Acacia Research (ACTG)


Acacia Research (ACTG) is an intermediary in the patent market. It facilitates efficiency and delivers financial gains for patent owners by leveraging its legal and technology expertise.

"Acacia signed more licensing deals generated more revenue and has more experience analyzing, valuing and monetizing IP than just about anyone focused in the IP space. We have been challenged by the largest, smartest, best capitalized companies and law firms in the world and have a proven track record of success." 

Acacia only represents prejudiced patent owners that prove in courts to be valid and infringed. As a result, Acacia has returned over $750 million for patent partners. So far, over 1,530 license agreements executed across 192 patent portfolios. Up until now, Acacia generated near 1.40 billion in gross licensing revenue.

It's A+ financial position with no real direct competition, asset light business model and historical although uneven success can offer investors uncommon value. Acacia benefits from a low risk high reward service model where companies, inventors, or research labs use their expertise to fully monetize their IP licensing. The service is mutually beneficial. Customer include small companies, sole inventors, or research labs. Further, large corporations can and do use their expertise to fully license their IP business.

During the Q1 2017 earnings call management commented on recent subsequent Q1 wins.
Acacia subsidiary Saint Lawrence Communications received a 9.2M jury verdict against MOTOROLA. A second trial seeking additional damages because the infringement was found willful is scheduled within the next few weeks. 

Subsidiary Cellular Communications Equipment (CCE) patent trial against Apple begins on July 31 2017. CCE succeeded with its Apple litigation in Germany. Initially Apple asserted the suit was unjustified. The reason being the European counterparts is the same as US patent dispute lost during the September infringement verdict. The related German infringement trial against Apple occurs late this year. This win favorably impacts the new US Apple suit lost September of last year that crushed the stock price. Read below and immediately following John Rogers (Ariel) comments on the original lost trial.

"Acacia lost the first trial because the jury lacked intellectual patent knowledge. We believe a favorable verdict is merely delayed and not permanently lost. We have added to the shares because we remain confident in the original thesis." Rogers' January investor comments

Looking forward, Acacia subsidiary Limestone Memory Systems has infringement cases pending against Micron and other defendants. Saint Lawrence found success in Q1 with a patent action in Germany.  Specifically, Germany court granted an injunction and enforcement proceeding against both Motorola and ZTE. Saint Lawrence has a trial scheduled against Apple in February of 2018.



Quarter 1, 2017 conference call financial highlights;

Revenues declined 64% (8.9M versus 24.70M). The Q1 non-gaap net loss was 4.2m or .08. after eliminating non-cash charges for amortization and stock options. Average margins for the first quarter were 85% as compared to 77% in the comparable prior quarter. Fixed SGA expenses except non-cash charges, and severance expected to be between $11.5 million to $12 million for 2017. Even with the negative results cash totaled $156.8M or 2.88 per share and net cash per share is 2.55. Management's optimism focused on the current patent assets coupled with recent court victories post Q1 close.

Acacia focus is to leverage their IT expertise. They plan to employ their experience and proprietary data to increase business in areas of IP outside patent licensing. Patent licensing will continue to be an important part of their business. But, it's a tiny subset of the whole patent ecosystem and current opportunities. High growth technology companies can benefit from Acacia's patent expertise, skills and industry relationships

An example of the expanded business strategy, loans made to Veritone. Two loans for 20M in 2016 and an 8M bridge loan before the Veritone (VERI) IPO on 05/26/17. The principal and accrued interest under both Acacia's $20.0 million secured promissory note and Veritone's $8.0 million line of credit converted to equity. Per the 05/26/17 SEC form 4 filing ACTG owns 4,119,521 shares of VERI. The total shares owned include free shares, exercised warrants. I don't have the exact total average cost per share. But most shares purchased at 13.60 and likely an average closer to 10. VERI shares IPOed near 15. Since VERI IPOed on 05/24/17 details are sparse on the VERI future relationship. The current market price for VERI is 13.30. I hope the ACTG sold VERI shares during the IPO. Potential positive news on Veriton, selected as 2016 Red Herring Top 100 North America Award Winner http://prn.to/1XdtrOl. Veritone's proprietary technology protected by over 90 issued and pending patents. The patent technology is likely reason for the relationship.

"We will continue to seek high quality patent licensing opportunities, but we believe alternative IP opportunities will be larger, less risky, more predictable, and more profitable than IP licensing business alone. "




















Net cash is $2.55. Cash per share = $2.88, Current Liabilities = $0.33 with no long term debt.
























The total insider buys for 2016 and YTD 2017 is $6,029,529 or 1,310,235 shares(~2.31% of total shares outstanding).


































John Rogers from Ariel owns 3,413,174 shares at an average price of 12.85. $13,413,174 or 6.75% of TSO.

January 2016 John Rogers commented on Acacia Research. "Intellectual property and patent expert Acacia Research Corp. (ACTG) stock fell -52.14% when it lost a lawsuit that many had expected it to win. In our view, Acacia lost the first trial because the jury lacked intellectual patent knowledge. We believe a favorable verdict is merely delayed and not permanently lost; the lawsuit will be refiled in Germany, where it will be decided by a panel of judges who have technical expertise. We have added to the shares because we remain confident in the original thesis."


Negatives:

Equity Investment in Veritone is not supported by fundamentals. Its highly speculative. 

Stock option expense during Q1 2017 increased 23%. These stock options have market based performance conditions.

Another interim CEO after resignation of interim CEO Martin Key. Key was unwilling to relocate his family to California. Key replaced CEO Matthew Vella in 2016.

Poor visibility for the timing of revenues and profitability. This makes valuation speculative.



Long ACTG