Value Investor Today

Here are some interesting hour long video's produced by the PBS television series
'Frontline'. 

1. Bernie Madoff
2. The Warning
3. Breaking The Bank
4. Close To Home

This posting will be short and to the point. My good friend PlanMaestro has written extensively on Premier Exhibitions (PRXI). If you would like to know more about the company and what they do, I suggest you view his blogs here. The purpose of my writing is to show that many value investors, including well known ones, have made a mistake with PRXI.

The famous investor, Mark Sellers, gave his reasons for investing in PRXI and becoming one of the largest shareholder of the company. His reasoning included:

“In 1994, Premier was granted salvor-in-possession status by a federal court for the Titanic, which sunk in 1912 in 12,500 feet of water off the coast of Newfoundland.

Because of the court ruling, Premier has the exclusive right to recover artifacts, data, and images from the Titanic site. After several expensive dive expeditions over the years, Premier has amassed the largest collection of information and artifacts from the Titanic (in fact, it has pretty much the only legal collection of Titanic artifacts because no one else is allowed to explore the shipwreck site). The company tours the world with these artifacts, exhibiting them in museums.

This is the “hidden asset” part of the company. The market value of these artifacts is in the hundreds of millions of dollars (for example, the Titanic has 3m rivets and Premier has been offered $10,000 for just one rivet!) We feel that if Premier were to sell the artifacts, it would get a cash infusion equal to 25-50 per cent of its current market cap and still not lose much revenue because it could continue to exhibit some of the items under an exclusive licence agreement with the buyer.”

An interesting observation is that he mentions Premier was offered $10,000 for one rivet and that the company has 3 Million rivets. He goes on to say that the market value of these artifacts is in the hundreds of millions of dollars.

Where Mr. Sellers made his mistake was in his presumption that Premier OWNS the artifacts. Premier was granted salvor-in-possession status BUT during the granting, the judges ruling on the case explicitly stated that Premier does not own the 5,900 artifacts or the wreck itself.

So why did Premier turn down the $10,000 offer for just one rivet? Simply because it wasn’t theirs to sell. Mr. Sellers didn’t do his homework and incorrectly valued the business based off its assets, which technically aren’t theirs. This goes to show why it’s so important not to buy a stock just because your favorite investor buys the stock. Sometimes they are wrong.

So how is the proper way to go about valuing the business? In my professional opinion, it is to value all future cash flows of the business. Currently, Premier hasn’t fared very well at making a buck. Total Operating Expenses have increased as a margin of revenue from 33.32% in 2007 to 64.94% as of 2009. The COGS of their merchandise alone in relationship to how much revenue the merchandise item creates has increased from a 17.15% margin in 2007 to 39.81% in 2009.

Premier has been increasing their spending at the same time as bringing in less revenue. After I finished my valuation of the company, I believe the fair market value of the firm is $0.26 per share. The company is currently trading for $1.16 per share.

A final point to mention is: over the news wire last night, an article stated that Premier has gone back to court to try and claim ownership of the titanic. This action also proves that Premier does not own the assets they claim that they do on paper. Many reports have came out, including the link I’ve provided, that believe the judge will rule against them but allow them to continue displaying the artifacts they’ve collected for profit.

Finally, Mr. Sellers may not be the kind of value investor one thought he was after learning all the facts.

Additional information regarding the ownership of titanic assets:

The actual court document that proves without question that Premier Exhibitions DOES NOT own the artifacts from the Titanic or the Titanic itself.

“Following a hearing, the district court entered an order dated July 2, 2004, in which it (1) refused to grant comity and recognize the decision of a French administrator awarding RMST title to the 1987 artifacts, and (2) rejected RMST’s claim that it should be awarded title to the artifacts recovered since 1993 under the maritime law of finds. R.M.S. Titanic, Inc. v. Wrecked & Abandoned Vessel . . .believed to be the R.M.S. Titanic, 323 F. Supp. 2d 724, 744-45 (E.D.
Va. 2004).”

Fox News

Guardian News

UPDATE: After reading the above court document thoroughly, it appears that the French ruling of all artifacts that were collected by Premier prior and up to 1987 were upheld by U.S. court. There’s a BUT though. When the French granted ownership to Premier of those artifacts, Premier had to agree to NEVER sell those artifacts or dispose of them in any way. Regarding all artifacts salvaged after 1987, U.S. Courts ruled that Premier could have exclusive salvage right to them but DID NOT grant Premier ownership of those artifacts.

This information reveals that Premier, regardless of being granted ownership of the artifacts up until 1987, can not sell those artifacts under any conditions. Therefore, the asset related to the Titanic artifacts have no material value to the shareholders of PRXI.

I sold my position in VXGN today. To sum it up, an activist group of value investors initiated a proxy fight in order to liquidate the company then, recently, the VaxGen company decided to merge itself with another pharma company that was in a worse position financially than VaxGen themselves. This was a classic case of throwing good money after bad.

In the following days, two law firms filed a class action lawsuit on the shareholders behalf against VXGN for breaching their fiduciary responsibilities. In response, the activist group of investors have been selling off their 13% stake in the company and dropped the proxy fight. They are exiting out the door.

Why? VaxGen was made up of mostly cash, approximately $33.2 Million. After deducting their total liabilities, they were worth $0.83 per share, however, they had no immediate debt so the chances of them being released from much of their long term liabilities was high and therefore their cash, after deducting TL, was most likely higher. On the day VaxGen agreed to a merger with Oxigene, the company was selling between $0.70 – $0.72 per share. OXGN will issue 15.6M common shares in exchange for all outstanding VXGN common shares. For each VXGN share held, VXGN shareholders receive 0.4719 OXGN shares. At the time of the deal, OXGN was trading for $1.37 per share which makes each share worth $0.65. Today, OXGN is trading for $1.26 per share making each share now worth only $0.59.

VXGN’s net-net value, without their hard assets, was a conservative estimate of $0.83 per share and they were trading as high as $0.72 per share the day the merger was announced. Yet, they agreed to sell their entire business, including their hard assets, for $0.07 per share less than what they were even trading for on the day of the agreement and $0.18 per share less than what their cash after deducting all liabilities was even worth.

Did VaxGen break their fiduciary responsibilities? I believe they have and so does two law firms; Howard G. Smith & Levi and Korsinsky, LLP. Both firms have fired off a class action lawsuit against VaxGen. Ever since, VXGN has been plummeting in market price and value. Regardless of the outcome of litigation, it is going to cost VaxGen large amounts of money to defend themselves and the $33.2 Million cash appeal that they originally had will be greatly diminished. It could cause Oxigene to step out of the deal or it could cause VaxGen to not be able to fulfill the agreement because of a lack of funds.

In any event, none of this helps an investor. So what have I learned from this situation? I have a simple answer: That a Margin of Safety works and is the most important investment concept ever created. Even though VXGN dropped -23.61% in market price over the last few days, I was able to sell at a profit. In a normal economic environment, it was a profit that would often times beat the S&P 500. Had I not purchased using a substantial Margin of Safety on top of my already conservative valuation, I would have lost a large percentage of my investment.

Incidentally and comical to note, the BETA of VXGN is 0.97 which means it is less ‘risky’ than the overall market. For anyone that believes in BETA or the Efficient Market Hypothesis, this is just one example that BETA amounts to nothing more than hogwash. It has absolutely nothing to do with risk and is incorrect regarding volatility.

To sum it up:

1. The Margin of Safety works and is your best tool to avoid risk of loss.

2. When the group that helped to sway your investment decision runs for the exit doors, it’s a good idea to follow them – quickly.

3. Always read the SEC filings. If I hadn’t read ALL the SEC filings, and on a daily basis, I would have been like 90% of all the investors who lose money.

4. Everything about BETA is hogwash.