Finding Value Together or Apart
Elise is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On cold winter days, sometimes it's nice to daydream about tropical paradises. Lately, I've been thinking back to mid-October 2008 when I was swimming and frolicking in the Hawaiian sun with my fiance. The economy was just beginning to unravel but while I was visiting during his port call, he, a commanding officer of a Seawolf-class fast attack submarine, had received official orders for us to go to Guam. The thought of waiting out the economic recession on a tropical Pacific island was awfully appealing! I now have a deep appreciation for fortunes found in the warm Pacific island sun and so I've been looking at Hawaii's Alexander and Baldwin (NYSE: ALEX).
ALEX is an old Hawaiian company, founded in 1870, and was one of the "Big Five" sugar cane companies who wielded a great deal of power in territorial Hawaii during the first half of the 20th century. Those companies jointly owned a shipping company, Matson Navigation, which carried the majority of all cargo shipped between Hawaii and the mainland. After statehood, the US Department of Justice challenged this ownership arrangement and ultimately Alexander and Baldwin acquired Matson outright.
Since then, ALEX has really been two companies in one: a commercial real estate and land-holding company, primarily focused on Hawaii, and Matson, a leader in Pacific shipping with logistics operations throughout North America. ALEX announced in early December that they planned to divide themselves into two publicly traded companies and the market responded favorably. The two companies will be comparable in size and the transportation company, Matson, will take 60% of the long term debt. ALEX has been paying an annual dividend of $1.26 and it is anticipated that Matson will continue to pay dividends of approximately $0.50 to $0.70.
ALEX's market capitalization is approximately $1.7 billion and it owns almost 90,000 acres of land that was acquired for sugar cane production on Maui and Kauai over a hundred years ago. If the market capitalization was entirely locked up in the value of the land, it would work out to less than $20,000/acre. That sounds awfully expensive to someone from the middle of the country, but on a tropical island? That's cheap! Now, of course, all that land isn't going to be dumped on the market, but it is comforting to realize how deep the land bank is for this company.
So, how does this company make money? The commercial real estate portion of the business has grown to almost 8 million square feet, which generate a stable cash flow (a profit of $9.2 million was reported in the most recent quarterly report released in early November). This cash is to be reinvested in additional real estate and development activity. Approximately $3 million in profit was achieved through real estate sales. In addition, Maui sugar posted operating profits of almost $4 million during the quarter (compared to less than $1 million during the same period last year). It has some unique "green" aspects as well; it operates the nation's largest private water system on Maui, bringing water from the windward side of the island to the arid interior. Hydroelectric power is generated on Kauai and Maui and they are burning biomass for energy.
The transportation entity generates profit through shipping from the mainland to Hawaii as well as to Guam and other islands in Micronesia. Matson's operating margin has been a respectable 8%. The Jones Act provides somewhat of an economic moat as foreign vessels are not allowed to operate commercially between US ports. Their primary competitor, Horizon Lines (NYSE: HRZ) (delisted this past October) only operates Pacific routes between Hawaii and the mainland and thus they have no competition on their other routes. A recently-opened route to China allows the vessels to return to the mainland with more cargo than when they were returning from Hawaii. A second China route was attempted but subsequently closed due to malaise in the shipping industry. The future of this profit stream relies on the Chinese economy and trade between the US and China.
Horizon recently closed its Guam business this past autumn after it was hard hit by a price-fixing scandal involving its Puerto Rico rates. As Guam anticipates a multi-billion dollar "military buildup" in the near future, Matson is currently the only shipping company that can bring supplies from the mainland. There have been some delays in the much-anticipated Guam buildup due to budget constraints and problems on island (a project to dredge the Navy Harbor so it could be accessible for aircraft carriers was postponed by at least a year because of concerns about the integrity of the initial marine study). Nevertheless, the Department of Defense remains committed to the US position on Guam as a "tip of the spear."
With a future based firmly in Hawaii and the Pacific, things look relatively bright for both halves of ALEX. This company relies heavily on the economy of Hawaii, which is doing relatively well. Visitor expenditures in 2011 rivaled the highest year of 2007 and unemployment is among the lowest in the nation, (under 6%).
Will Alexander and Baldwin and Matson both thrive after their separation? Separation allows both companies to focus their efforts on their unique business strategies and investment needs. It will also allow analysts to better research the two companies, which could lead to more favorable estimates of the valuation of the two companies as well as attracting sector-specific investors. The leadership of the two companies will primarily be drawn from within the ALEX ranks of long-term leaders whose compensation is based on creating shareholder value. In addition, no jobs will be eliminated as a consequence of the process. Thus, there should be little downside to the process of the split.
The future of equities, like life itself, is always hard to predict. Since October 2008, things unraveled for the economy and for me. Shortly after I moved to Guam, my sailor did not. Instead, it turns out, he ran off with one of the two other women to whom he was engaged at the same time. I have learned not to pin too many hopes on a rosy future and have learned the unexpected can happen. At least I can still own a tiny bit of land in the tropical Pacific and a boat to get there, in the form of this company.
Elise owns shares of ALEX.