Underground Value: January 2007

Thursday, January 25, 2007

Premier Exhibitions, Inc.

Premier Exhibitions, Inc. (PRXI) has been on quite a tear lately, surging close to 70% since the beginning of 2007. Their Q3 conference call (1/10/07) announced another great quarter, and I especially appreciated the fact that written transcripts were available. Key takeaways:

Revenues of $7.9M
Titanic exhibits are fully booked.
Considering three options for monetization of Titanic assets.
Two Bodies exhibits to be added late spring.
Scrims (fabric walls) should save $1M annually, (5 exhibits * $100K / exhbit * 2 setups / year)
Growing cash of $10.2M and no debt.
$3.3 M revenues during the week of 12/26/06 to 1/2/07, which promises an excellent Q4.

Just a week ago, they announced plans to open new Bodies Exhibits in Pittsburgh, and Sao Paulo, the 5th most populous city in the world.

As a side note, value investors generally don't try to time the market. I've held this stock for under a year, with little substantial movement until the past few weeks. It's hard enough to be right about a stock. I doubt there's any way I could've predicted the timing of this action. When time permits, will post my updated writeup.

Sunday, January 21, 2007

FootStar, Inc.

Footstar, Inc. (FTAR) is a holding company and operates a retail business through Meldisco, which sells family footwear through licensed footwear departments and wholesale arrangements. Meldisco has operated licensed footwear departments since 1961 and is the operator of licensed footwear departments in the United States. FootStar was forced into bankruptcy by a problematic athletic shoe division which was later sold off. In February, they emerged from Chapter 11, with no debt.

Valuation of FootStar must take into account two separate scenarios. Under the current Kmart Settlement, FootStar is set to be liquidated at the end of 2008. The liquidation would be the worst case scenario, however, it still represents an attractive proposition. In the two quarters out of bankruptcy, FootStar has reported $20 MM and $6 MM in earnings. Assuming a conservative run-rate of $40 MM per year and $5 MM adjustment for D&A, FootStar will have accumulated an additional $90 MM in cash through 2008. On the balance sheet, FootStar has $68 MM in cash, $110 MM in inventory, a $20 MM headquarters building with an additional $135 MM in liabilities. FootStar could be worth approximately $153 MM at liquidation with some additional upside for their NOL's.

If FootStar is allowed to continue as ongoing concern past 2008, then we assume $40 MM annual earnings, or $60 MM of EBITDA and look at peer comparisons. With an industry P/E multiple average of 14 and EV/EBITDA average of 8 and the existing $68MM cash, this implies FootStar is worth between $548-628 MM.

Given 21 MM shares outstanding, we have approximately $7.28 per share in liquidation value and approximately $26-30 per share if FootStar continues to operate. I was lucky enough to purchase shares in February at $4.20 and October at $4.93 which represented a large enough discount to the worst case scenario. The shares have moved up substantially since then to the current price of $6.60. This currently only represents a small discount to liquidation, and I am not sure if I would recommend a purchase. However, I continue to hold as a free call on the possibility that they are an ongoing concern, either through renegotiation of KMart Agreement or pursuit of a different business model.

Additional Opinions:

Valuation

I recently sharpened my valuation skills with these excellent programs provided by the school.

Wall Street Program
Training The Street

As of now, I feel most comfortable with using public comps, historical comps, and DCF. Some of the other valuation methods seemed a bit too speculative (especially LBO). These models can be highly sensitive to the inputs, so there is an art of choosing which model to use as well as using that model correctly. But it is important to have an investment thesis be so compelling that you are less sensitive to any biases. I hope to post up within a day or two writeups of some of my investments.

"Based on my own personal experience - both as an investor in recent years and an expert witness in years past - rarely do more than three or four variables really count. Everything else is noise."

-- Marty Whitman

"Usually, the success of an investment is highly dependent on only a few key variables ... and I can’t think of a single case in which one of those variables was the discount rate we used - whether 8, 9 or 10 per cent."

-- Whitney Tilson