3Q Earnings and Conversion Committee Update

Earnings press release

Impressive top line growth.  I can’t help but see that EBITDA (newly included by TPL in releases) is pretty much equal to revenues from royalties, land sales, and easements.  It appears as if all profits from water are being eaten by legal fees and comp.  Estimated water margins appear to have stabilized near 50%.  The sheet below isn’t perfect but it’s likely directionally right.  Margins are being squeezed by expenses.

q3 margin analysis updated

Simple margins tell you this as well.

simple margins q319

Can’t wait until legal fees are in the rear view mirror.

D&A increasing.

I’m not operating the business but my guess is that there are some aspects that can be tightened up.  We shall see.

That all being said, $7.74/share x 4 = $31/share annualized.  $569 / $31 = 18 P/E.  Low to historic multiples.   We’re looking at a $775 price at a 25x multiple which is more consistent with historical valuations.


Conversion Committe update

The Committee has continued to meet with its advisors, including Credit Suisse, which is assisting the Trust and the Committee in developing its recommendation to the Trustees. The Committee has met 5 times, both in person and over the phone, since its inception, and deliberations to date have been productive and informative. Although its deliberations are confidential, the Committee will continue to provide monthly progress reports to shareholders as required by its Charter before issuing a final recommendation to the Trustees.

Was hoping for a bit more progress than that!  So 2 meetings in October?

Open Thread: Valuation

A couple of readers have asked that I start up a valuation thread.  No wrong answers here if you’d like to add your thoughts.  I’d particularly like to hear how you handle asset valuation vs income from assets; I’ve seen a fair amount of double counting.

I’ll start with a quicky that I wrote after the Q: “I calculate the “non-sale” (no sale income included) EBTDA to be $73MM.  $73MM taxed at 20% = $58.4MM or $234MM/year.  20x = $4.67B.  30x = $7B.  Current mkt cap is $6.13B.  Implied multiple = 26x.  Again, very back of the envelope.”


From the WSJ Archives

Texas Pacific Land Trust Offers A Get-Rich-Slow Opportunity

Oldy but goody here from 1998.  The modern owner has to wonder if Bregman’s quote around a “creeping buyout” will hold true from here.

“People are going to become less interested in ‘concept’ stocks that sell at hope times greed times infinity,” says Mr. Shaefer, who is also editor of the Investor’s Edge newsletter, which has pushed Texas Pacific. Instead, investors will “be looking for real underlying asset value in the companies they own.”

Mr. Shaefer says his fund bought an undisclosed stake in Texas Pacific in January 1997 at $27.63 a share, and he doesn’t plan to sell until the stock reaches at least $80. By his calculations, the underlying assets are worth about $100 a share right now.

At its current rate, the trust is buying back stock more quickly than it’s selling land. Between 1980 and 1995, the trust reduced its number of outstanding shares by 34% but reduced its land inventory only 8%, from 1.2 million acres to 1.1 million acres.

Steven Bregman, president of Horizon Asset Management in New York, has researched Texas Pacific for his firm’s Contrarian Research Report and believes the stock is worth buying. “It’s cheap,” he says. “As long as you want to hold it for a decade, you put it away and forget about it and get rich slowly.”

The buybacks, says Mr. Bregman, are “like a creeping buyout. It’s a snowball effect.”



Valuation Checkup

Trailing 12mo EPS stands at $21.79 as of 9/30/18.

12mo trailing eps

Since the quarter printed, we’ve seen the Trailing 12mo Earnings multiple contract from 39.6x to 26.3x.

26.3x is below the long term mean of 28.8x but comfortably inside one standard deviation from the mean (17.4x).

px and pe

It appears that TPL’s multiple had a bit of a regime shift in late 2005.  After that point, P/Es were generally higher with an average of 36.1x.  Though the P/E also appears more volatile, the standard deviation of the smaller sample is 10.9x vs 11.4x for the entire history displayed.

Fair value at long term P/E mean = $21.79 x 28.8x = $628

Fair value at 9/2005 through current P/E mean = $21.79 x 36.1x = $726

Source: Bloomberg


Vol and Vol

px and volume 11-1-18

Volume and volatility.  There won’t be much substance in this post.  It is meant to take stock of recent price action.  Maybe someday we’ll look back at today as “simpler times”.

Bloomberg and Yahoo both report today’s volume at 69k shares which is ~5x a normal day’s volume and ~3x of that of a heavy day.  If we approximate a VWAP of $700 today, it is estimated that $48MM in market value of shares traded today which represents just under 1% of the closing market cap.  For comparison, AMZN had 1.2% in turnover.  The takeaway is that it takes extremely heavy (relative) volume to come close to a “typical day” in a large cap stock.

What’s driving it all?  Your guess is as good as mine.  The 10-Q isn’t out yet.  That doc presumably contains material non-public information so there is a chance the Trust isn’t back to buying yet.

The upside to heavy sell off today is that someone or multiple someones all put their money with their mouth is and bought heavy size today.

It’s tempting to wonder if the name is being pushed around by a sophisticated trading desk taking advantage TPL’s typical gaps in the offer and bid stacks.  Wouldn’t be hard for them to take out many, many stop losses along the way.

Either that or HK is selling…   There, I said it.


Source: Nasdaq