Cresud Inc. (Nasdaq: CRESY) Price: $11.00Market Capitalization $550 M Enterprise Value $383 M Book value: $576 M Revenue (FY 07) $36 M EBIT $12.5 M Earnings (FY 07) $16 M Shares: 50M EPS : $0.33 Intrinsic Value: $30+Investment ThesisThe ideal company is run by smart owner/managers who think over the long term and can build value accordingly. Cresud is just that: a brilliant management team that is building an agricultural and property empire. What’s more, the market is placing an absurdly low value on Cresud’s land assets and competitive advantages. Company DescriptionCresud owns 1.1 million acres of agricultural and raw land in Argentina, and has through 38% ownership of IRSA (NYSE: IRS), a stake in shopping centers, office buildings, residential buildings, hotels, a bank, and urban land parcels. Why Buy? • Market is drastically undervaluing Cresud’s land assets ($165/acre) • Company is run by very smart operators who can buy land cheaply and create value out of it efficiently • Agricultural boom and weak economy is driving huge demand for farm and pasture land • Leucadia National Corp. recently purchased 6.7% of the company at around $15 Risks• An Argentine government that attempts to redistribute wealth from landowners to urban poor • No catalyst – unlocking land value is a slow process • Currency – peso has been devalued multiple times • Commodity prices could be at a peak • Company issues equity for growth. Potential dilution to intrinsic value per share if new investments don’t return as much as previous onesValue I peg intrinsic value greater than $30. Cresud’s farmland is being valued by the market at $165 per acre compared to US prices of $2,000-$5,000 per acre. Obviously, there should be an “Argentina” discount due to the meddlesome and disorganized government and potential for economic meltdown, but it has gone too far. Flashing back to 2002: Argentina was experiencing 40% inflation, defaulted on its debt, and the economy was in financial meltdown. The government forcibly converted dollar denominated debt into peso debt at 33 cents on the dollar. At that time, Cresud was an unknown microcap and traded at a low of 0.7x book value (Argentine GAAP). At present, the Argentine economy is shaky but not insolvent and at 1x book, the shares are close to where they bottomed. But this time around, prices for soybeans, corn, and most cereals have at least tripled, Cresud has $170 million in net cash, and is a much bigger entity (with a bigger share of IRSA, the urban property development company).
Cresud Inc. (Nasdaq: CRESY) Price: $11.00Market Capitalization $550 M Enterprise Value $383 M Book value: $576 M Revenue (FY 07) $36 M EBIT $12.5 M Earnings (FY 07) $16 M Shares: 50M EPS : $0.33 Intrinsic Value: $30+
Risks• An Argentine government that attempts to redistribute wealth from landowners to urban poor I question whether that is a correct assumption or not. I'd break the statement down into two parts:1) An Argentine government that attempts to redistribute wealth from landowners This is pretty cut-and-dried true. No qualms with this part of the statement.2) to the urban poor Is it really for the "urban poor"? or is it for the benefit of those in charge of the redistribution?I'm probably splitting hairs here, but I feel there is a big difference. Socialism is the word at work here. What you describe is Socialism in theory, what I posit is Socialism in practice.I am not well steeped in Argintinian political history and I did not stay at a Holiday Inn last night. O'fer two. But, at a 30,000 foot level it looks to me like the powers that be are going to be for quite some time. If these crooks are going to be in charge for years or decades longer then I don't see the situation ever correcting.If I am right, then your risk #2 will remain, staus quo, for a very long time.
Cresud’s farmland is being valued by the market at $165 per acre compared to US prices of $2,000-$5,000 per acre. I fail to see a connection between land prices in the US and land prices in Argentina. What is the going rate for farm land in Argentina?It would seem to me that land prices in the US have absolutely no relationship to land prices in Argentina - each being determined from local supply vs demand phenom.Rich
Hey Rich,Great point and I should have made that more clear. Last time I checked about 5 months ago the prices were slighly lower in Argentina than the US, but in the $3,000 range. And as far as I can tell as of now, farmland in neighboring Uruguay, which is much more stable politically, is going for $4,000 an acre, give or take. Not all of Cresud's holdings are farmland, but on the whole, their portfolio should be worth $500 per acre. Also, Cresud gets essentially the same end prices for its crops (minus a hefty export tax) as farmers in the US. But even with the export tax, the returns are still good because prices had gone up so much. The risk is that the tax sticks even when prices fall, but it appears the strike has dented Cristina Kirchner's government, so the situation is more promising than it appeared in the past. I hope that helps a little bit. The assumption priced into Cresud at the moment is essentially that the land will be unprofitable for the foreseeable future. $165 per acre is lunch money for two weeks. Cresud is not totally insulated from the craziness that is the Argentinian economy (it has an interest in a bank and shopping centers), but I think the pessimism is priced in at this point. I think the comparison with 2002 is interesting in that regard.Take care, Andrew
Not all of Cresud's holdings are farmland, but on the whole, their portfolio should be worth $500 per acre. Can you see my ears perkup? :)Great pick! Rich
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