This stock write up is part of the Guru Focus April 2011 Contest:
This is not the first article written about PRXI. My friend, Ryan O’Connor did a fantastic write-up of the company on his blog http://www.aboveaverageodds.com, in August 2010. Many readers, who follow the value blogs, have probably seen some other write-ups on PRXI.
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However, no one has written up about PRXI on Guru Focus (in over a year), and more importantly, I believe I have some new and insightful information. I relied on my own research for this article instead of taking tid-bits from other write-ups. The only write-up I read on PRXI was by Ryan.
Additionally, the catalyst is getting closer every day with the court decision due by August 12th 2011 the latest. I am submitting this idea for the April contest. With the market overvalued, and value stocks hard to find, PRXI seems to offer a compelling value.
This is a special situation, which IMHO is based almost entirely on the court ruling issued in August 2010 and some scuttlebutt that has been done to find out what is the most likely scenario. Therefore, most of the discussion will focus on valuation and the court decision, and there will be less attention on the company’s margins, competitors’ etc. However, I will get more into the company description later in the article.
Premier Exhibitions, Inc. develops and tours museum quality exhibitions worldwide. The company creates, designs, markets, and presents educational and entertaining exhibitions; sells apparel, posters, and Titanic-related jewelry; publishes exhibition catalogs; and provides ancillary services, such as audio tours and photographs. It operates and promotes various exhibitions, including Titanic, the artifact exhibition, which features the artifacts recovered from the wreck site; Bodies Revealed and Bodies, The Exhibition, the exhibition that display multiple human anatomy sets, which contain a collection of whole human body specimens, single human organs, and body parts; and Dialog in the Dark that is intended to provide insight and experience to the paradox of learning to see without the use of sight. The company’s exhibition products are presented to the public in exhibition centers, museums, and non-traditional venues, as well as other venues with high traffic, such as hotels and casinos. Premier Exhibitions, Inc. was founded in 1987 and is based in Atlanta, Georgia.
I could write a lengthy piece but I will make it as succinct as possible while providing the most relevant information. As, it turned out this piece was a lot longer than I expected, and I did not cover a lot of the business aspects, but I am not posting to win the prize (I doubt I will since special situations are hard to fit into the criteria for Guru Focus outlines), but to give people interested a chance to ask more questions or research the company in more detail.
There has been numerous litigation cases since the first assets of the titanic were discovered in 1985. In 1987, TVLP – Titanic Ventures Limited Partnership recovered 1800 artifacts. TVLP was purchased by RMS Titanic Inc. The 1987 assets were not included in the recent court decision stated below.
RMS started to salvage further assets of the wreckage in 1994, and was therefore considered salvager in possession of the assets. They made several other journeys over the ensuing years, uncovering over 5,000 artifacts.
There were numerous court cases over whether RMS had rights to the Titanic wreckage. In the most recent ruling Judge on August 12th 2010, Judge Rebecca Smith, a federal judge for the United States District Court for the Eastern District of Virginia ruled that RMS (now a wholly owned subsidiary of Premier Exhibitions), ruled that PRXI was entitled to 100% of the fair market value of the titanic assets.
This is an important point: This is the final ruling, by August 12th 2011, the company will be receiving the assets or the cash value.
The judge strangely stated that the decision about whether to award the actual assets or the cash value would be decided within a year (August 12th 2011).
Why is it taking the judge so long to make the decision, why does it take a year, she should have ruled on the spot? The judge is likely trying to assemble a buyer since the judge wants the assets protected and stated that they should all be kept together.
This means that either the court is arranging to find a buyer for the assets from Premier, or the court will sell it and award the cash to Premier. The buyer might be a Government, a large museum, or a consortium of buyers that will host the assets in one place.
First, let us look at the value of the Titanic assets, according to the appraisers they are worth $110m (which would also “likely” be the cash awarded). One could argue the assets are worth nothing, but I would bet any museum would die to have them. The Titanic has historical significance to three nations, France, the UK, and America. It also got enormous publicity from the 1997 film by director James Cameron, which has grossed close to $2 billion. The movie is being released in next year, which coincides with the 100 year anniversary of the sinking of the ship. Just for comparison, the Mona Lisa was assessed at $100m in 1962!
Now for the less speculative aspects, let us examine the appraisal with numbers. The appraisers, Paul Zerler and Stephen Rogers came up with an appraisal of $110m. They began the appraisal in 2000, and therefore, have ten years of experience with the assets of the titanic. They individually inspected every single article, and used “the character of the object, its state of conservation, the scarcity of the item, and other relevant factors.” The appraisers additionally took into account assets sold by the survivors of the Titanic in the valuation. Another independent appraiser testified before the court and stated that he agreed with Zerler and Rogers’ estimates. Zerler was not able to testify in court due to health issues, but Rogers stated that Zerler’s estimates usually sell within 10-12% of their appraisal value.
There is another factor, which I have considered based on recent events. The appraisal was made over the course of several years, and the court decision was on August 2011. Since August 2011, nearly every asset class has gone up tremendously in value. There was a great WSJ article from August 29, 2011 giving some data about fine arts. Here are some of the important quotes from the article:
“Just as the stock market is setting new postcrash highs, the art market has largely recovered from the recession.”
“Record prices are being paid for individual favorites like Pablo Picasso, whose “Nude, Green Leaves and Bust” sold at Christie’s last May for $106.5 million, the most ever paid at auction for a work of art.”
“What’s selling overall? Auction houses say newcomers are asking for large-scale pieces—possibly wanting to get their money’s worth on an inch-by-inch basis.”
While, this is could be a sign of a bubble, it is great for Premier if they are awarded the assets, as the Titanic assets have almost surely gone up in value as well since the appraisal.
Additionally, the S&P500, gold, and silver are up approximately 25%, 28% and 169% since August 12th 2011. However, for the sake of being conservative I will assume that the assets of the Titanic are valued at $110m.
The judge as stated above has not decided whether Premier will get cash or the assets, however, from the court ruling it appears that they will get the cash. The judge had some harsh words about PRXI and how they handled the assets of the Titanic in the past, and I therefore believe the judge will award them cash, or make sure the assets are sold. I recommend the readers view page 39 of the court ruling for some statements by Judge Rebecca Smith about Premier’s handling (or mishandling) of the Titanic’s assets in the past.
Valuation is tricky for this company because I am uncertain about the possible scenarios and whether if there is a cash award taxes must be paid. I believe the company will set up some vehicle to avoid taxes but to be very conservative I will assume that they will pay 40% on any cash received. Management has not given much guidance on this matter.
I assume the company is going to liquidate. They have no debt, and unless they are planning a disastrously large acquisition, the only thing to do with the cash is to give it back to shareholders.
Here is some further reason for my thinking from the 10-K:
The Company’s largest shareholder, Sellers Capital Master Fund, Ltd. (“SCF”), informed the Company that at the request of the fund’s investors it intended to return all capital to them. When SCF initially reached this decision in June 2010, it had planned to attempt to locate a single purchaser for the fund’s 46 percent equity investment in Premier’s common stock over the next 12 to 18 months. On October 7, 2010 Mark Sellers, Chairman of the Board of Premier Exhibitions, Inc. and Managing General Partner of Sellers Capital, informed the Company that Sellers Capital is no longer marketing its 46 percent ownership stake in Premier, and further that Sellers Capital no longer has a specific time frame within which to sell its stake in Premier. Instead, Mr. Sellers indicated that Sellers Capital would retain its shares in the Company until such time as it could obtain what he believes to be a better value for the shares.
Sellers wanted to sell his entire stake in the company, and then only two months after the court ruling (August 2010) he completely reversed his decision. Did he change his mind on a whim? Or did he realize how good the court ruling was, and wanted to get the cash and then get out. The best way to accomplish this would be an orderly liquidation and not through dividends, which are taxed.
Here is the current balance sheet of PRXI (I used yahoo finance as it was easier for formatting than Edgar fillings):
|Period Ending||Nov 30, 2010||Aug 31, 2010||May 31, 2010||Feb 28, 2010|
|Cash And Cash Equivalents||6,329||4,809||9,134||10,339|
|Short Term Investments||803||3,312||3,304||3,308|
|Other Current Assets||4,197||2,843||2,771||1,866|
|Total Current Assets||14,565||18,020||21,942||22,132|
|Long Term Investments||–||–||–||–|
|Property Plant and Equipment||12,108||12,281||12,875||13,545|
|Deferred Long Term Asset Charges||–||928||928||927|
|Short/Current Long Term Debt||–||–||–||–|
|Other Current Liabilities||961||666||1,502||1,705|
|Total Current Liabilities||9,389||6,002||7,613||7,223|
|Long Term Debt||–||–||–||–|
|Deferred Long Term Liability Charges||–||–||–||–|
I am going to use very conservative method for a liquidation valuation:
6.2m cash 100%
S/T investments .8m 100%
A/R 75% 1.6m
Inventory 50% .5m
Other current 25% 2m
PPE 25% 25% 3m
Other assets 25% 1.9m
Total liquidation value of assets is 16m
Liabilities are $13m so total liquidation would leave investors with $3m.
Outstanding shares- $47m*current share price of $1.80 equals a market cap of ~$85m. EV is ~$79m.
PRXI has $35m of titanic assets aside from the court ruling (this does not appear on the balance sheet because the assets are recorded at cost). It seems that if the judge wants to keep all the assets together if PRXI is awarded cash, they will really get $145m and not $110m. Although, the judge does not discuss where the $35m will go, it is likely that they will be kept together with the other $110m since the judge repeatedly stated she wants the assets to stay intact. Digital archives (which consists of additive value from the company due to intellectual property, costs of salvage, exhibition displays, and lab operations) associated with the $110m are worth ~$45m (2007 appraisal).
Here are the two scenarios I see:
Best case 1. Court awards $110m and lets PRXI keep the $35m original assets they already own, or purchased by the “buyer”
Case 2. No cash they get the assets, which I think with the original assets and digital archives, are appraised at close to $200m.
In all these cases I would prefer liquidation, and think it is likely based on Sellers’ actions and hints from management.
Let us examine these scenarios:
Case 1. Company gets $145m and has $3m left after liquidation; the company is worth $148m. PRXI’s intrinsic value would be $148m/47m o/s= $3.15
Case 2. Company has close to $190m in assets including digital rights; if the company could sell for full value the stock should rise 140%, and IV is $190m/47m o/s=$4.04 (However, I consider this worst case, because if the judge is not arranging a buyer, the company might try to monetize the assets, or the assets might be worth far less than $110m).
Taking taxes into account makes the investment less attractive. As stated above, I doubt the company will have to pay taxes but to be conservative let us say they have a tax rate of 40%.
- $148m*.6=88.8m. The market cap however would be completely cash making it have a negative EV! While, it might not make sense to liquidate for the exact market valuation in this case, we will have to treat the company as going concern. While, the company is burning through cash the flow, things appear to be starting to rebound. FCF (OCF-Capex was about even for the latest Q ended November 30th, even though operating income was negative $2 million). Assuming, that we are looking at the company as a going concern (which we only have to do in 1 out of 4 cases); assets minus liabilities are $25m, add in the $88.8m and the market cap should be ~$114m, which would equal a share price of $2.50. This assumes the company trades at book which is very low for a company, where 85% of the market cap would be cash.
For final valuation I am going to do something funny. I assume case 1 is the most likely. To be conservative I will assume it is more likely they will pay taxes; I will assume this to be a 75% chance. .75*2.50+.25*$3.15 equals approximately $2.70 per share. This would mean the stock has a 50% upside guaranteed by August 12th 2011 (136 days from the time of this writing). If you annualize the numbers that is close to a 200% return.
The only bear case I can see is that the company wins the assets and unsuccessfully tries to monetize them.
Why is the stock so cheap? I think it is mostly due to the fact that is illiquid. I purchased stock recently and the order only got partially filled. This has never happened to me before. Also, there is concern that the assets of the titanic have no real intrinsic value, however, I discussed this above, and think that many museums would jump at the opportunity. Since, these assets will be sold on August 12th even if they are awarded to the company; the value has only probably gone up since the original appraisal. These assets could be worth an additional 25% just based on the rise in the stock market and the (temporary) “wealth effect” associated with it.
Final words about management:
As I mention about Sellers, the largest shareholder and the Chairman of Board has a clear interest to maximize shareholder value. Eight out of the nine directors are independent which is not bad for a small cap company. Many small cap companies have boards almost entirely consisting of executives from the company. The board actually meets as opposed to other companies, where the board just receives pay checks and speaks a couple of times a year. According to the Proxy the board met 19 times during FY10!
Sellers also made some significant changes to the board. According to the Proxy “The directors strongly criticized the compensation that we paid to our senior executives, our hiring practices, and the governance that we followed in making compensation and hiring decisions. These directors expressed their intent to reform our practices in these areas and to provide compensation for our senior managers that is more clearly aligned with the interests of our shareholders.”
The CEO, Christopher J. Davino was appointed on January 28th 2009. With the help of Sellers and the board they have done a remarkable job turning around the company. The touring and stationary Titanic exhibitions as well as solid performance the stationary Bodies exhibits have been doing well, and had a GP of $10.2m for the nine months ended November 30th, however, these results were hampered by poor performance in the touring Bodies portion, which had a loss of $1.0m.
Some other highlights of the great progress of the new CEO (all data is from Q310:
Revenue increased to $10.2 million compared to $8.7 million
Total exhibition days increased 19% to 1,613, as a result of better deployment of the entire capacity of touring exhibitions.
Total attendance increased 20% to 980,506.
While ticket prices declined 7%, with the uptick in the economy and inflation I expect this number to rise in the future.
The CEO stated in the most recent press release:
“Having identified the main area of challenge within our business, we have decided to discontinue any further self-operated touring Bodies exhibitions, which will materially lessen our financial exposure. We will reduce our inventory of specimens and cut the fixed license costs by $4 million annually. In addition, we are also reducing General and Administrative costs and expect to drive further efficiencies throughout the business over the coming months. These decisive actions will generate a runrate cost savings estimate of $3.0 million to $3.5 million beginning in the second quarter of fiscal 2012. In addition to lower fixed costs, we will also benefit from the ability to reallocate our resources toward performing assets such as the Titanic and other new and exciting content opportunities. As we complete these efforts in the fourth quarter, we expect to emerge in fiscal 2012 as a leaner, consistently more profitable company, one that’s squarely focused on expanding our market opportunity.”
The current CEO is not trying to throw cash at bad segments, in the hopes trying to desperately turn them around, he is making smart decisions that our in the best interests of shareholders.
This article is supposed to discuss competition; however, as I see liquidation as the most likely scenario this is not a concern. Just for comparison sake, no company in the world has the assets of the titanic, nor do they have any publically traded companies that have similar business models. One competitor is Musee Grevin SA, however, I do not see this company having any chance of a 200% annualized return this year, with a clear and defined catalyst coming in 136 days from now.
Disclosure: I am long PRXI
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