Grahamian Value Week in Review ― January 8, 2021
“They used to ask him: ‘Mr. Isaac, how do you measure in times of high inflation how you are doing this year?’ and he said: ‘If I have one more apartment, one more hectare of farm, one more cow.’ He measured real assets.”
— Eduardo Elsztain (on his grandfather)
WEEK IN REVIEW
FEATURED GUEST INSIGHT
In the past week —
No new businesses have been added to the list of Grahamian Value companies.
There have been no material developments at Grahamian Value listed companies.
This marks our thirteenth consecutive week with no new additions to the Grahamian Value Classic list of companies. Due to underlying share price movement, Universal Stainless & Alloy Products and P&F Industries no longer meet the valuation requirement for inclusion on the list.
Further details are available at GrahamianValue.com/methodology
I. WEEK IN REVIEW
There have been no material developments at Grahamian Value listed companies.
II. FEATURED GUEST INSIGHT
The following is a guest contribution by Nicholas E. Radice (twitter), a New York-based investor and holding-company executive.
Important Message for All Readers: While the co-editors admire the above showcased thought leader, all opinions expressed are subject to error and the material below is intended for educational purposes only. The public equity explored below is subject to local regulations and norms. Please take careful note of the
Summary of Risk Factors enumerated on Page i of this Form 20-F
. Particular prudence is warranted, personal diligence is always strongly advised.
Cresud S.A., with a presence in South America, is a company engaged in the production of agricultural commodities.
Valuing Complex Real Estate Portfolios
In 2005, Bill Ackman of Pershing Square estimated Sears Holdings’ real estate portfolio to be worth over $22 billion. In 2012, Bruce Berkowitz of Fairholme Fund noted that Sears Holdings controlled more square feet than Simon Property Group—presumably implying a value in the tens of billions as well.
Today, the real estate core of Sears Holdings, spun out as Seritage Growth Properties, trades at a market capitalization of less than $600 million. After the 2010s—with situations like Sears’ demise, or energy-industry collapses such as Chesapeake—valuing and investing in large and complicated property portfolios has fallen far out of favor.
At the firm that finances our investments, we deal with operating vast and complex corporate facilities and real estate footprints. Our clients include the largest real estate owners and investors in the world. What we see in the economic performance of real estate is that it is, indeed, dominated by “trophy” assets.
Over time, most large real estate portfolios end up with value concentrated in a few assets, or possibly even a single asset. The mistake made by many investors is simply to multiply a large number of square feet or acres by an estimated average price. As seen recently with malls, the gap between the best properties—for example, Ala Moana Center in Honolulu—and merely an average property can be much wider than expected.
Thus, as a variant on Benjamin Graham’s “net-net” approach, we take the trophy-property valuation alone and subtract total debt. One might argue that Sears investors could have saved themselves billions of dollars with such a mindset; or at least recognized that, by extension, Sears’ leverage was much higher than it appeared.
Los Pozos: a Real-Asset “Net-Net”?
While not a current asset, Cresud’s Los Pozos farm alone, net of corporate debt, may be worth more than Cresud’s market capitalization.
Located in northern Argentina, Los Pozos’ cost basis is estimated at $25 per acre—circa 1995, with financing from the Quantum Fund—a stirring investment. Its 103,784 acres devoted to livestock are now valued at roughly $3,706 per acre, or $385 million. The agricultural component, at 44,479 acres, is assessed at roughly $6,178 per acre, for a value of $275 million. In short, the productive core of Los Pozos is worth at least $660 million—just this one farm.
And yet, that productive portion is only a minority of the acreage—over 148,000 acres combined—in a total of over 590,000 acres at Los Pozos, leaving room for further development. In subtracting Cresud’s corporate net debt of $430 million, an investor is effectively paid to assume the rest of Cresud’s holdings: 1.4 million additional acres spread across South America; IRSA, essentially the “Vornado” of Buenos Aires; and miscellaneous equity stakes.
Many of Cresud’s assets are publicly-quoted, offering price transparency. At the time of writing, Cresud’s 62.4% stake in IRSA, traded on the NYSE, is valued at $165 million. Its 33.6% stake in BrasilAgro, also traded on the NYSE, is valued at $100 million. Thus, the combined value of those primary stockholdings is $265 million.
That value is separate from Cresud’s wholly-owned farms in Argentina and Bolivia, comprising over 1.3 million acres (or roughly 732,000 acres net of Los Pozos) and 24,000 acres, respectively.
Cresud is moving downstream into processing and services. It owns three “startups” of that type: 100% of Carnes Pampeanas, a meatpacker; an agricultural broker named fyo, at 50.1%; and Agrofy, an e-commerce platform, at 22.3%.
In attempting to value those assets, we might assume a crude estimate of $40 million collectively. They may possess “optionality”; yet we use conservative, round numbers for the sake of simplicity.
Carnes Pampeanas is roughly 2% to 3% of National Beef’s size, a former Leucadia National Corporation holding that processed around five-million heads of cattle annually. By that measure—and National Beef’s exit valuation, as well as a multiple on Carnes’ $1.5 million in EBITDA—we reach a value of roughly $10 million.
In 2019, fyo reported net income of $3.46 million, from which we might assume a valuation of $20 million for that growing business. Agrofy, which has attracted venture capital, may be valued at $10 million; a dramatic discount to how this e-commerce asset would be priced in the United States.
Los Pozos, valued at $660 million, minus corporate net debt of $430 million, results in a value of $230 million.
Cresud’s publicly-quoted assets—IRSA and BrasilAgro—trade for a combined value of $265 million. Cresud’s “startup” portfolio is valued at $40 million. While unpleasant surprises may pop up, as with IRSA’s Israel assets, we assume roughly $305 million in total equities value.
In Bolivia, Cresud owns three farms devoted to crops, mainly productive surface. We use a conservative estimate of $30 million for those assets, a severe discount to recorded sales prices per acre.
In Argentina, remaining acreage is primarily a northern portfolio concentrated in a few large farms; as well as a sizable sheep estate in Patagonia. As a conservative estimate, we may view the latter, with 210,000 productive acres, as worth $30 million.
In sum, we have an estimated net asset value of $595 million—Los Pozos, equities, non-core farms—which does not include over 520,000 remaining acres devoted to agriculture and livestock in Argentina. To avoid the aforementioned “average-value fallacy” in real estate, you may choose an estimate for those, net of trade payables and other remaining liabilities.
Land of Silver
The most common feedback we receive regarding Cresud is that it is located in Argentina. In other words, the most immediately Google-able piece of information.
One would assume that the market is aware of that fact, and it is discounted into the price. While we accept that Argentina is not the most attractive jurisdiction, what is an acceptable discount? Is no price too low?
By contrast, in failing to research business fundamentals, was a more-favorable German domicile the key for Wirecard investors in that recent episode? Is political risk higher today in Buenos Aires, or New York and Hong Kong?
Our macro view is guided by Warren Buffett’s statement twenty-six years ago, which rings just as true today:
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or Treasury bill yields fluctuating between 2.8% and 17.4%.
“But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”
As of the time of this writing, both the author and the co-editors own shares of Cresud S.A. Please see important disclaimers at the end of this communication.
III. WEEKEND READING
Harvard Business School Case 211-011: Cresud S.A., Farmer or Real Estate Developer?
November 2010, Revised February 2013: Alejandro Elsztain, CEO of Cresud S.A., is faced with the difficult choice of whether to sell, develop, or continue to hold the 151,000 hectares of remaining undeveloped farmland at the company's Los Pozos farm in Argentina. Developing the land will further expose Cresud to a variety of risks related to owning and operating farmland, but the potential financial rewards are potentially significant. As competition has increased and farmland values have skyrocketed in the last eight years, Cresud's overall corporate strategy has been to increasingly focus on development opportunities outside of the country—in areas such as Brazil, Paraguay, and Bolivia. Alejandro's looming decision on Los Pozos is, in many ways, reflective of choices facing his company in general. Authored by Ray Goldberg, Arthur I. Segel, Gustavo Herrero and Andrew Terris
Harvard Business School Case 515-043: Cresud and Argentina
January 2015: Argentina-based Cresud managed 1 million hectares (2.5 million acres) of land in South America. For 20 years, the publicly traded company’s strategy had been to acquire underutilized properties and turn them into productive farmland for cattle and crops. In 2014, Cresud's CEO wondered if the strategy was still correct in the face of falling commodity prices, more powerful input companies, and potentially positive changes in Argentina's political environment. Authored by David E. Bell and Mary Shelman
IV. WEEKEND WATCHING
Courtesy of Bloomberg QuickTake: “Eduardo Elsztain, chairman of Cresud S.A., talks with Pimm Fox (twitter) about the outlook for investment in real assets such as farms. Mr. Elsztain also discusses food production, demand and prices.” (Recorded on November 8, 2012)
V. WEEKEND LISTENING
Courtesy of John Mihaljevic (twitter):
Investment lessons from the 1930s: Phil Ordway of Anabatic Investment Partners shares insights from a little-known book, Frederick Lewis Allen’s Since Yesterday: The 1930’s in America. We discuss historical parallels and examine how insights from past episodes can help us become better investors. During the discussion, John Mihaljevic mentions one of his favorite books on the 1920s and ’30s — Once in Golconda, by John Brooks.
“Slow hunches” in business and investing: Elliot Turner of RGA Investment Advisers presents a key concept from Steven Johnson’s book, Where Good Ideas Come From: The Natural History of Innovation. We discuss how so-called slow hunches manifest themselves in business and investing. (December 6, 2020 episode date)
ABOUT GRAHAMIAN VALUE
Grahamian Value is a labor of love, centered around our desire to openly share data and perspectives that we find helpful in our pursuit of Benjamin Graham-inspired investment ideas. We appreciate your time, your trust and your readership. Learn more at GrahamianValue.com
Harry Sauers and Shai Dardashti are co-editors of Grahamian Value and, as of the date of this communication, may individually own shares of companies mentioned herein. The publishers do not receive compensation from the companies and people covered in Grahamian Value for such coverage. This communication is for informational purposes only. This is not intended to be investment advice. Seek a duly licensed professional for investment advice.