USEG

USEG is a US based company focused on mining and drilling for resources including mylobdenum, uranium, gold, oil, and gas, as well as real estate operations.

Market Cap: $66 million
Cash on hand: $73.95 million*
Debt to Equity: 9%
Dividend: NA
Book per Share: $4.80
Cash per Share: $3.12

RECENT PRICE: $2.81

Molybdenum Mining
USEG holds 100% interest in a massive deposit of molybdenum called the Lucky Jack Project. Mining has not yet begun and production is expected for 2012.

Oil and Gas
USEG has formed several partnerships with US based drillers. One: a 20% interest in two new wells currently being drilled by PetroQuest. Two: A 4.55% interest with a private, Huston -based driller. Drilling is anticipated for 2009. Three: the Company is actively searching for quality partnerships in an effort to create a better return on the large amount of cash on hand.

Uranium
USEG sold its stake in Uranium One in April 2007 for $100 million. The Company expects further payments and royalties: $20 million when production begins at Shootaring Canyon; $7.5 million on first commercial uranium delivery; up to $12.5 million in royalties when Canyon is fully operational.
USEG also holds a 4% net profit interest in Rio Tinto's uranium mine in Wyoming.

Gold
In June, USEH sold its stake in Sutter Gold Mining Company for $5.4 million Canadian. This payment was not included with the 'Cash on Hand' figure above.*

Real Estate
USEG is developing a 216 unit multi-family facility in Gillette, Wyoming. As of March 2008, the prject was 60% complete. The Company also owns an undeveloped piece of land in Riverton, Wyoming adjacent to its headquarters. Plans are under review. USEG is considering other potential real estate operations.

It's difficult to value this company on earnings or cash flow because USEG rarely has any consistency in these categories. Usualy, valuing hard assets like real estate and mineral rights is too difficult but USEG has made it easy on us: Buy the stock below book value and cash value and the rest of the stuff is free. Consider buying anything below $3.00 per share.

IAC, Spinoffs, Arithmetic

IAC - InterActive Corp

IAC is Barry Diller's Internet Frankenstein; but soon this small media conglomerate will spin-off a handful of operations. Since the announcement of this event, the stock has fallen approximately 30%. Today the stock trades for $22. I'm curious what a holder of IAC should expect in the future.

Currently, IAC has $1.403 billion in cash or $5 per share. Also, IAC has $500 million in receivables or $1 per share conservatively. That means the remaining businesses are worth $16.00 total per share.

Recent sales breakdown among the five segments as follows:
HSN 48%
'New' IAC 25%
Ticket Master 19%
Lending Tree 3%
Interval 5%
*ValueLine

If the stock prices fall along these sales breakdowns you have the following:
HSN: $7.68
'New' IAC: $4.00
Ticket Master: $3.04
Lending Tree: $0.48
Interval: $0.80

The New IAC will keep most of the cash and the "Barry Diller Premium". Some of these companies should also have a buyout premium. Interval is preforming well and growing. Lending Tree will need time to recover. Ticket Master has met new competition but still preforms well. HSN could easily become an acquisition target for any number of media companies. New IAC will hold valuable Internet properties such as: Ask.com, Match.com, Evite.com, Gifts.com, College Humor, BustedTees, Chemistry.com and many more.

Will the spin-offs create a lot of value? Maybe. It will be interesting to watch and might be worth some discretionary funds.

Sears Brands Lead to Cashflow

When Sears Holdings announced its restructuring of operations, the most discussed point was if this was the beginning of Lampert's own "Berkshire Hathaway". Rarely discussed is the fact that Sears has much more going for it compared to a dying/failing manufacturer of commodity textiles . The ignorant and impatient regularly call for a fire sale of assets as if they have no on-going value. This couldn't be further from the truth. In the most recent Annual Letter, Mr. Lampert discusses the unseen value held by Sears brands alone.

"One of our most important resources is the great brands we own, in particular DieHard, Craftsman, Kenmore, and Lands' End. All four of these brands have significant equity with customers and provide tremendous opportunity for value creation. To illustrate, let me discuss one of them, DieHard, in more detail. Based on brand recognition studies, DieHard leads in customer recognition among car battery brands by a wide margin, but it lags dramatically in market share. Why? We believe it is due to fewer points of distribution. As a proprietary brand, DieHard is only available in 900 Sears Auto Centers and 1,400 Kmart stores. Yet it is competing with other batteries that are available in thousands of locations across the country. Further, a car battery purchase is a duress purchase event, in which the customer is looking for the nearest, most convenient solution. Unfortunately, it is not always us, but there is an opportunity for us to rethink our brand distribution strategy to create value."

This point, that DieHard is the most recognized battery brand, is rarely discussed. I honestly can't figure out why. Their is a very obvious* avenue for growing DieHard sales - Auto Zone. Currently, DieHard is sold at 2,300 SHLD locations. AZO has about 4,000 North American locations. Not only does this double the points of sale but it's easy to see more battery sales occurring at a ubiquitous auto parts store than at 1,400 weak big box retailers. I won't attempt to guesstimate the number of possible sales but it is easy to see a massive, perpetual flow of cash into Sears Holdings.

The same licensing scenario can easily apply to Kennmore and Craftsmen. As ESL/RBS builds its stake in Home Depot, they are presented with another chance to benefit on both ends of their licensed products. Craftsman is a great product but tool-buyers spend retail time in hardware stores and rarely make special trips to Sears/K-Mart just for an American wrench or tool box.

An interesting twist on this brand-story is the fact that Sears Holding has securitized these three brands. Sears wrote $1.8 billion dollars worth of bonds backed entirely with these brands. The bonds are currently held in an offshore insurance subsidy owned by Sears. These bonds can sit and appreciate while acting like a potential $2 billion dollar insurance policy for the company.

This portfolio of brands presents SHLD with strong potential future cash flow. Add the potential of real estate leasing, credit cards, continuing operations,buybacks and you have a holding company with far more potential than a useless textile factory. Somehow, Buffett did alright and Lampert should too.

*Buffett always mentions that he preffers doing business with people he likes. Maybe, Lampert could take that a step further; only do business with yourself. Mr. Lampert's investment groups own a controlling +34% stake in Auto Zone.

The Fear Basket

ACF- A independent auto finance firm. Using a proprietary screening system, ACF issues, services, recovers, and securitizes auto loans. Leucadia National has built a 25% stake in the company over the past year even though ACF has had two unprofitable quarters. The company plans to tighten lending and cut costs.
Normally, ACF trades at 1.5x Book Value. If the company reaches a BV of $20 over the next three years the price could reach $25, which equates to a 25% annualized return.
Current Price- $13
Dividend- 0%
Book Value- $17

PRAA- A collections agency. PRAA purchases charged-off portfolios of assets from other parties for pennies on the dollar and then collects. The business is simple but filled with regulatory issues concerning harassment. PRAA hasn't had an unprofitable quarter in years and sported a ROE over 17% for the past 8 years. The current environment should offer PRAA some opportunities to buy charge-offs at lower than average prices.
Current Price- $34
Dividend- 0%
Book Value- $15

RWT - A mortgage REIT. Much of the income is derived from packaging and selling securitized debt obligations; a scary place to invest. RWT also barrows money against some of its loans to raise capital, however, it recently sold$122 million in additional stock to opportunistically buy distressed CDO's and other debt. The securitization market is frozen so income will drop; add the greater dilution and you will have some good buying opportunities in the next few months. When the price drops, the monthly yield (obviously) rises.
Current Price- $35
Dividend- 8%
Book Value- $5

CCRT - A subprime mini conglomerate. Operations include limited credit cards for unbanked customers, auto sales/loans, microlending, and a collections agency that collects for both CCRT's portfolio and portfolios purchased at a discount from banks. Management own 60% of the company and they quote Buffett often in the Annuals. Recently, CCRT has discontinued some 105 unprofitable and marginal pay-day loan store fronts. Cash flow has been poor recently but when the economy turns, the price should meet and surpass book value.
CCRT has regularly traded at twice book value. If book grows to $20 in three years and the price rises to approx. $25 then you have a 35% annual return.
Current Price- $9.50
Dividend- 0%
Book Value- $14.50

Haynes International (HAYN)

Haynes International develops, markets, and manufactures specialty alloys for aerospace, chemical processing, gas turbines, power generation, incineration, industrial heating, hazardous waste, ect. These alloys are manufactured in several forms: sheet, coil, plate, forgings, fasteners, bar, wire, billet, tube, as well as value-added custom cuts and forms.

The Companies customers are very diverse including GE, Rolls Royce, Boeing, DuPont, Dow, Eli Lilly, BP, and many more. The manufacturing occurs in the US (Ind., La., NC.) with 6 US Sale/Service centers and 7 international (Eng., Fra., Italy, Switz., India, China).

As of the last conference call, the company was operating at +100% operating capacity for flat alloy products (accounting for 70% of profits). The Company claims to have "big demand for value-added service" and is "moving up the value chain" in their niche markets. Moving into this model can grown the companies moat and competitive advantage. By continuing R&D, becoming critical partners with their customers, and increasing value-added products the Company can protect their weak moat.

The valuation for this company is attractive on traditional metrics.
Market Cap: $520
P/E: 7.5
ROE: 28.26
D/E: 0.12
Net Margins: 11.81%
Yield: 0%
EPS: $5.88
BV/Share: 26$

The stock is down nearly 50% in the past three months (in the bottom 10% of the market). This scary drop opens up an opportunity for long-term investors. Here are several return scenarios using a discounted EPS valuation. The models conservatively estimate EPS at $5 with a 10% discount rate:

Scenario 1: 2% growth in perpetuity = $63
Scenario 2: 6% growth for 4 yrs. followed by 2% in perpetuity = $73
Scenario 3: 10% growth for 5 yrs. followed by 2% in perpetuity = $88
*This model assumes no further dilution.

Notes:
As a small company, HAYN is always subject to take over speculation. They pose a nice value to the massive multinational steel companies.
The price of nickel (needed for nickel-alloys) is driven by the stainless steel markets.
Third Avenue Value is a holder of the company.
The Company is a provider to Boeing but hes very low exposure to the 787 Dreamliner.
The company has a decently sized short interest.

Super Value: A Name that Fits (SVU)

Super Value, a grocer, pharmacy, and grocer logistics company with 2,478 stores announces a 25% increase in year over year earnings. What happens?

The stock drops almost 20% in two days. Why? The CEO did something really stupid and short-sighted: He was honest about the state of inflation, food prices, and the US consumer.

While SVU drops from $34 to $27, Kroger a competitor in the exact same sector, tacks a $1 on to its share price. While the CEO of Super Value speaks honestly, a competitor facing the same expensive wheat, corn, meat, dairy, ect. remains stable in the face of a large market sell-off.

This rapid sell-off has over shot dramatically. No matter what happens to inflation - PEOPLE HAVE TO EAT. At the current price, SVU represents a dreary sentiment for growth in earnings. The current price assumes the company will grow earnings 0% for the next five years followed by an future growth rate of 1% (10% discount assumed, DFCF).

Apparently, no one bothered to look at the financials. Debt is abnormally large at the moment because SVU is paying for its acquisition of Albertson's, a high-end grocer. As debt is paid down, the Company can convert more of its cash into shareholder earnings.

Sales could remain level for years as debt is serviced and EPS will grow more than 0-1%. The current price is too pessimistic. Assume a modest and organic increase in sales over the long term and its not hard to imagine Super Value growing earnings at a more impressive rate.

Assume SVU grows earnings at 0.5% for the next three years, then 2.5% thereafter, you have a $35 stock on your hands. For your trouble, SVU currently has a 2.3% dividend.

Reverse Engineering Capital Southwest Corporation

In an effort to become a better stock picker, it helps to understand the thinking and reasoning of the best. Leucadia National has an excellent reputation for finding companies, both public and private, in distressed sectors, locations, or business situations and having the patience to see past the current troubles.

In that vein, I enjoy looking at its recent equity purchases and trying to figure out what is so appealing about each company. The most recent purchases for LUK include: CSWC, GEIO, and UWBK. These companies were purchased between August and November of 2007. GEIO went through a merger during that period making it difficult to know when LUK got involved. UWBK is a bank and I find it difficult to understand and value a blind pool of assets and its management. This leaves us with CSWC, one of Forbes’ “100 Most Trustworthy Companies”.

Capital Southwest Corporation’s Business
CSWC is classified as a close-ended equity fund but this is isn’t a complete description. CSWC acts as an equity investor, a venture-capital firm, a capital allocator, and manager of its wholly-owned subsidiaries. Formed in 1961, CSWC is now considered the largest public venture-capital firm. The company’s “Investments are focused on opportunities for capital appreciation derived from expansion financings, management buyouts, recapitalizations, industry consolidations and early-stage financings.” (2007 Annual Report) The company looks for proven companies with experienced management and they (unlike most venture capital) don’t go in with an exit strategy. This means they are seeking to form long term partnerships to last the lifetime of these companies. A quick look at annual reports shows that CSWC still holds positions in investments initiated in the ‘60’s and ‘70’s. The portfolio is relatively concentrated with 87.4% of its net worth ties to just eight companies; including: RectorSeal, Media Recovery, Lifemark, Whitmore, Heelys, Palm Harbor Homes, Encore Wire and the Alamo Group.

Figures
The traditional statistics for determining value would lead an investor to believe this company is being undervalued.
Debt = $0
Price/Book = 0.84
Current P/E = 3.5-4.5
5 yr. ROE = 17.2%
ROE = 28.5%
ROC = 28.5%
No analyst coverage
52 week low = $105.16

Purchase Reasoning
A company holding that holds a mix of private and public equity in profitable businesses is compelling when selling below book. This begs the question “Why?” A few factors are dragging CSWC’s short term prospects down. Investments in Palm Harbor and Encore Wire have to be adversely effected by the housing market; earnings will drop in the face of a slumping housing sector. Also, some of the company’s manufacturing interest will hurt from slow downs in housing, autos, and transportation. Another factor weighing on investors are several changes in management and a delay in the most recent quarter’s earnings. On top of that, the Company did only one major deal in fiscal 2007, claiming that their was too much money chasing too few deals. I view this as a long term positive.

The biggest material loss may be caused by the massive drop in the stock price of Heely’s since this summer, dropping from $25 to $6 and change. Heely’s provided the largest gains for CSWC in the most recent years. That’s a lot of uncertainty and negative news for a company that is delaying this quarters data. The suspense is painful.

So why buy now? While selling a discount to last quarter’s calculation of book value, the price is probably even with current book value. This price lets an investor own a diverse base of businesses at cost with potential for appreciation once the housing downturn eases. The free lunch is that you pay no premium for the skills of management who will thrive in a low-credit environment. For CSWC, this provides a situation where too little money chases a fair number of deals.

Buying CSWC in today’s environment is a high-uncertainty yet low-risk opportunity. It’s difficult to know how the company will perform in current market conditions but at it’s current price range, CSWC is supported by the values of its underlying businesses. Hopefully, over the long term, CSWC can prove to offer a strong upside with less risk. It may be worth waiting for the delayed quarterly data and buying on what many expect to be bad (short-term) news.