PICO Holdings: Water Assets at a Discount

Michael Melby presented his in-depth investment thesis on PICO Holdings at Wide-Moat Investing Summit 2016.

PICO Holdings owns water rights in the southwestern United States and participates in the U.S. homebuilding market through its 56.9% economic interest in UCP, Inc. (NYSE: UCP). PICO owns significant water assets in key metropolitan areas such as Reno, Phoenix, and Las Vegas which should increase in value due to population growth, short water supplies, and ongoing drought conditions. The company’s consolidation of UCP for accounting reasons distorts the balance sheet, as all debt attributed to PICO is actually held at UCP. Treating the UCP ownership stake as a marketable security reveals PICO as an asset-rich company with a clean balance sheet and an adjusted enterprise value of under $130 million. This represents a sharp discount to the book value of PICO’s water assets and is likely a sizeable discount to the market value. Additionally, UCP could provide additional upside with the stock currently trading under 0.7x book value. Our sum-of- the-parts analysis suggests the company’s portfolio of assets could be worth over $500 million or over $20/share. We believe investors have exited the stock due the company’s history of unwise capital allocation decisions and poor corporate governance. Recent shareholder activism has resulted in five new board members and a new strategic direction focused on monetizing assets and returning proceeds to shareholders — greatly reducing the risk of more capital allocation blunders. Overall, PICO provides investors with the opportunity to invest directly in water assets at a sharp discount to both book and market value.

About the instructor:

Michael Melby is the founder and portfolio manager of Gate City Capital Management, a micro-cap value focused investment firm. Before starting Gate City Capital, Michael worked as a research analyst at Crystal Rock Capital Management where he covered the consumer, restaurant, retail, and gaming sectors. Michael previously worked at Deutsche Bank Securities in their Debt Capital Markets group and at the University of Notre Dame Investment Office where he focused on natural resources, fixed income, and risk management. Michael earned an MBA from the University of Chicago Booth School of Business where he graduated with Honors and a BBA in Finance from the University of Notre Dame where he graduated Summa Cum Laude. Michael is a CFA Charterholder and has earned the Financial Risk Manager designation.

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