Michael Melby presented his in-depth investment thesis on PICO Holdings (Nasdaq: PICO) at Wide-Moat Investing Summit 2017.
PICO owns water rights in the southwestern United States and participates in the U.S. homebuilding market through a 56.7% 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 and shortness in water supplies.
UCP recently agreed to merge with Century Communities (NYSE: CCS), with UCP shareholders expected to receive cash and stock compensation of $11.35 per share. PICO is set to receive nearly $120 million in value from the transaction, including $55 million in cash. PICO’s adjusted enterprise value after subtracting the consideration in the UCP transaction is ~$225 million, a sharp discount to the value of PICO’s water assets.
Michael’s sum-of-the-parts analysis values PICO at $580 million, or $25+ per share. PICO’s corporate governance has improved dramatically in recent years as the company replaced its prior CEO, modified the incentive compensation structure, and installed a new board of directors. PICO is expected to return a significant amount of cash to shareholders, including cash held on the balance sheet as well as cash proceeds from the sale of UCP and future water assets. Overall, PICO provides an opportunity to invest directly in water assets at a sharp discount to both book and intrinsic 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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