Tejon Ranch Shares Priced Right
Management is pursuing the real estate development of the 270,000 acre Tejon Ranch Company (TRC) located in Southern California. The company's three major development projects are the Tejon Industrial Complex, Tejon Mountain Village and Centennial. As commercial, industrial and residential entitlements are pursued, the stock's valuation ought to expand significantly. The Buy rating is maintained.
The company's prime asset is approximately 270,000 acres of contiguous, largely undeveloped land that is 60 miles north of Los Angeles. Management is implementing a focused strategy aimed at transforming the company from an agricultural operations based company to a real estate development company. The company is pursuing three initial development projects: Tejon Industrial Complex (commercial /industrial development), Centennial (planned residential community), and Tejon Mountain Village (mountain resort community).
Since Tejon Ranch is in the early stages of developing 270,000 acres of largely undeveloped land, traditional valuation methods based on P/E, cash flow, or a dividend discount model are not appropriate. In addition, book value is distorted making P/B inaccurate. The land is being held on the balance sheet at cost or $7.9 million ($29 per acre), since it was acquired through Mexican grants in the 1840s.
Despite the facts that Tejon's three development projects comprise less than 12% of the company and that approximately 240,000 acres may be set aside for environmental conservation and good stewardship, the stock should be valued on a Price/Acre basis. The stock's valuation has moved up on a stair-step basis as development projects are being successfully pursued.
We expect the value of land to significantly increase as further entitlement processes are completed. As the management succeeds in its vision of developing Tejon Ranch over the next 25 years, the valuation per acre should dramatically increase. Over the next few years, we expect the valuation to increase to $6,000 per acre.
Wait Out Resource Cap Uncertainty
Resource Capital Corp. (RSO) reported REIT [real estate investment trust] taxable income of $12.1 million or $0.48 per share compared to $9.7 million or $0.39 per share in 1Q07, representing a 25% increase. The company maintained its quarterly dividend payout of $0.41 per share in 1Q08, $0.02 per share higher than the year ago period. Operationally, the company continues to perform well and almost all of their commercial loans are performing.
We expect commercial real estate loan volumes to decrease in the coming quarters as real estate fundamentals worsen. The credit squeeze should continue at least through the end of the year, and spreads could decrease as investors' appetite for mortgage bonds is low. We think that the company has adequate liquidity to withstand the current downturn, although with key financing sources shut off, RSO will have more difficulty borrowing money.
RSO will be dependent on loan payoffs to make new loans. On the other hand, only a small portion of the company's debt is at risk to margin calls and overall delinquencies in RSO's portfolio are still low. We recommend investors hold the shares for the attractive yield and wait for some uncertainty to pan out in the commercial debt markets.
On a price/earnings basis, the company is trading at 4.6x our 2008 estimates of $1.60 per share, a 7% premium to sector averages. We are setting our six-month price target at $7.50 per share or approximately 5x 2008 projected earnings.
AutoZone's Heavy Retail Exposure
Leading retailers of automotive parts and accessories AutoZone, Inc. (AZO) has significant cash flow and plans to expand its square footage growth. AutoZone has maintained a mid-single-digit square footage growth rate by opening new stores every year. Category management efforts and supply chain initiatives are likely to be offset by higher staffing costs.
Moreover, AZO is suffering from sluggish same-store sales, which are expected to remain under pressure. Thus, we maintain our Hold recommendation on AutoZone, with a six-month target price of $132.00, which is 13.0x our 2008 EPS estimate.
In June, the company authorized repurchase of an additional $500 million of the company's stock, bringing its current unused repurchase authorization to $608 million. For fiscal 2008, the company repurchased 2.9 million shares of its common stock for $350 million. With significant cash flow on its balance sheet, the company can repurchase about 8% of its own shares per year. Each 1% reduction in shares increases earnings growth by 3%. As a result, earnings per share and earnings growth have increased as well.
Despite opening new stores, AutoZone is facing fierce competition from Advance Auto Parts Inc (AAP).
