Throwback Thursday – Dole Investment Analysis Case Study Part 3

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This is the eighth post in our new Throwback Thursday’s Series, where we share with you posts from the past blogs to bring you as much value as possible.

Today, we’re continuing the case study on Dole from articles in 2012 and 2013.

In Part 1, I valued Dole and compared it to its competition.

In Part 2, I shared with you the results I had in only 104 days after my initial analysis of Dole led to great things.

Today, we get a new updated and in-depth valuation of Dole’s hidden assets and operations after it’s spin-off back then before getting to the negative aspects of the eventual going private transaction.

This includes a deep dive into how to finding the value of Dole’s land holdings and even the value of its ships.

We’re now to the far more important learning aspects of these articles.

I researched and wrote extensively about Dole when I began doing ‘real’ investment research in 2012.

I’m going to be reposting a series of my past research and investment articles on Dole beginning today.

They’re a great case study in doing deep work. Here are some of the things we’ll be looking at in this series…

• HOW to find the value of potentially hundreds of millions or billions of dollars worth of hidden assets
• The signs of a company potentially having hidden value
• Doing deep work to find the value of these and other things people won’t look for
• Valuations and how and why I’ve done these valuations
• And more…

I hope you enjoy this series and know we can all learn a lot from doing this.

Oh and please excuse the poor writing style and huge paragraphs. I wrote this in 2012 before I learned how to write.

As always, nothing is changed below from the past article in 2012.

Jason

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Dole Is Still Undervalued: Updated Valuation And Analysis Article After Sale To Itochu

Earlier this year I completely dedicated myself to learning the techniques, process, and proper mind set to become an excellent value investor. I wrote my first full article back in June about Dole Food Company (DOLE).

Here are my thoughts on Dole back in June, and my conclusion thoughts after comparing Dole to Chiquita (CQB) and Fresh Del Monte (FDP).

Due to its big change since that time I have been asked by a reader what are my thoughts about the new Dole, now that it has eliminated what was its biggest problem; its debt. Here is just one of the many articles outlining the sale to Itochu for $1.7 billion, that is expected to close by the end of the year.

The reader wants to know what I think about new prospects going forward, if I still think the company is undervalued, or if I would think about selling now if I find it to be overvalued.

The reader also asked me about the 2009 Dole Food Automatic Common Exchange Security Trust which I talk about here.

Since the transaction has not closed still, most of the information in the above articles remains intact as it pertains to margins and debt levels about Dole’s current state. I will first value the business as I see it after the sale of its worldwide operations and then comment on what I think about new Dole’s prospects after the transaction closes. When I refer to Dole as a whole I mean Dole before the sale of its worldwide operations. New Dole is in reference to my estimates of Dole’s operations after the sale of its worldwide operations. I have a call into Dole investor relations to get exact revenue and EBIT numbers for new Dole, but to this point I have not received a call back. I am estimating that new Dole will lose about 36% of its EBIT after the sale of its worldwide operations. I came to that estimate from looking at Dole’s sale to Itochu presentation from September which can be viewed here.

These valuations were done by me, using my estimates, and are not a recommendation to buy any stock in any of the companies mentioned. Do your own homework.

All numbers are in millions of U.S. dollars, except per share information, unless otherwise noted. Valuations were done using Dole’s 2011 10K, second quarter and third quarter 2012 quarterly reports and presentations, and Dole’s presentation of what it should look like after its asset sale.

The main thing I was worried about with any asset sale is that Dole would have to unload some of its very valuable land assets. Thankfully after the transaction is completed new Dole will still own 113,000 acres of land including some very valuable land in Hawaii. All assets below are being kept by new Dole.

Sum of the Parts Valuation

Land Holdings

Dole owns 25,000 acres of non-core land in Oahu valued by Dole at $500 million or $20,000 per acre. Dole also owns 22,100 acres in Costa Rica, 3,900 acres in Ecuador, and 25,500 acres in Honduras. Only part of each country’s acreage are being used for growing fruit: 8,200 in Honduras, 7,300 in Costa Rica, and 3,000 in Ecuador. Meaning the rest could presumably be sold without interfering with current operations; about 33,000 acres.

• All Costa Rica land valued at $5,000 per acre equals $110.5 million
• All Ecuador land valued at $3,500 per acre equals $13.65 million
• All Honduras land valued at $3,500 per acre equals $89.25 million
• Remaining 36,500 acres valued at $5,000 per acre equals $182.5 million

Adding total land value estimates up equals $895.9 million just in land value or $7,928.32 per acre, which comes out to $10.18 per share in total land value.

Estimated value of unused non-core land, 33,000 acres in the above three countries at $5,000 an acre for Costa Rica and $3,500 for Honduras and Ecuador, land is $75.7 million.

Total non-core land assets that could be sold valued at $575.7million total, or $9,925.86 per acre; $6.54 per share in land assets that could be sold.

Ship and Ship Related Equipment

Dole owns 13,300 refrigerated 40 ft containers at a very conservative $5,000 each, equal $66.5 million. This is a very conservative estimate as these containers can sell for as much as $50,000 a piece. I am using $5,000 per unit as my estimate because I want to be extra conservative and because I have not been able to find an exact break down on how many of the 13,300 container units are the 40 ft refrigerated units as Dole’s also has some 20 ft refrigerated, and completely unrefrigerated containers, so I wanted a very conservative estimate of price to be safe.

Dole also owns 11 ships which I am very conservatively valuing at $1 million each. I found a few container ships selling for under $1 million but most were well over that price, with some prices reaching over $100 million. I am again just being conservative here because I do not have vast knowledge on the prices of Dole’s ships.

Adding all of the land, ship, and container value up gets us to a total of:

• All land, ship, and container value = $973.4 million, or $11.06 per share
• Only non-core land that could be sold, ship and container value = $653.2 million, or $7.42 per share.

None of Dole’s operations, cash, debt, or any of its building or other equipment is counted in the above calculations. I will include Dole’s cash in the below valuation.

I did not include any of its buildings or other equipment in the above valuation because I could not find any concrete information, and again did not want to speculate on numbers.

Now I will value Dole’s operations.

EBIT and Net Cash Valuation

Cash and cash equivalents are 82 and it has 0 in short-term investments.

Dole as a whole has a trailing twelve month EBIT of 180.7 for its entire current operations. Per Dole’s sale to Itochu presentation I am estimating that it will lose approximately 36% of EBIT after the sale of its worldwide operations which leads to a trailing twelve month EBIT estimate of 115.65 for new Dole’s operations.

5X, 8X, 11X, and 14X EBIT + cash and cash equivalents + short-term investments:

• 5 X 115.65 = 578.25 + 82 = 660.25 / 88 = $7.50 per share
• 8 X 115.65 = 925.2 + 82 = 1007.2 / 88 = $11.45 per share
• 11 X 115.65 = 1272.15 + 82 = 1354.15 / 88 = $15.39 per share
• 14 X 115.65 = 1619.1 + 82 = 1701.1 / 88 = $19.33 per share

Combined Valuation Of New Dole

All values are per share values.

The only thing the above values are not containing is the debt. The reason I am not including the debt in any of the estimates of intrinsic value is because Dole, as a whole, now has total debt of $1.4 billion but will be able to pay off all of it if it chooses to after it receives the $1.7 billion from Itochu. Thus making the above very good estimates of what new Dole should be worth after selling its worldwide operations and ridding itself of the debt.

I had an additional two paragraphs written about Dole’s TEV / EBIT and ROIC margins but those had to be scrapped since I have still not heard back from Dole investor relations about new Dole’s exact numbers and I did not want to speculate.

New Dole is also forecasting that after the sale is finalized it will be able to save around $100 million in cap ex and corporate expenses by the end of fiscal 2013 which supposedly are going to be yearly savings going forward, and to be able to improve its overall business operations. Even leaving improvement in operations, possible future acquisitions, and money savings out of all my calculations, new Dole should be selling at a very conservative minimum of $14.92 per share, and I actually think quite a bit higher. Current share price for the whole of Dole is $10.70 per share, a 29% margin of safety.

Dole management has also stated that after the sale to Itochu is finalized that it may look to sell or spin off further assets, or make some acquisitions to bolster its operations within new Dole, any of which may help unlock further value in its shares. This is pure speculation, but I could see Mr. Murdock who owns around 40% of Dole, possibly looking to take the new Dole private again now that its major problem has been eliminated so he can control its operations again, which would also help unlock shareholder value.

Why after all of the above has Dole as a whole been dropping in price lately?  My guess is that people have been selling for a combination of the following reasons:

• That Dole just released bad quarterly numbers that missed analyst estimates and which sent the herd running
• Before that people were probably selling some personal shares that they owned to lock in profits since the stock has run up from around $8.50 a share to over $15 a share at one point
• A lot of it may also be that people are still treating this as a highly indebted, risky, poorly operated, and marginally profitable company that it is without looking deeper at the assets that it will still hold after receiving the $1.7 billion from Itochu, and how new Dole will now be a much healthier and less risky company

However, even if you do not count any of its operations at all, Dole as a whole is selling now for less than JUST a conservative value of the land, ship, and containers that it owns. Meaning the downside is covered by hard saleable assets even if new Dole’s operations were to become massively unprofitable, which I think is very unlikely.

New Dole looks to be massively undervalued, will still hold very good high value assets, especially saleable land, has some future potential catalysts that could help unlock value, it should be able to compete better with Fresh Del Monte and Chiquita, and new Dole will now be freed up to make acquisitions and improvements to its business and operations after the transaction with Itochu closes as it will not be burdened by the massive amount of debt that it has carried for years.

I plan to buy shares for my personal account and add more shares back into the accounts I manage after selling some Dole shares up 70% in September.

Here is a last minute update as Dole has set the shareholder meeting for December 6^th to approve this transaction.

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From here, things take a bit of an unexpected turn for the worst when it comes to this companies management and going private transaction.

P.S. We just launched the new Value Investing Journey Masterclass. If you want to learn how to do the above things yourself check out the course at the link above.

P.P.S Make sure to check out the brand new Value Investing Journey Training Vault here to gain access to $10,000 training sessions for as little as $97 a month.