Thursday, December 4, 2008

Premier Exhibitions: The price isn't right

If you remember from the last post on Premier Exhibitions, the company had $17.481 million in cash and marketable securities as of Feb 29,2008 and no debt, with a healthy cash generating business to boot. The entire company is selling for $33.33 million today. What happened in the interim?

Well, quite a few things and not all of them were good, to say the least. The company hired Bruce Eskowitz to be its CEO in September 2007. His agenda: Build Premier into a full-scale ticketing/merchandising business. The executive management team was revamped costing Premier a fortune, to put it mildly. The decision to run more shows independently (they had been partnering with JAM and LiveNation for most of their shows before) meant gross margins declined, from the mid 70's to the low 50's that they expect today. They bought MGR entertainment, an entertainment merchandising company, for $2.1 million (gross revenues of $9.1 million) in March 2008. In fiscal 2008, Premier made all of its money from 2 exhibitions(19% from Titanic and 81% from the hugely successful Bodies exhibitions). Earlier this year, in an ABC 20/20 episode, the origins of the bodies that were being used for display in the Bodies exhibitions were brought into question. There were claims that the bodies were those of tortured Chinese prisoners. Premier denied the charges and money was spent in legal expenses to handle these allegations. Ultimately, Premier resolved the issue by publishing a disclaimer to the effect that they couldn't completely guarantee the source of all the bodies that were on display.

Meanwhile, in an effort to diversify their revenue stream, Premier decided to add 3 more exhibitions: Dialogue in the Dark, Star Trek and Sports Immortals. There was a significant ramp-up in personnel costs as additional people were hired to handle this explosive growth ($2.535 million in the 1st qtr of fiscal 2008 vs $8.018 million(!) in the 1st qtr of fiscal 2009). They also signed a long term lease to display 3 of their exhibitions at the Luxor casino in Las Vegas, moving from the Tropicana. All of this expansion comes right smack in the middle of one of the worst recessions in the US in decades.

The aforementioned expenses have contributed to cash balances dwindling to $8.1 million at the end of the 2nd qtr of fiscal 2008, with Premier expecting to draw on their line of credit facility with Bank of America by the end of the year. Cash flows for the year have been extremely meager (about half a million from operations), with declining attendances at the exhibitions coupled with the outrageous rise in personnel expenses in the pursuit of "growth" being major contributors. After Premier reported a first quarter loss for fiscal 2009, dissatisfaction grew and Bruce Eskowitz was replaced by Arnie Geller, one of Premier's founders, as CEO in August 2008. The same Arnie Geller that had continued to be paid about $650,000 in salary after Eskowitz replaced him as CEO. He was, however, one of the company's founders and owned about 9% of the outstanding stock. Surely, he'd have the interests of the company's stockholders at heart.

Meanwhile, in the fall of 2007, a man I rate very highly, Mark Sellers, started building a position in Premier. Mark Sellers runs a hedge fund, Sellers Capital, and looks to invest in undervalued situations. On a completely unrelated note, it is interesting to see that Sellers looked at Steak 'N Shake as a potential investment before Sardar Biglari took charge there and decided not to pursue it as a potential catalyst was not visible. Look up www.ft.com and www.fool.com for articles/interviews by/with Sellers. He comes across as an extremely sensible, intelligent investment manager. It is clear(to me anyway) that Sellers understands investing the way it ought to be practised.

If he's that good, why don't you tell us his actual track record so we can judge for ourselves, eh? Sure.
Annualized net returns since inception (Aug 2003 through the end of Q3 2008): 19.86% vs 5.16% for the S&P 500. This, after his positions in the fund were down about 55% in Q3 of 2008. You heard that right. A lot of it was attributable to his biggest holding, Contango Oil and Gas, which declined precipitiously in Q3 as oil prices fell off the cliff. Knowledgeable observers feel Contango is undervalued at today's prices(likely atleast 2x) although I have no opinion there. His only other holding at the end of Q3: Premier Exhibitions.

Sellers now holds about 16% of Premier's stock(he is the company's largest shareholder), and as the business performance started deteriorating, he asked for 2 board seats and got them. It is likely he was instrumental in Arnie Geller returning as CEO.

So, around the time of Q2 earnings, the situation at Premier was:
a. Largest shareholder on the Board of Directors pushing for cost control, a focus on return on invested capital and better corporate governance.
b. Second largest shareholder and one of the founders returning as CEO.
c. Trial for the salvage award moving forward as Premier had submitted revised covenants to the court in the event that they were to be granted an "in-specie" award.

Things were looking up, right? Right. A week or so before Q2 earnings, Sellers announced that he was shutting his fund down and would be liquidating his positions. Bummer. Except Sellers wouldn't allow redemptions from his fund(to prevent forced selling) and he expected to wind his fund down over a period of 2 or more years in order to get sensible prices for his holdings. Good on him for doing the right thing. As always, it's a good thing to associate yourself with people of the highest integrity. I'll post more thoughts on Sellers shutting his fund down, and the perils of managing other people's money, later.

Back to Premier. Even though the Sellers news wasn't bad, all things considered, the stock continued to decline. Q2 earnings were announced(not good, of course, given the economic conditions), and in the conference call, management announced that they'd not provide guidance for earnings any more. In general, I consider that an extremely bullish signal. I don't believe that there is any value added from providing earnings estimates and investors waiting with bated breath to see if a company hit/missed/exceeded earnings expectations for each quarter. The earnings guidance practice is a colossal waste of resources, both on the company's side and on the investor's side of the fence. Not every one feels the same way, of course, and the stock continued to decline relentlessly from that point on.

As the stock cratered, Sellers Capital asked for the resignation of Arnie Geller on November 4, citing a variety of reasons, none of which would entice anyone to buy the stock, mind you.
You can read the SEC filing here:
http://www.sec.gov/Archives/edgar/data/796764/000095015208008867/l34475adfan14a.htm

Sellers also proposed that he'd be the non-executive chairman(without pay) after Arnie Geller's departure, overseeing the turnaround. There was no response from Premier. On November 21, Sellers Capital made official their choices for the 4 board seats that would be opening up:
http://www.sec.gov/Archives/edgar/data/796764/000095015208009643/l34658aexv99w2.htm
Guess who I'll be voting for?

Premier sells for $33.33 million today. What are you getting for that price?

$46 million in fair value for the Titanic artifacts that are owned free and clear.
A free option on the outcome of the salvage award trial which is worth anywhere between $0-$110 million, an option with an extremely high probability of working out based on comments made by the US government in the trial.
The underlying low capex, high ROIC business for free.

The challenging economic conditions, entrenched shareholder unfriendly board/management, the yet to be determined result of the capital expenditures at Vegas and the new exhibitions all represent risks here. The price at this point though is sufficiently compelling that the risk/reward equation is heavily skewed in favour of the equity investor.

Often wrong but seldom in doubt,
Ragu

2 comments:

  1. Ragu,

    Great find and well-researched stock, I enjoyed reading this post.


    ~ Qleap

    ReplyDelete
  2. Qleap,

    Thanks for your kind words. Someday I might even write about the underlying business. In the meantime, if Mr.Market liked this pick as much as you seemed to have enjoyed reading this post ...

    --Ragu

    ReplyDelete