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Think home buyers are getting some nifty incentives as the housing craze cools? Well, check this out.
Some companies own so much highly valued real estate these days that when you buy their stocks, you're paying for the property and essentially getting their businesses for free.
Let me slow down and say that again. Many businesses own a heck of a lot of real estate that's shot up in value in recent years. The companies typically are in sectors that call for extensive land and floor space -- think retailing, restaurants, hotel chains, casinos and amusement parks. That land, in many cases, is worth more than all of a company's outstanding stock.
In a minute, I'll give you a list of seven property-rich stocks worth a look now. But first, a bit more about why you'd want to own these stocks.
Portfolio pep
Example No. 1: The Pep Boys - Manny, Moe & Jack (PBY, news, msgs) has a stock-market capitalization of just $704 million. Yet Citigroup Research analyst Jonathan Litt calculates that the auto parts retailer has at least $1.17 billion worth of land and buildings on its books.Even if you account for net debt of about $475 million, Pep Boys' real estate is still worth at least as much as the company's $1.2 billion in "enterprise value" (a calculation analysts use to value a business by adding a company's debt to its market cap, and then subtracting its cash).
So theoretically, at least, Pep Boys could close up shop and liquidate its real estate, and shareholders and creditors would lose nothing. (Yes, there would be transaction costs and capital gains taxes -- but Pep Boys' real estate is actually worth a lot more than $1.17 billion.)
More from MSN Money
There are still no guarantees, of course, that if you buy Pep Boys shares today you will make money. But on average, you are likely to do well if you buy companies that own so much real estate that they look like land banks.
One group of such companies uncovered by Citigroup's Litt in the spring of 2005 advanced 29.5% by the end of July, compared to S&P 500 Index ($INX) gains of 10%. Another list Litt published around the same time bested the S&P 500 by five percentage points. Litt recently published another group of 177 potential candidates. Check out the chart on this page for a rundown of the 15 companies from that list with the best ratios of real estate-to-enterprise value.
| Company | Total enterprise value* | Land and buildings, book value* | Real estate as % of enterprise |
|---|---|---|---|
$1,120 | $1,174 | 105% | |
$1,181 | $1,031 | 87 | |
$488 | $405 | 83 | |
$3,568 | $2,883 | 81 | |
$1,178 | $930 | 79 | |
$2,132 | $1,665 | 78 | |
$659 | $514 | 78 | |
$1,791 | $1,391 | 78 | |
$510 | $395 | 78 | |
$989 | $754 | 76 | |
$22,436 | $15,614 | 70 | |
$526 | $354 | 67 | |
$2,091 | $1,406 | 67 | |
$1,393 | $911 | 65 | |
$1,716 | $1,114 | 65 |
*In thousands. Source: Citigroup Investment Research and FactSet.
Bring out your buyouts
Your best hope when playing land-rich companies is that they get bought out for a tidy premium. Given all the cash in the hands of corporations and private equity investors, that's a likely outcome these days, says Thomas DiBella, a portfolio manager at the Turner Small Cap Equity Fund (TSEIX, news, msgs).Rate this Article
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