Wednesday, May 8, 2013

Unlock the Hidden Value in This Stock

JANA Partners, lead by the famous activist investor Barry Rosenstein, has become active again. In the middle of April, JANA accumulated as much as more than 5 million shares (including options to purchase 824,600 shares) of Oil States International (NYSE: OIS), which was equal a 9.1% stake in the company.
In its recent 13D filing, JANA reported that the aggregate cost of its Oil States’ stake was around $340 million. Since the beginning of the year, Oil States has gained more than 7%. Should investors follow Barry Rosenstein into Oil States? Let’s find out.
Accommodations could be a REIT
Oil States is the leader in supplying specialty products and services to major oil, gas, and coal producing companies around the world. The business is operating in four main business segments: Accommodations, Offshore Products, Well Site Services, and Tubular Services.
The majority of its revenue, $1.78 billion, or 40.3% of total 2012 revenue, was generated from the Tubular Services segment. Accommodations ranked second with $1.11 billion in revenue, while Well Site Services generated the least revenue out of the four segments contributing only $713.6 million in 2012. Interestingly, Accommodations and Well Site Services are the two biggest income contributors, with $364.6 million and $156.8 million, respectively, in operating income. Tubular Services had a very thin margin of only 4.2%, contributing only $75 million in operating income.
According to the 13D filing, JANA seems to push for corporate changes in Oil States. The two parties have had discussions to separate Oil States’ “Well Site Services segment from its Accommodations segment and the formation of a REIT for Accommodations.” As I take a closer look at Oil States’ recent 10-K filing, I estimated that the Accommodations segment has around 1,470 acres, which is equivalent to more than 64 million square feet.
Valued cheaply compared to Simon Property
Compared to the largest mall REIT in the world, Simon Property (NYSE: SPG), the real estate of the Accommodations segment (both lease and owned) is around 26.4% of Simon Property’s total real estate size. Simon Property currently owns or has interests in around 325 retail real estate properties, with around 242 million square feet in total.
Furthermore, Simon Property had a 29 % stake in Kl├ępierre, a REIT operating 260 shopping centers in 13 countries in Europe. At $176 per share, Simon Property is worth around $55.23 billion on the market. Thus, a rough approximation would relatively value Oil States’ Accommodations segment at more than $14 billion, more than three times higher than Oil States’ current market cap of only $4.2 billion.
The market values Simon Property at more than 37 times its trailing earnings and 9.5 times its book value. In terms of earnings valuation, as the Accommodations segment of Oil States generated $364.6 million in operating income, the equivalent earnings valuation would place Oil States’ Accommodations segment at nearly $11 billion.
J.C. Penney’s hidden real estate value is also huge
Simon Property has shown no interest in the sale-leaseback option of J.C. Penney’s(NYSE: JCP) 111 stores in Simon malls in the U.S., because the occupancy rate has been on the rise. J.C. Penney, after experiencing a significant drop of more than 53% in the past twelve months, has been trying to turn itself around.
As of January 2013, it had $3.17 billion in equity, only $930 million in cash, and as much as nearly $3 billion in long-term debt. The company has been trying different alternatives to divest several real estate holdings for more cash. J.C. Penney and its advisers have been thinking of several options, including real estate spin-off and sale-leaseback.
Cantor Fitzgerald LP expected that the company could raise $1.5 billion by spinning off its real estate into a new company, and use this company to issue senior notes, backed by unsecured guarantees. J.C. Penney currently has nearly 112 million square feet of real estate in total. Indeed, if J.C. Penney operated as a REIT, it would be worth half of Simon Property, or more than $20 billion. At $17 per share, J.C. Penney is worth only $3.7 billion on the market.
My Foolish take
As J.C. Penney operates as a retail operator, not a real estate player, it would take a lot of time to unlock its huge potential real estate value. However, Oil States’ Accommodations segment is not about retail, it is about lodged properties. As the Accommodations segment has been generating decent operating income, it seems to be much easier and take less time to unlock its hidden asset value. Indeed, I personally think that Oil States could be considered an opportunistic stock.