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Premier Exhibitions (PRXI) – I’m jumping on this bandwagon too!

September 1, 2010

 After reading Above Average Odds Investing’s recent post on PRXI, then PlanMaestro’s illuminating series of earlier posts, I have decided to open a position. It may seem late to buy into PRXI given that 1) the operational turnaround has already taken place, 2) Sellers Capital, the major catalyst for the turnaround, will be liquidating its fund and selling its position in PRXI over the next year and 3) the share price is up over 150% during the past year (most of which took place after the court decision regarding the Titanic salvage objects on August 13). So why would I open a position now? Simple, intrinsic value significantly greater than market value plus likely catalyst.

It seems to me that the most probable scenario is as follows:

  • Sellers Capital has stated that it will be looking for a single buyer of its 46% stake in PRXI and will not sell its shares into the public market. Furthermore, Sellers will probably not accept less than 75-90% of the intrinsic value of their ownership share.
  • The August judgment has given a lot more transparency to Premier’s intrinsic value. Using AAOI’s metrics (which seem OK to me):
in millions (except per share)    
        Total Per Share
Titanic Assets      
  Original   $35.0 $0.75
  Newly awarded      
    Gross 110.0    
    Taxes @ 36% 39.6    
    Net   70.4 1.50
Subtotal Titanic Assets   105.4 2.25
           
Digital Archives   44.0 0.94
Operating Business   54.0 1.15
Cash       8.0 0.17
Total Intrinsic Value   $211.4 $4.52
           
Shares outstanding     46.81
  • There needs to be a transaction for Sellers Capital over the next year that provides them with 75-90% of PXRI’s intrinsic value so they can liquidate their fund in an orderly fashion. For an outside investor coming in now this equates to a potential gain from today’s price of between 100-140% (assuming the Sellers’ transaction acts as a catalyst)
    Total Per Share % chge
Market price     $1.71  
         
Value:        
  lower limit 75% $158.6 $3.39 98%
         
  upper limit 90% $190.3 $4.06 138%

Obviously those selling into the market yesterday don’t agree with me or they have a different investment time horizon (I think the transaction may take a year or more). Of course, it could simply be that I am missing something. But it would have to be something big.

So I have taken an initial position. Recent share price action leads me to believe that, without any imminent news, the share price could drift lower, perhaps even significantly lower in the next 3 to 6 months. So I have taken a 1/3rd position and anticipate filling it out in the next months. My buy points are 15% lower and 30% lower than my initial buy in ($1.86) , that is, at $1.58 and $1.30. The tradeoff here is that an announcement could come before the stock drifts down to these levels and I could miss the opportunity. The anticipated return matrix based on a two-year time horizon (a bit conservative; this should really play out in the next year).

      Return Outcome
Position % of total Avg Cost Low High
         
First third 33.3% 1.86 35% 48%
         
Second third 33.3% 1.58 46% 60%
         
Third third 33.3% 1.30 61% 77%
         
Total 100.0% 1.58 46% 60%

 I know the returns look outrageous. Is Mr. Market really asleep or am I just missing something? Only time will tell.

Potential Downsides to the above scenario

  • Sellers Capital cannot find a buyer and begins to sell into the public market: This is kind of unlikely because of their large position and the impact it would have on the market price and thus the value of their investment. It is more likely that if no buyer could be found, the fund would distribute shares to fund shareholders. This, of course, would put significant downward pressure on the market price as shareholders unloaded into the public market. Neither of these scenarios, however, really impact the intrinsic value of the company.
  • More likely: If no strategic buyer is found for the Sellers stake, and the shares are distributed to lots of little shareholders current management may not be pressured into returning full intrinsic value over the next couple of years (i.e. No catalyst, no efficient asset allocation). For example, management might sit on the Titanic assets and get a low or no return. This would reduce the IRR of an investment today, but I have a hard time believing that, with the above calculated difference between intrinsic and market values, somebody wouldn’t come in and make that difference narrow eventually.

So, we’ll all keep tuned in to see what Mr. Market will be up to on this one.

Profitable investing!

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From → Positions Closed

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