Amrep AXR S
November 01, 2006 - 11:11am EST by
heffer504
2006 2007
Price: 70.40 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 465 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT
Borrow Cost: NA

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Description

Amrep owns a lot of land in New Mexico. Much like California Coastal (CALC) when I wrote it up, I consider this security to be a free put on real estate values.  This writeup is short for timeliness reasons.
 
The value of the company is in three areas.  They have 95m of cash on the balance sheet, though 20m of this is likely overstated due to a temporary payables spike they discuss in the last quarter.  They have a magazine distribution business which is generously worth 50m at 7x ebit.  That leaves 330m of value for their land holdings in Rio Rancho, NM.  Rio Rancho is a suburb of Albuquerque, and shares a lot of characteristics with the now-imploding Phoenix market: California-based investment buyers driving the market, plenty of land, and a warm desert climate.
 
There is not enough data to get true sales prices per acre, but it seems like around 30k/acre for undeveloped and probably twice that for developed acres.  They actually don’t break land apart this way, so this is somewhat of a guess, but is reinforced by a few other data points.  They further break apart land into contiguous (large lots, sold to big builders) and noncontiguous (sold to private owners or small builders); only 25% of the land is contiguous.
 
My basic calculation is as follows: 18,000 acres, 65k/acre, 75% gross margin (has ranged from 40-65% historically), 3% sales commission, 5m overhead/year, 40% tax rate, and a 60% discount factor (assuming they sell the land over the next 12 years, though they’ve said they’ll do it over 20).  This gets me to 275m of value, as compared with the 330m ascribed to it.
 
In the short term, though, I think things could get pretty bad.  I obtained housing starts from the local land office, and here is the data:
 
YEAR
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
TOTAL
2006
322
178
337
242
170
191
126
113
81
 
 
 
1760
2005
193
347
195
335
288
315
254
317
236
218
146
240
3084
2004
94
85
201
176
142
185
166
135
113
181
121
121
1,720
2003
60
79
110
114
111
135
141
105
93
103
71
102
1224
2002
71
66
83
75
68
77
70
83
66
90
75
77
901
2001
62
67
102
78
114
83
64
92
68
72
58
56
916
2000
44
28
47
64
57
57
69
43
70
51
44
54
628
1999
20
53
26
61
47
23
55
48
48
30
37
58
506
1998
35
33
85
85
63
75
57
38
66
60
16
51
664
1997
48
70
69
35
87
79
18
63
23
43
49
91
675
1996
34
81
58
48
65
64
91
110
40
91
38
58
778
1995
56
60
105
77
117
63
56
67
55
64
50
89
859
1994
63
72
69
64
41
52
41
65
67
91
56
91
772
1993
29
73
105
91
90
115
80
100
48
111
70
91
1,003
1992
22
43
59
54
48
55
69
81
72
24
52
41
620
1991
35
31
39
39
31
44
45
43
48
49
95
75
574
1990
29
20
14
25
53
39
30
76
29
35
38
28
416
1989
58
65
105
64
61
59
51
53
37
49
8
46
656
1988
38
75
100
70
99
127
54
58
103
55
45
39
863
1987
102
106
95
78
36
48
43
39
84
81
43
45
800
1986
73
85
89
118
74
129
76
95
109
74
72
32
1,026
1985
91
108
67
73
182
105
93
103
81
128
37
59
1,127
TOTAL
 
 
 
 
 
 
 
 
 
 
 
 
15,008
 
 
This table probably won’t format correctly, but starts were 500-1,000 a year through 2002, when they spiked to 1,200 for 2003, 1,700 for 2004, and 3,100 for 2005.  in 2006, the monthly progression since january has been 322  178  337  242  170  191  126  113  81.  This last number is for September; October comes out next week, though the initial read from the land office is “lower than September”.
 
In addition, here are some quotes from local brokers from a few weeks ago.  They’re basically what you would expect in this market environment.
 
"Softening in that we now have a buyer's market (in excess of six months house inventory."
 
"Because of the large inventory of resale homes and the higher interest rate, builders have slowed up their new projects. Many are on the drawing board and most in Rio Rancho, but the builders are waiting until Spring. We do have a winter here, albeit mild, so it is best to wait.  Many of the homes for sale in RR are being sold by investors so that is why you see a lot on the market."
 
"As talked about indirectly above, the market is slowing and so more “For Sale” signs are coming up.  Also, many sellers who are really needing to move are starting to make big price decreases."
 
Finally, the main employer in Rio Rancho is Intel, which has announced a major headcount reduction initiative.  According to Intel, Rio Rancho is safe until mid 2007, but perhaps could see cuts then.  Since Intel is building a new fab in Arizona, they won’t be hiring in Rio Rancho for a while.
 
AXR is an IBD top momentum stock.  I believe, because of the strong decline in home starts, that no builders were buying lots (either outright or through option exercises) in August, September, or October, and thus earnings could be under $.50 (versus $2.38 in the last quarter), which would boot the stock of the IBD and break its momentum. 
 
The risks are that the company is controlled by a few families, who own 75% and could always take the company private.  Offsetting this, I would argue that they should report a bad quarter first and then buy the company, not vice versa.  Also, they've owned this stock for over a decade, so they could decide to monetize some of it as well.

Catalyst

significant decline in earnings
broken momentum
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