Description

Value Line is cheap. I give it a 3 for timeliness, a 1 for safety and a 1 for cheapness (and as a value investor, cheap with a great business is a potent combination). The story is very simple. The stock is at $35.94, with about 10mn shares outstanding. The company has approximately $25 per share in net cash (after netting out deferred revenue). So, for $11, you get well over $2 per share in earnings for the businesses (exclusive of income from investments, which are largely investments in Value Line’s own mutual funds). The businesses are the mutual fund business and the well known investment survey (print and computer) and profits are earned roughly 60/40 in favor of investment management.

Assets under management alone equal approximately $6 billion. At the low end of the going rate for these type of mutual fund assets --3%, the mutual fund operations are worth at least $18 per share. The valuation level of recent transactions has been well above 3% of assets and includes deals such as UniCredito's October 2000 acquisition of Pioneer Group for 5% of assets under management and the acquisition of Sanford Bernstein in June 2000 by Alliance Capital for approximately 4% of assets. Mutual fund assets tend to be valued higher than Bernstein's institutional money management business.

The Publications area has shown no growth in the last 5 yrs, but is still highly profitable, generating about $1.70 in EBIT per share for the latest fiscal year. Earnings have been trending down in this segment, as it has had competition from the internet, but I am still willing to throw in a minimum of $10 per share for the publication (way low) and we get a low case value of $53 per share (I think the real number is well north of $60 per share). Not too bad.

Catalyst

Jean Bernhard Buttner and family control approximately 86% of the stock. This is the main problem with this idea. Perhaps outside shareholders don’t matter. Ms. Buttner is 65 years old. While we wait for value to one day surface, most of the cash is invested in the market and the value of the operating businesses is growing quite nicely. Plus, the Buttner family has bought nearly one half million shares in the last year.