Asset-Rich A&B Still Sells Cheap

Since I last wrote about Alexander & Baldwin (ALEX - commentary - Trade Now) back in early January, shares are up about 12% on a total return basis, while the S&P 500 is up about 6%. While that amounts to a very minor victory, my expectations for the company are a lot higher, and it still appears to be on sale at current levels.

Clearly, A&B's shipping business, Mattson Navigation, which accounts for the majority of its revenue, is not a popular place for investors to be these days, given the double whammy of a recession (which I for one believe is all but over) and rising fuel costs. While fuel costs do pose a threat -- Mattson burned an estimated 2 million barrels in 2008 -- the company does have the ability to levy fuel surcharges, which it just increased from 20% to 28%, effective July 5.

Recent quarterly results reflected the effects of the recession as sales fell 45% to $320 million, while operating earnings fell 72% to $22.7 million. Still, A&B was in the black for the quarter, bottom-lining $3 million (including a $6.4 million restructuring charge) or 7 cents a share. The company also declared its normal $0.315 quarterly dividend, and it appears as though brighter days are ahead.

The stock currently trades at 10 times trailing 12-month earnings, and less than 7 times enterprise value (EV) to EBITDA, and 2010 consensus estimates are calling for earnings of $1.51 per share. This puts the forward P/E at about 15.7, certainly not ultra cheap but below the company's longer-term average of more than 19. However, I also believe there's room for positive surprises here as well. A&B is cheap on a price-to-sales basis, however, currently at less than 0.6, well below its longer-term average of about 1.1.

At just 0.9 times book value per share (1.7 longer-term average), A&B also looks inexpensive, especially when you consider what is essentially excluded from book value: the 89,200 acres of land (88,790 of which are in Hawaii ) or 139 square miles, much of which is carried on the books at original cost. While a good chunk (29,205 acres) is conserved, there are 58,840 agricultural acres (A&B grows sugar cane and coffee) and another 745 that are fully entitled, prime, valuable Hawaiian acres.

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At the time of publication, Heller was long Alexander & Baldwin.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, a fee-only financial planning he recently launched. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.