Crafting a Value Play at Chris-Craft

Some well-known value investors have decided that the low-profile company has assets too enticing to pass up.
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For too long,

Chris-Craft

(CCN)

hasn't made investors jump, jump.

But with the

S&P 500

at 30-plus times (flat) earnings, and the average company somewhere between overpriced and insanely overpriced, Chris-Craft is that rarest of finds: a true value stock. Just check the balance sheet: The company has close to $30 in cash backing for each of its shares, which are trading around 42. That's what you call downside protection.

Of course, all that cash comes at a price. Chris-Craft is a sleepy company controlled by a family that seems more concerned with paying itself seven-figure bonuses than getting Chris-Craft's stock moving. The company's stock hasn't budged in more than three years. And Chris-Craft's unwieldy capital structure makes it difficult to value, a further drag on its stock price.

Even so, some well-known value investors have decided that Chris-Craft, which -- through two publicly traded subsidiaries -- owns 10 local television stations and half of the struggling

UPN

network, has assets too enticing to pass up.

Chris-Craft "is exceedingly cheap based on any fundamental analysis," says money manger Bruce Sherman. Sherman's

Private Capital Management

owned more than 2 million shares of stock in Chris-Craft and its subsidiaries as of Sept. 30, according to

Technimetrics

, and Sherman says he's buying more. "At 60 it's a fair value, but at 42 it's a slam dunk."

"They've got a good solid station group in big strong growing markets, and they've got a ton of cash," says Laura Salerno Linehan, an analyst for

Gabelli & Co.

As of Sept. 30, Gabelli owned more than 5 million shares of stock in Chris-Craft and its subsidiaries,

United Television

(UTVI)

and

BHC Communications

(BHC:AMEX), according to

Securities and Exchange Commission

filings.

Chris-Craft functions essentially as a holding company for BHC and United Television, with an 80% stake in BHC, which owns three stations outright as well as half of the UPN network and 59% of United Television. In turn, United Television owns seven other stations.

Linehan estimates that BHC, which trades at about 119, is worth around 140 per share. She arrived at that figure by putting a 13 multiple on the $64 million in cash flow that BHC generates from its three television stations, then adding the value of BHC's stake in United Television, which she figures is worth $700 million, as well as BHC's $1.2 billion cash hoard and the $400 million BHC has already spent on UPN.

That's a grand total of roughly $3.1 billion, or around 140 for each of BHC's 22.2 million outstanding shares. To figure a price for Chris-Craft, Linehan simply notes that Chris-Craft, which has 41 million shares outstanding, owns about 18 million BHC shares. So each Chris-Craft share is equivalent to 0.44 BHC shares. And 0.44 of BHC's target price 140 translates into a target price for Chris-Craft of 61 per share, or a 50% premium to Chris-Craft's current price.

It's possible to quibble with Linehan's estimates. For example, a truly rock-bottom estimate of BHC might value the company's investment in UPN as a total loss, and figure BHC's stake in United Television at its public market value, which is $565 million, not $700 million. But even using those figures, and figuring that the company's broadcast cash flow should carry a multiple of only 12 times, BHC is worth no less than 115 per share, near its current price.

And that rock-bottom BHC price of 115 translates into a price for Chris-Craft of around 50. So even if BHC goes nowhere, Chris-Craft stock is at least 20% undervalued.

None of these estimates assume any upside to UPN, the network into which Chris-Craft and

Viacom

(VIA) - Get Report

are now pouring $200 million annually. Even if it never turns a bottom-line profit, a successful UPN would be a valuable asset for Chris-Craft, because it would boost the value of the local stations the company owns. So if UPN ever becomes something other than a sinkhole -- admittedly, a long shot -- Chris-Craft will likely skyrocket.

Chris-Craft could also boost its stock by combining Chris-Craft, United Television and BHC into a single company, Linehan says. "A combination between the companies would be one type of catalyst" to draw investors into the stock, she says.

For now, though, the company has stubbornly refused to simplify its capital structure -- or make any other moves that might attract new shareholders. In fact, Chris-Craft executives refused to talk on the record for this story.

That's no surprise. The company is controlled by the reclusive Herbert Siegel, who last made news a decade ago, when he turned Chris-Craft's stake in

Warner Communications

into a $1.5 billion pile of cash. Since then, Siegel has apparently been unable to find a media investment worth his trouble. Instead, he's been content to draw a $1 million annual salary and $2 million-plus bonus for several years. His sons, John and William, also take home six-figure annual salaries.

"It's a typical value stock. No one covers them, they don't talk to anyone, they don't do anything with the investment banks and the stock just wallows," admits Sherman, the money manager.

Even so, Sherman says Chris-Craft is a low-risk play with the potential for a big reward, especially if its bet on UPN pays off. "Herb Siegel is the only guy to best

legendary Warner chairman Steve Ross in a transaction," he says. "He hasn't lost money ever, so I don't mind him being the custodian of my assets."