Betting on Farmland

NEW YORK ( TheStreet) -- As a value investor, I have long been enamored by companies that own real assets, land in particular. Small agriculture plays are particularly interesting, although you must be very patient with these; they can be volatile and take years to play out.

I believe that farmland itself is an asset class, and despite the run-up in land prices over the past several years, it is still a desirable asset that they aren't making any more of. Publicly traded agriculture companies are few and far between, but worth a look.

Florida-based Alico ( ALCO) owns 130,800 acres, which is about 204 square miles, in six Florida counties. The company operates citrus groves, and it has more than 17,000 acres of land dedicated to growing Hamlin and Valencia oranges. This business represented 44% of 2012 revenue. Another 30,600 acres is used to grow sugarcane, and 67,400 acres is considered ranch land and conservation land, used for cattle production, sod and native plant sales.

With a market cap of $300 million, Alico has a fairly clean balance sheet. The company ended last quarter with about $7 million in cash, $6 million in long-term investments, and $36.5 million in debt. Earnings, however are not consistent, not unexpected for a company whose sales and profits are tied to weather conditions. Currently trading at 40 times trailing earnings, shares are up 33% over the past year. ALCO Chart ALCO data by YCharts

With an enterprise value (or "EV", which is calculated by adding a company's debt and market cap, and subtracting cash) of about $330 million, and 130,800 acres of land, Alico trades at $2,519 on an EV to acres basis, a homegrown calculation I sometimes use when evaluating companies that own substantial amounts of land. This calculation assumes that only the company's land has value, and doesn't consider the value of any other company assets, besides cash. Interestingly, Alico carries the land on its balance sheet at $81.8 million, or just $625 per acre, perhaps very low. ALCO Enterprise Value Chart ALCO Enterprise Value data by YCharts

For perspective, the company has engaged in some land transactions in the past year or so , purchasing 396 acres in Alachua County in Florida in June for $1.2 million, or $2,967 per acre. In September 2012, the Alico sold a conservation easement on 11,600 acres in Hendry County, Florida to the U.S. Department of Agriculture for $20.7 million, or $1,784 per acre. Alico, however, retained mineral and water rights on the property.

In June 2012, the company sold 4,010 acres in Polk County, Florida in two separate transactions, for $10.1 million, or $2,524 per acre.

In more recent news, last week the company announced a 50% increase in its quarterly dividend from 8 cents a share to 12 cents. Whether this dividend will continue to grow remains to be seen; the company's dividend history is erratic.

Alico is an asset-rich company, and I don't expect it to remain publicly traded forever. Ultimately, I believe the company will be the target of a transaction. It appeared as though a deal might be done earlier this year, when the company hired Deutsche Bank to help it explore "potential strategic and financial alternatives." That came after the company's largest shareholder, Atlantic Blue Group, which owns 51% of the company, declared that it wanted to sell its stake last January. No new details have been provided, but I expect that we'll hear more in the near future.

There are a few other interesting small agriculture and land-related companies that I'll cover in future columns.

At the time of publication, the author was long Alico.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. 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.