I'm Buying More of This "Free" Business

I've stated emphatically that Extendicare (NASDAQOTH: EXETF  ) (TSX: EXE  ) is undervalued, and not by a little. And I've backed up my words with actions. In the last six months, my Special Situations portfolio has made the stock nearly 30% of the portfolio. It's so undervalued that buyers today are paying little or nothing for the entire U.S. business. In practical terms, I think the stock could double.

With management expecting a resolution to an ongoing investigation with the U.S. government by the end of June and a prospective buyer interested in the business, I'm adding to my stake.

Beds for sale
As I detailed in my previous buy recommendation (the third of three), the valuation on Extendicare's American unit is very cheap, possibly even free. In fact, I calculate that the American business is valued at less than half the per-bed valuations that Sabra is fetching. That's stunningly cheap, though not without some reason as that unit undergoes an OIG investigation. So my calculations suggest this unit could be worth $10 or so on its own, and then you also have the value of the dividend-paying Canadian unit.

On the most recent conference call, management revealed some information on the sale process for the American unit and the ongoing OIG investigation. Here's the money quote as I see it: "If the OIG investigations are resolved on a satisfactory basis to EHSI and the third party in the near term, it is expected that the separation of the Canadian and U.S. businesses will be effected by way of a sale of the U.S. business."

So management suggested that they have a buyer lined up at some price and the pending investigation was holding things up. So when will that be resolved? Management suggested they would know by the end of June the status of that decision. If things fall in Extendicare's favor, then the business gets sold. If not, they can still split off the American unit in some fashion. However, management reiterated, the status quo was not an option; the American unit would be separated in some fashion.

That's excellent to hear when you see the market ascribing almost little value to that American unit.

Foolish bottom line
The price for the American unit is so cheap and therefore the odds are so clearly stacked in our favor here, that it's hard to foresee this becoming a permanent loss of capital. That's why I have the confidence to add to a position that already comprises nearly 30% of my Special Situations portfolio. So I'm adding another $1,300 to Extendicare. Interested in other great investments? Follow me on Twitter: @TMFRoyal.

Interested in Extendicare or have another stock to share? Check out my discussion board or follow me on Twitter @TMFRoyal.

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Editor's Note: A previous version of this article did not disclose that Jim Royal owns shares of Extendicare. The Fool regrets the error.


Read/Post Comments (6) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 23, 2014, at 1:25 PM, foolwhale wrote:

    Jim,

    I would like to know why the disclosure at the bottom of this article says that you do not own any shares of the companies listed in the article. Do you not own Extendicare? It may be none of my business, but I am just curious as to why you do not own EXETF personally?

    Thanks,

    Patrick

  • Report this Comment On May 23, 2014, at 1:32 PM, TMFRoyal wrote:

    Hmmm, that's odd, Patrick, since I explicitly wrote that I had. We have an automatic disclosure tool that pulls that info and it is listed in my profile (which you can check, too). I'll get it adjusted.

    Thanks for the heads-up.

    Jim

  • Report this Comment On May 23, 2014, at 1:55 PM, foolwhale wrote:

    Thanks for clarifying. I bought EXETF for my daughter's ESA after you brought it to my attention in previous posts. Love the dividend and upside. I had understood that you owned as well and wanted to be sure I was not missing something.

    Thanks again,

    Patrick

  • Report this Comment On May 23, 2014, at 2:28 PM, TMFRoyal wrote:

    Thanks for bringing it to my attention, Patrick.

    Foolish best,

    Jim

  • Report this Comment On May 23, 2014, at 2:38 PM, TMFRoyal wrote:

    Thanks for bringing it to my attention, Patrick.

    Foolish best,

    Jim

  • Report this Comment On May 23, 2014, at 6:02 PM, Mykiemon wrote:

    Hi Jim,

    Yes, I added shares today also...actually doubled my position on the news that it would be bought or cut loose, either way value should emanate.

    Thanks and buena suerte

    Mykie

    PS Based upon the less than stellar performance of the American unit, can we expect an immediate dive in share price after the spin off or sale stock price is set? Is heavy selling activity almost inevitable? And shouldn't the parent also suffer a small pull back just due to the commotion?

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