Drip Portfolio Report
Monday, October 20, 1997
by Randy Befumo (TMF
[email protected])
ALEXANDRIA, VA (Oct. 20, 1997) -- Our KANSAS CITY SOUTHERN (NYSE: KSU) valuation odessey is almost at an end. Over the past two weeks, we have valued the core railroad operations (Kansas City Southern Railroad, or KCSR) and the financial asset management business (KSU-FAM). Today we take a cursory look at Kansas City Southern's other assets, add all of this together, and see whether or not the company is undervalued.
As well as owning a large asset management business, Kansas City Southern owns 41% of DST SYSTEMS (NYSE: DST), a transaction processor that focuses on the mutual fund industry. As DST is publicly traded, it is pretty easy to put a price on this stake. With 49.3 million shares of DST outstanding and Kansas City Southern controlling 41%, the company owns 20.2 million shares. At a current price of $37 9/16 today, Kansas City Southern's stake in DST Systems is worth $758.8 million.
Now, it just so happens that DST Systems also owns a pretty big stake in another public company -- COMPUTER SCIENCES CORP. (NYSE: CSC). Now, there are two schools of thought here. The first is that the full value of the Computer Sciences stake is already reflected in the DST Systems price, so we do not have to bother with it. Otherwise, we would be double-counting the value of the stake. However, the second school of thought argues that the market almost always discounts cash and securities when they are held by an operating company, meaning that the value of the stake is never fully reflected.
For the purposes of our analysis, you will have to decide. I will just give you the numbers and say my bias is to count the value of the Computer Sciences shares in Kansas City Southern's favor. I believe that after KCSR is spun-out, there is a good chance that KCS-FAM will acquire the rest of DST that it does not own, meaning that the stake in Computer Sciences will probably be sold as part of that acquisition. As this money will certainly add value in that scenario, I think it should be counted now. DST owns 4.3 million shares of Computer Sciences. As Kansas City owns 41% of DST, it owns 1.8 million shares. At $73 1/8 per share, this stake is worth $128.9 million.
Like many other railroads, Kansas City Southern also owns a lot of land. The company controls 1,025 acres of waterside property in Port Arthur, Texas, including three docks. It also owns 8,000 acres of land via various rights-of-way along the course of its railroad. With 43,560 square-feet in an acre, if we value the waterfront property at $1 a square foot and the rights-of-way at 25 cents a square foot (very low prices), we get $44.6 million for the waterfront gig and $87.1 million for the rights-of-way. This gives us $131.7 million in value for the land that Kansas City Southern controls.
Finally, Kansas City Southern owns 80% of the Wyandotte Garage, a facility with 1,147 spaces. Looking over the recent acquisitions of CENTRAL PARKING (NYSE: PK), a company that owns and manages parking lots, $400 would be an absolute bargain basement price per space. At $400 per share with 80% of 1,147 spaces, this is work $0.4 million to the company.
Now, many will say that I am leaving out one of the most valuable assets of Kansas City Southern -- the Tex-Mex railroad. However, given that there are not separate financials for this property and my expertise in valuing railroads is pretty limited, I would rather leave this as a fudge factor and not put a price on it rather than guessing way too high. The land and the parking spaces are something I am comfortable with as I put prices on them before. However, doing a per mile of track or something with railroads is not something that I believe I have enough expertise to do. So, in closing, this may be worth something, but we should leave it as a fudge factor and not worry about it.
So, in closing we have:
KCS-FAM -- $1.1 billion to $2.7 billion
KCSR -- $753 million to $1.5 billion
Misc. -- $1.0 billion
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Total Value -- $2.9 billion to $5.2 billion
Current Stock Value -- $3.6 billion
Current Long-Term Debt -- $0.9 billion
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Current Value -- $5.4 billion
Ouch. Unfortunately, Kansas City Southern is not dramatically undervalued. To be truthful, I had been hoping that it was. However, all of this work is not for nothing. Depending on how Kansas City Southern engineers the spin-out of the railroad, the financial asset management business could be undervalued. So we will revisit Kansas City Southern once the terms of the spin-out are released. Finally, only one or two investments out of ten pan out to be really interesting -- particularly in a market that has doubled in roughly three years looking at the S&P 500. Continually looking at investment possibilities keeps us sharp, educates us about business models, and allows us to know when something is an opportunity in the future with a lot less work.
I hope this series has been instructional, if not resulting in an investment idea. If anyone had a particular problem or issue with any of the math that I used, e-mail me at [email protected] and lemme know. I will use a column or two this week to clear up any problems. Otherwise, I will take a look at Intel's quarter as promised last week and turn the column back over to Jeff by the end of the week.
Hello, folks. Jeff here. We'll be sending money to INTEL (Nasdaq: INTC) by the end of this week. Most likely we'll send the company's transfer agent, Harris Trust, $300, which represents our three monthly cash additions to the portfolio since the Drip launched at the beginning of August. Since Intel is our only current holding, it's where we're sending all of our monthly savings to date. In the long run, we aim to invest nearly equal amounts into each holding. Please note -- we didn't receive our Intel account information in the mail yet. We merely called Harris Trust and asked for our DRIP account number by giving our social security number. We are registered with Intel's DRIP (as are many of you probably), it's just that we haven't received our account information in the mail yet.
If you call Harris Trust (number available here) and hit "0" for the operator, then wait a minute, then tell them you'd like to know your Intel DRIP account number and be prepared to give them your social security number (or the social security number that you used to open the account). Once you have your account number, you can send checks to Harris Trust. Simply indicate your account number on the check and include Intel's ticker symbol, INTC, alongside your account number. Address your envelope ATTN: INTC DRIP. Harris Trust buys more Intel the first day of every month. We aim to be in on that bandwagon.
Soon, either way, everyone should be receiving their Intel account information in the mail. But if you want to get a little jump on it, give Harris Trust a call and get your account number. Finally, be sure to ask for the address where you should mail the check, if you don't already have it. We'll publish that address this week, too.
Mind you, this isn't the usual process: usually the transfer agents mail an envelope to you in which you send them your optional investments. But in the beginning, this is a good way to speed up the process. Our apologies to Harris Trust! (And just think... I bet any day now we'll all be receiving our information in the mail anyway -- saving them all this phone work.) But we just didn't want to wait any longer, especially when we don't need to. Our first additional investment goes this week.
Fool on!
TODAY'S NUMBERS
Stock Close Change
Intel $84 1/16 +1 1/16
Day Month Year History
Drip: +0.00% 0.00% 0.00% 0.00%
S&P: +0.00% 0.00% 0.00% 0.00%
NASDAQ: +0.00% 0.00% 0.00% 0.00%
Rec'd # Security In At
9/8/97 1 Intel $94.69
Base: $800.00
Expenses: $ 55.50 (Moneypaper)
Purchases: See above
Cash: $649.10
Total Value: $735.00 apprx.
The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to have $150,000 by August of the year 2017.
