Description

I recommend the J. G. Boswell Company (BWEL) as a long.  Although relatively well known among investors who follow non-SEC-reporting companies, BWEL has never been previously discussed on VIC.

Company Description

J.G. Boswell Co. was founded in 1927 by Lt. Colonel J.G. Boswell and significantly grown by his nephew J.G. Boswell II.   BWEL runs the largest farm in America focusing primarily on Pima Cotton, tomatoes (for paste), alfalfa, wheat, and smaller crops.  BWEL also owns a large farm in Australia, also farming cotton, and has a number of smaller businesses.  The fiscal year ends in June.  For a couple of years the company has had mediocre results due to poor rainfall, which is why the stock is now $650 instead of $1,100.  In a world where value is hard to find and coming off a multi-year drought, $650 seems like a reasonable bet.

The key financial numbers for FY 2016 are: sales of $414mm, operating income of $15.7mm, net income of $18.7mm, EPS of $18.48.  FY 2015 was a little better, but not much: sales of $457mm, operating income of $25.7mm, net income of $19.4mm, and EPS of $19.17.  Book value was $570 as of 6/30/2016.  Detailed financials are released only once per year and only to shareholders.  There are 1.0mm shares outstanding, which makes the arithmetic easy; there are also around 37k options outstanding.

American Operations

The company is quite secretive and so it is difficult to know the exact size of the operations.  A good general source is The King of California [1], a history of the company and J.G. Boswell II.  The book mentions that at Boswell family meetings the virtues of stealth are taught by pointing out that “as long as the whale never surfaces he is never harpooned”.

Sources indicate that the US operations are in excess of 200,000 acres (312 sq. mi), a sizable portion of the middle of the state of California.  The operations are extremely well managed.  San Joaquin Valley (SJV) Pima cotton often enjoys a premium to other Pima cottons, and Boswell often enjoys a further premium over other SJV farmers.

Recent years have had poor crop results due to the lack of rainfall in California.  In September 2015 BWEL received $20mm in Prevented Planting insurance that reduced COGS in FY 2016.  In September 2016 the company received $7mm for the same reason so COGS will be reduced for FY 2017.  This and other farm subsidies make it unlikely that BWEL will lose significant money on its US farming operations (in 2016, one poor year following a previous poor year, I believe that US farming operations would have lost money if not for the subsidies).

The company seems hopeful for the 2017 FY, though.  The dividend was hiked from $2.25 to $3.00 per quarter in January and the company directly credited increased water supplies.

The company owns a massive amount of water rights due to a complex web of legal rights, very impressive hydroengineering, and political agreements.  Some years ago I read a plausible estimate that they had 350,000 AFW (acre-feet of water, i.e. the amount of water needed to cover an acre of land one foot deep).  This estimate was derived by taking the crop acreage at the time and working backwards based on the water needs of e.g. an acre of alfalfa.  Other sources suggest 400,000 or more AFW.  The company will not comment.

It seems plausible that, someday, this water will be sold to thirsty Los Angeles.  When that might happen – and how much it will be worth – is a source of much speculation among BWEL shareholders.  Sold as on annual basis, $100-$300 per AFW seems like a conservative range; sold permanently, I think $2,000-$4,000 per AFW is a reasonable range.  However, the politics of selling water are very difficult to predict and so some caution seems warranted.   A good place to start the guessing game is the finances of the Metropolitan Water District of Southern California [2].  The numbers can get very fancy, vastly higher than the current market capitalization.

The value of the remaining land after a water sale is unclear.  Farmland without water doesn’t grow much and cotton is a thirsty plant (but not as thirsty as tomatoes and alfalfa).  There may be other crops that take less water; the company has recently been investigating pistachio trees.  Still, without water the land may not be worth much on its own other than for holding the Earth together.  The bulk of the land is quite far from San Francisco, Los Angeles, or indeed the coast.  The largest employer in Corcoran, California is the prison system, the State reasoning that there is no need to waste valuable costal land on the incarcerated.  It may be that some of this land is suitable for large-scale solar development, a low-water option that would not have been plausible 10 years ago.

Australian Operations

Auscott owns approximately 75,000 acres (about 117 sq. mi) in New South Wales, Australia.  Boswell acquired 60,000 acres in 1990 for $74 million and the remaining 15,000 in 2001, I believe for around $16mm.

For a number of years Auscott has had poor rainfall and mediocre profits.  In FY 2016 the division earned around $4mm.  However next year things are looking better.  There has been sufficient rainfall in Australia for Auscott to have at least two good seasons.  Since Australia is in the Southern Hemisphere it has a different growing season with 40% of a crop being in the current FY and 60% in the next.  In a good year Auscott could make $20mm.

A good place to look to get some sense for the potential current market value of Auscott is the 2015 purchase of Tandou by Webster [3].  Tandou was also involved in NSW cotton operations and owned water rights, so the operations have significant similarities.

Other Activities

Other activities of BWEL include real estate development, oil & gas leases, and agricultural biotech.

Boswell has done numerous real estate projects over the decades.  Their current project is Yokohl Ranch [4], a large project in Tulare County CA.  Yokohl Ranch has around 36,000 acres (56 sq. mi) maybe 25 miles East by Southeast of Fresno.  The land is not very suitable for crops but has a history of ranching.  The project is engaged in planning, permitting, and entitlement.  The project website is a good source for information.  These kinds of projects take a long time to complete (many years).  Boswell’s stated balance sheet value for the assets involved in the project is $69.7 million (up from $59.5mm in 2015 as the project progresses). 

Oil & Gas leasing produces a few million dollars a year, depending on pricing; 2016 yielded $1.8mm and 2015 $2.4mm.  Mineral rights are owned in California and Oregon; some of the mineral rights are attached to surface rights and others are not.

Biotech is concentrated in Phytogen Seed Company, a 46%-owned joint venture with Dow [5].  The primary product is improved varieties of cotton.  Sales of this subsidiary (which is not consolidated) were $61mm in 2016; net income was $15.1mm; Boswell’s 46% share of net income was equity accounted.  Boswell’s stated balance sheet value for its 46% interest is $31mm.

Valuation Summary

I find it simplest to start with the smaller parts first.  Valuing Yokohl ranch at current balance sheet value strikes me as conservative and yields $70 / share.  Mineral rights might be worth $20 / share.  Phytogen is probably worth a good deal more than stated value; at 10x net pretax income – arguably still rather conservative as I note below – one gets $70 / share.  There are probably a few other hidden gems of value, but even ignoring them one gets to $160 / share.

I peg Auscott at $150mm or another $150 / share.  If typical poor rain patterns of the last six years are more common going forward than this may be too high.  On the other hand, rain was good this year.  The recent sale of Tandou, mentioned above, is also a positive data point.

The bulk of the value is in the California farming operations, with perhaps a big speculative payoff, someday, from the water rights going to a higher and better use.  There are a couple of ways to go about this.  One is to consider some value per acre.  This is not so easy to do since Boswell’s property (due to scale and water rights) has very few comparable properties.  Also, land used for high-end cotton is not necessarily able to grow higher value crops e.g. high-end grapes.  Still, $5,000 per acre seems like a reasonable conservative guess.  With, say, 150k farmable acres that works out to $750 / share.  Keep in mind that after a sale of water rights the land would be worth far less (even $500 per acre might be much too high; waterless land in places like Nevada can go for $50 / acre, although perhaps some of Boswell’s land might be worth more).

Another way to figure value would be some multiple of earnings.  Over a number of years – assuming the drought of the last couple of years does not indicate a permanent change in weather patterns – I believe that $30-40 / share of earnings may be possible in a typical year from the US operation.  Given the farm subsidies and other advantages involved, a relatively high earnings multiple (e.g. 20) might be reasonable, yielding $600-800 / share of value.

Debt is around $205mm or ($205) / share, yielding a total value between $700-900 / share, meaning that for today’s price one is paying a modest discount to the rather conservatively calculated value of a world-class farming operation.  Farmland, somewhat like timberland, has some attractive properties for investment purposes, i.e. some cashflow today and inflation protection over time as the land values increase.  The company pays a decent dividend and buys back stock when it can, so you too can enjoy this pleasant set of circumstances in a conservative and well-run manner.

If one wanted to be a little more aggressive, then perhaps my $5,000 / acre price on the core CA farmland is too low.  Moreover, it’s likely that eventual sales prices on the Yokohl project will be substantially higher than the $70mm number it is on the balance sheet for; the property has been owned for many years.  Oh, and I’d be delighted to purchase 100% of Phytogen for 10x earnings ($150mm).  Among other things, it has $46mm in cash less total liabilities, and after subtracting this excess cash from the $150mm purchase price one is really paying around 7x pretax.  Phytogen earns around 50% returns on tangible capital (pretax and after correcting for the overcapitalization).

Finally, if the “great water rights sale” ever occurs, the resulting value could be far higher, even assuming that the remaining CA land decreased in value substantially.

[1] The King of California.  Mark Arax and Rick Wartzman.  2003, PublicAffairs, a member of the Perseus Books Group.
[2] http://www.mwdh2o.com/WhoWeAre/Management/Financial-Information
[3] http://www.abc.net.au/news/2015-06-16/tandou-takeover/6548922
[4] http://www.yokohlranch.com/
[5] http://www.dowagro.com/phytogen/

Catalyst

The Cotton Grows
Yokohl Sells
The Great Water Rights Sale
(really this isn't a very catalyst-y name)