August 15, 2016 - 2:51pm EST by
2016 2017
Price: 10.25 EPS 0 0
Shares Out. (in M): 23 P/E 0 0
Market Cap (in $M): 235 P/FCF 0 0
Net Debt (in $M): -40 EBIT 0 0
TEV ($): 190 TEV/EBIT 0 0

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  • Sum Of The Parts (SOTP)
  • Management Change
  • Asset Sale


Taking a page from a Book/Movie, I really enjoy... -  “High Fidelity”  https://www.youtube.com/watch?v=F9yP10X3wAY


Top reasons to buy PICO now:

  1. Make multiples on your money – The upside (depending on the order of operations) is to return 100-300%

  2. The northern valley area, north of Reno Nevada, is in the early innings of a boom period again – higher employment, more industrial projects, more individuals consuming, housing…and yes, the need for water. Reno went through a severe financial crisis and has limited staff for the economic development process. Now that the city of Reno is expanding the office from 3 women all named Betty, who split a 40 hour weekly shift, building permit activity should improve

  3. Water scarcity: this isn’t changing anytime soon. Yes, sometimes it rains more than expected, but the trend directionally is that water is scarce: http://www.foxnews.com/entertainment/2016/08/03/killing-colorado-documentary-explores-water-crisis.html

  4. Corporate Governance – shareholders have a deep bench at the management team level at Vidler as well as the board of directors.

  5. Arizona water credits: Phoenix can’t play hard ball…We are a hostage taker…don’t focus on low end valuations…we are the only game in town as Arizona grapples with water shortages exacerbated by California’s seniority in regards to access to Colorado river water. See below a link detailing the situation in Arizona and California: https://www.newsdeeply.com/water/articles/2016/06/03/a-chief-source-of-water-for-california-dries-up


Top concerns regarding an investment in PICO:

  1. Management compensation is an overhang.

  • Would you rather have them or not? Management turnover at a time when water sales are on the horizon may create another undue distraction

  1. PICO won’t ever monetize its UCP stake.

  • Clearly, a sale of UCP would result in material shareholder capital return via a tender, but to be fair, we have less fundamental downside now as the business is on the mend as we wait (don't let the conference call transcript fool you...)

  1. Activist noise continues, distracting management and the board from monetizing assets

  • Activist activity at times feels never ending however, dialogue has become much more constructive as the company and shareholder interests are aligned to create value

  1. Shareholder flows creating technical pressure on the stock:

  • Pico’s holder base is mainly small cap and retail investors, and are a nervous bunch. Flows should continue to improve as a result of upgraded corporate governance, board and investor communication and transparency

  1. What if Tesla files for bankruptcy (disregard that Amazon, Apple, Jet, are setting up camp)?

  • Well the gigafactory is really a joint venture, and unlikely Panasonic will pull the plug…As far as we know 7k workers need a place to live…and the developers are looking to build, build, build…

  • Additionally, even in the event of a Tesla bankruptcy, debt holders will still be incentivized to have Tesla continue to manufacture cars which will require batteries from the gigafactory


Valuation: The two components of PICO’s valuation are Vidler Water Company which owns water rights in the southwestern United States and the company’s stake in a homebuilder called UCP. We are not ascribing any value to Pico’s NOLs or legacy investments and capitalize ongoing corporate costs.   Vidler’s primary assets are 13,000 acre feet (8,000 fully permitted, 5,000 unpermitted) of water north of Reno Nevada, ~400,000 of long term storage credits (stored water) in Arizona, Carson / Lyon county Nevada water rights and Tule desert Nevada water rights. In regards to Pico’s water assets north of Reno and outside of Phoenix Arizona, we believe that after the company demonstrates a “proof of concept” monetization in Q4 2016, each transaction thereafter will be at materially higher valuations. See below a timeline (per Pico annual general meeting presentation) that details management’s best estimate regarding monetization of its 8,000 fully permitted water rights north of Reno. The current price per acre foot for these water rights are $35,000 however, we expect this price to appreciate materially given the scarcity value of these assets and developer “fear of missing out.” Additionally, the order of operations in regards to monetization is important. If the company is able to monetize its stake in UCP first, tendering stock at ~14.00 per share, the company will effectively be buying Pico’s water assets at a material discount, creating tremendous technical upside.


The below Pico net asset value per share sensitivity assumes a range of values for Pico’s homebuilder stake, price per acre foot of Pico’s reno water assets (8,000 fully permitted) and the price per Arizona water credit (~400,000 total credits). We assume a value of ~$160MM for Pico’s remaining 5,000 acre feet of unpermitted water rights north of Reno and the Tule and Carson / Lyon water credits (detail available upon request). Additionally, we assume ~$85MM of water monetization is used to tender / repurchase ~5MM shares. In a base case scenario, we assume a NAV of $30-35 per share, or a 200-250% return to current trading. If UCP is monetized first, and shares are tendered at $14.00, ~$6 per share upside to the below sensitivity is implied.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


High Fidelity: See top reasons to own PICO (above)


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