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Since I was a kid, I’ve heard my father tell a story about his daily commute to work. Every morning, he’d walk by Tiffany & Co.’s flagship store on Fifth Ave and 57th Street. He knew investors were attracted to the company’s strong brand, but were they getting the whole story? In particular, my father wondered whether Tiffany owned its iconic Manhattan property.
His curiosity finally got the better of him, leading him to dig into the company’s public filings. That task took a bit more legwork in the 1970s than in today’s digital world, but he finally discovered that yes, the company did own the building.
He also discovered more: Tiffany’s market value at the time was $30 million. A quick calculation suggested the real estate was worth more than the company’s entire market capitalization. In other words, anybody who invested in Tiffany in July of 1975 got the value of the whole business—from the Tiffany trademark and its inventory to the world-famous Tiffany Diamond—for free. A little over three years later, in November 1978, Avon Products acquired Tiffany & Co. for $41.41 per share, a 452% increase from its $7.50 share price in the summer of 1975.
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Finding an undervalued asset such as Tiffany’s Manhattan property doesn’t happen every day, but it’s still worth looking. At Boyar Value Group, we refer to assets like buildings as “hidden assets” as they can be understated, obscured or even missing from a company’s balance sheet. One reason: Generally accepted accounting principles require companies to list certain assets such as real estate at historical cost, even though their value may substantially increase over time. That makes these assets difficult—or
impossible—to find by glancing at financials or using a simple stock screening tool. You’ll only find them through curiosity, patience, reading and old-fashioned elbow grease.
In addition to real estate, hidden assets can be natural resource reserves, off-balance-sheet investment holdings, and brand equities. Anything that might be overlooked during a cursory glance through a company’s businesses or financial statements may offer a hidden source of value. For example, we researched Stokely-Van Camp in 1975 when it was mainly known as a maker of canned baked beans. A review of its other holdings turned up Gatorade, which was relatively unknown at the time, but on its way to becoming a household name that today has a commanding share of the lucrative sports drink market.
Even a company’s name can steer investors away from its real value. In 1979, investors wouldn’t necessarily have recognized Binney & Smith as a household name. But they likely had a box or two of the company’s most iconic product, Crayola Crayons, in their house.
How do you Find Hidden Assets?
You need a combination of basic curiosity and stubborn self-discipline to find hidden assets, even though they’re often hidden in plain sight. You need to act like a detective and ask a lot of questions. And when you do identify an undervalued asset, you still have to decide whether to act on it.
When we uncover a hidden asset, we use it to help establish a private market value of the business, and then we look to see how that value compares to the publicly available market value. If the stock appears to be selling at a significant discount, we then look at how likely the company is to unlock the hidden value. Without a potential catalyst to realize the value of a hidden asset, there’s less reason to act on it.
Two Case Studies: The Madison Square Garden Company (MSG) and Acushnet Holdings (GOLF)
In today’s market, one could imagine an investor overlooking the true value of Acushnet Holdings (GOLF) if they did not dig deeply enough to find that the company owns the iconic golf brands Titleist and FootJoy. This failure to do the necessary legwork could be to their detriment, as we currently estimate GOLF’s intrinsic value to be $33 per share, versus today’s share price of ~$23.
For another example of the potential for hidden value, consider The Madison Square Garden Company (MSG), which could control up to 2.5 million square feet of air/development rights around “the world’s most famous arena.” MSG doesn’t ascribe any value to these rights on its balance sheet, but we estimate it could be worth $400 per square foot, or $1 billion. That amounts to around 18% of the company’s current enterprise value calculated at a share price around $288. It is also worth noting that Forbes recently valued the Knicks alone at $4 billion dollars and James Dolan has publicly stated that he has received informal offers of $5 billion for the team (imagine what the Knicks could be worth if they didn’t have the worst record in the Eastern Conference).
Recently, Vornado Realty Trust, which owns MSG neighbor One Penn Plaza, has announced an ambitious plan to transform the area around Penn Station. Pair those plans with a potential forthcoming renovation of Penn Station, and the likelihood MSG could soon monetize its air rights looks pretty reasonable. It’s impossible to know for sure, of course, but if this potential hidden asset pans out, investors who spotted it may end up being rewarded for their diligence.
Disclosure: Boyar Asset Management and its employees own shares in both Madison Square Garden (MSG) and Acushnet Holdings (GOLF). Past performance is no guarantee of future results.
February 12, 2019 at 11:28AM
Forbes – Entrepreneurs