Bowl America rolls a strike
This item will be a little different than posts in the past. In this post I wish to talk about, and give my fair value for a company that owns bowling lanes along the east coast, Bowl America.
Bowl America (AMEX: BWL.A) is a closely held company that owns and runs 19 bowling centers in D.C., Baltimore, Richmond, Jacksonville, and Orlando. Bowl American runs 756 lanes across 19 facilities. Bowl America opened their first bowling center in 1958 in the Metro DC area. That facility is still open today. The company was founded by the current CEO and Chairman’s father C. Edward Goldberg.
I first ran into Bowl American through a stock screener on my Fidelity account. As I researched the company and read the presidents letters I fell in love with the company and the opportunity it provides. Bowl American is a pretty standard bowling operation, they generate revenue from three main sources, open bowling, league bowling, and concessions/merchandise. The first thing I liked about this company was the management’s philosophy, the management runs a very shareholder friendly company, and I dare say a shareholder focused company. In reading the president’s letters it’s very clear he is a strong believer in giving back company profits to shareholders in the form of a dividend. The dividend has been increasing for the last 50 years. In the current shareholder letter it’s stated that “…cumulative dividends on that single $2.00 share will exceed $100.” Besides paying a steady increasing dividend the company is run very conservatively, they own each center outright, have no debt on the books, and have a large cash position. Each new bowling center is financed out of their cash position.
Bowl American presents a unique challenge in deriving an intrinsic value. The reason for this is three-fold, the first is the real estate portion of the company is quite large, and most of it is valued on the books at it’s purchase price in the late 50s on up. Most of their properties are held in the Metro DC area, and for anyone who’s been asleep at the wheel a plot of land in DC is worth a little bit more now than it was in 1958. The second is the large securities portfolio the company holds. As of Sept 30th Bowl American had a securities portfolio value of $6,218,625. The third reason is that I don’t believe a classic P/E valuing correctly values the cash this business throws off, because of this I’m going to do a FCF analysis to determine the intrinsic value.
I searched through the latest 10-Q, annual report and last year’s first quarter 10-Q. In the first quarter last year they had an unusually high capital expenditure, they purchased a new bowling alley and recorded it in Q1. Due to this I’m adjusting the 2007 Q1 CapEx from 1,762,974 down to what has historically been the CapEx for that time period 220,000. By adding in the quarter that just ended and subtracting out Q1 last year from the figures in the 10-K I get
$5,957,998 Net Cash Provided by Operating Activities
$795,713 CapEx for fiscal year 2007
I’m using a discount rate of 10% and an annual growth rate of 5% with a FCF of $5,162,285, and 5,135,690 shares outstanding. With this I get a value of $20.10/share. (5162285)/(.1-.05))/5135690 = 20.1035. That’s without dividends subtracted. Adjusting for dividends I get $8.50/share. ((5162285-2978932)/(.1-.05))/5135690 But this is only part of the story, remember they have a large amount of stock on their balance sheet. The Chairman and CEO has mentioned that he is a ’stock nut’, which could explain the telcom stocks Bowl American holds. In the latest 10-Q there is a listing of share amounts and companies, from this and yahoo finance I can figure out the current value of the holdings. I have a list of the stocks and share amounts below.
- 3,946 shares of Alltel = 281981.16
- 45,580 shares of AT&T = 1845990
- 669 shares of Avaya = 11694.12
- 2,000 shares of Embarq = 95320
- 939 shares of Idearc = 15822.15
- 475 Shares of LSI = 2574.50
- 9,969 shares of Qwest Communications = 66991.68
- 40,000 shares of Sprint = 556400
- 18,784 shares of Verizon = 809590.4
- 11,865 shares of Vodafone = 427495.95
- 4,079 shares of Windstream = 53353.32
The total value of the securities portfolio as of the close at 4pm on 12/17/2007 is $4,167,213.
Taking the assumption that the cash and equities totaling $6,497,917.3 will be employed to grow the business at a rate of 5% I get a value of $25.30/share for the securities portion. Adding the securities/cash and the operating FCF together I get a value of $33.80 as the intrinsic value of Bowl America. Currently Bowl America is trading at $15.91 at 4pm on 12/17/2007. Given these figures Bowl American is trading at a discount of 52.9% to it’s intrinsic value.
I’m interested in anyone’s thoughts on this analysis. I’m open to suggestions or corrections in my math and/or assumptions.
Disclaimer: I have held shares of Bowl American since March 07. Also note Bowl American trades on the American Stock Exchange with very low volume, so liquidity can be an issue.
December 18th, 2007 at 4:36 pm
Great analysis.I did a quick back of the envelope calculation and came up with an IV of $15 and change. This is without taking the appreciation of value on the balance sheet as you have mentioned. Overall great analysis, keep up the good work/
December 24th, 2007 at 8:11 pm
[…] Pick* Bowl America rolls a strike posted at Stock Value Finder. A look at this small cap bowling company and an estimate an […]
December 27th, 2007 at 10:39 pm
i really enjoyed this post, can’t wait to read more!!
December 29th, 2007 at 6:18 am
I would question the validity of the 5% assumed growth rate given that, despite managment’s assertion that they’re looking for new locations, they don’t seem to be having much luck. The closing of one center recently due to a weather mishap certainly didn’t help revenue growth. And it appears that expenses are growing faster than revenue, leading to a profit drop of over 50% in the most recent first quarter. One real damper on the stock price is the fear of investors that the business is in a state of decline. Also, it hasn’t helped that commercial real estate peaked in February and the value of the company’s real estate holdings has tanked since then. It’s a free market, if you think it’s undervalued you can buy more shares. But there’s a lot of folks out there who don’t think it’s currently undervalued, which is why the stock isn’t trading at $17 plus anymore.
December 30th, 2007 at 6:51 pm
John,
Thanks for the great comment. I always appreciate hearing a contrary viewpoint. I would agree that the drop in the last quarter earnings is concerning, I would disagree that expenses are rising, the current quarter expenses are actually less this year compared to last year.
I think investors need to have a little more patience concerning Bowl America finding new properties. In the past management has shown discipline in building new facilities, by not rushing in, and doing their homework first. I think the real estate market crash in DC could provide some great opportunities to pick up attractive parcels at a great price.
If as an investor you’re worried about their value dropping because of the large real estate holdings I’m reminded that most of the holdings are on the books at purchase price from 30 years ago. And even though the real estate market peaked and is crashing I find it hard to believe that prices will fall below what was paid 30 years ago.
Thanks again for the comment. My timeframe on any value investment is 5 years. Hopefully I’ll be proved right that Bowl America is undervalued, and in the mean time I’ll continue to collect the outsized dividends.
Nate
January 1st, 2008 at 3:21 pm
Hi Nate,
Thanks for your response. You are correct, expenses in the most recent first quarter did drop in dollar terms, but I was looking at operating expenses as a percentage of revenue, which increased from 84.5% to 90.6%, which I thought was rather shocking. Understandable, though, given the considerable fixed costs and the revenue drop. What I didn’t hear from the company was what they intended to do about it, which makes me wonder if the situation will continue to deteriorate. We’ll know soon enough, Q2 will be more important than Q1 anyway.
True, I agree that real estate prices are unlikely to revert to the low levels of years ago, but that is already factored into the stock price, which currently sells for a substantial premium above book value. Also, I suspect the book value may actually overstate the value of some assets. This may be a little too harsh, but used bowling equipment today is virtually worthless. There have been so many bowling center closings over the years that there is a glut of equipment out there and it can be difficult to get more than a few hundred dollars for that pinsetter that you recently paid twelve grand for if you went to sell it. And a building built for bowling is virtually worthless, too, unless you use it for bowling. For almost anything else, you’ve got to raze the building and build a new one.
As far as opening new locations, there have been literally hundreds of centers for sale across the country for years, there are so many marginal operators out there who would be willing to sell out, but I don’t see BWLA out there buying. Why not? I presume they look at the numbers and figure they can’t make a go of it. Makes me discouraged about the company’s growth prospects.
What do you think about the lack of leverage? Most companies have at least some debt because debt is generally cheaper than equity. That is, most bond holders getting steady payments demand less compensation than stockholders who receive more risky returns. Besides, and this is a biggie, debt is tax deductible and equity isn’t. I understand management’s stance that they don’t want to have any debt but it seems to me that it limits the rewards for shareholders who don’t benefit from a more optimal capital structure.
What also of the future management of the company? They aren’t going to live forever, and they’re almost all age 70 plus–have you seen a plan for this company surviving the majority stockholders? Is someone just going to buy the B shares and destroy the value of the company?
January 2nd, 2008 at 3:36 pm
John,
Great comments, the points you bring I think are more important than the earnings issues. Bowling can be affected by weather, gas prices, and a whole multitude of things outside of their control, so earnings bouncing around some isn’t concerning in the short term for me. I am interested in seeing the Q2 earning too, it could be an indicator for the future.
You bring up an interesting point in regards to purchasing out other operators, my personal opinion is that with the current CEO we won’t see much growth in the near term, I think he’s happy throwing out the current cash flow as dividends and keeping the business running.
And that brings me to the next point you mentioned, the senior management team. This was something that had me concerned when I initially purchased the stock. They seem to have run the company well in the past, but I’m not sure if their age is showing in the slowing growth of the company. With a more aggressive management team BWLA could really take off, this is the time to purchase down and out operators, and leverage their economy of scale to make the purchases profitable.
In regards to debt I don’t mind when companies don’t employ any leverage, the upside is limited, but the downside is limited also, BWLA owns their facilities and doesn’t have any payments to make, so they could survive a downturn in business. And that might be what we’re facing currently. I don’t think they’re afraid of debt, I just don’t think they’ve found a need yet. If they burned through the cash pile and wanted to expand they’d have to take out a line of credit. If you read through the SEC filings there is correspondence between the CFO and the SEC regarding the issue that BWLA doesn’t have a revolving credit facility in place. BWLA states that all growth is financed out of their cash.
Thanks again for your comments. As you’ve pointed out very well there are a lot of unknowns around Bowl America, but then again what value play doesn’t have similar issues. Is this a cigarette butt with one last puff left in it? I guess that’s the question that remains to be seen.
January 25th, 2008 at 9:52 pm
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May 25th, 2008 at 2:35 pm
Hi,
This stock showed up on my screener also. Although prices have changed since your analysis was done, I’ll use your data for ease of comparison.
Here’s my thinking:
1. Start with the BWL market cap
2. Subtract the value of the stock portfolio (we can buy the stks ourselves)
3. Subtract the cash (I can hold my own cash, thank you).
4. Do you know the date and value that each bowling center was acquired? We can then use an implied appreciation rate to estimate the current Real Estate value, Then subtract the value of the real estate (if I want to buy real estate I can do it myself)
5. This leaves the implied value of the actual bowling business cashflows.
6. Earnings from operations/implied valuation #5= Cash Flow Yield
1. mkt cap: 5,135,690 shs x $15.91=$81,708,828
2. stk portfolio -$4,167,213 round off your cents!
3. cash -$2,330,704
4. real estate (the big question for everyone these days eh?)
I’ll assume 1MM per center x 19 centers = -$19,000,000
5. Implied Value of the Operating Co cash flow sum(#1 to #4) $56,210,911
6. Net Cash from Ops - CapEx $5,997,998 - $795,713=$5,202,285
$5,202,285/$56,210,911= 9.25% cash flow yield
***
My Comments:
9.25% isn’t bad.
Obviously, it all depends on the value of the real estate. Again, Do we know the date and price paid for each bowling center? We can then use an implied appreciation rate to estimate the current real estate value.
Alternatively (this is by no means professionally done, I just browsed the net) I estimate the value of a bowling alley lane as between $10,000 and $40,000 per lane based on sales of other bowling alleys across the USA.
As stated inthe original analysis, Bowl America has 726 lanes.
cash flow yield
726 lanes x 10,000= $7,260,000 gets 7.66%
726 lanes x 15,000=$10,890,000 gets 8.09%
726 lanes x 20,000=$14,520,000 gets 8.57%
726 lanes x 25,000=$18,150,000 gets 9.12%
726 lanes x 26,171=$19,000,000 gets 9.25%
726 lanes x 31,950=$23,195,700 gets 10.00%
Mind you, 10yr treasuries are yielding 3.84% (today).
Bowl America @ 9.00% ish? vs 10 year Treasuries @ 3.84%
Quite a difference in risk and reward!
This is were the art comes into it.
Comments are welcome