Investors in Craig Still Have to Play a Waiting Game
Thanks to an unnamed Wall Street analyst, some Craig Corp. shareholders got a chance to unload quite a bit of stock this week at stellar prices.
It may turn out to be the last such opportunity for a while, unless Craig’s ultraconservative helmsman has a change of heart soon about the economy and what businesses are worth.
L.A.-based Craig is a shell company whose controlling shareholder is James Cotter, a 53-year-old investment genius best known for his management of the $400-million-plus Forman family fortune (Pacific Theatres Corp.).
Cotter took control of Craig in 1985, when it was a long-suffering consumer electronics firm. Since then, Craig has become Cotter’s personal investment vehicle. It has no operations of its own now, just big stakes in three key businesses:
* 50% of Stater Bros., the 105-store supermarket chain mostly in Riverside and San Bernardino counties.
* 34% of Reading Co., which had owned a load of Philadelphia real estate but now is mostly a shell itself, with $63 million in cash.
* 9% of Citadel Holding, parent of Fidelity Federal Bank of Glendale.
Those stakes have long been estimated to have a total asset value of $20 to $30 per Craig share, depending on how aggressively you price the businesses and what Cotter might do with them.
Craig common stock, however, has mostly traded below $20 for the past 2 1/2 years and was at $15.375 a week ago--just before a short story in Business Week magazine caused a feeding frenzy. The thinly traded stock soared 57% to $24.125 by Tuesday on the New York Stock Exchange, only to settle back to $20.625 by Thursday.
The Business Week blurb quoted an unnamed analyst as saying Craig’s assets are worth $30 a share. Anybody who owned the stock already knew that number. What the new buyers may not understand is that Cotter has never been in any hurry to try to realize the value of Craig’s assets--which is why the stock has mostly languished since late-1989 and why some long-time holders were willing to sell into the sudden price spike this week.
Cotter has a reputation for being a conservative investor, and a quiet one. But Edward Kane, Craig’s president, shared some thoughts on Thursday. Most significantly, he said Cotter still is in no hurry to make something happen with the Reading or Citadel stakes.
“He’s a patient type of guy,” Kane said. “We’re not going to make a deal for the deal’s sake.”
But Kane does admit that the company is “actively” looking to put Reading’s cash to work by buying an operating company of some sort. Reading earlier this year sold most of its central Philadelphia real estate holdings to the city, leaving the firm with $63 million mostly in short-term Treasury securities.
In addition, Reading (which trades over-the-counter for about $12 now) has $10 a share in tax-loss carry-forwards still on the books. Those are accumulated losses that can be used to offset future income--a nice tax shelter.
By virtue of its 34% stake in Reading, Craig reports 34% of Reading’s earnings as its own. So as soon as Reading buys some kind of working business with a consistent profit flow, investors will have a better idea of how to value Craig stock.
Why hasn’t Cotter liked anything that Reading has looked at so far? “For a long time, things were too pricey,” Kane said. Given the still-weak economic backdrop, Cotter refuses to pay up for assets, Kane said. In fact, Cotter has viewed the United States “as a miniature Japan”--a speculative bubble.
Meanwhile, Kane warns away anyone hoping that Cotter might exit the iffy S&L; business. Citadel now trades for $30.375 on the American Stock Exchange, way below the $55.33 a share Craig paid in the late-1980s. “We have no plans to sell,” Kane said. Instead, the company expects to be a buyer of other S&Ls; through Citadel, by virtue of its relatively healthy balance sheet. But this too will be a long-term process, Kane admits. And there’s near-term risk that Citadel’s problem loans, while still very low, could jump.
The real problem for Craig (and the bulls chasing its stock) in the short run is Stater Bros., the gem asset that accounts for $20 to $25 of Craig’s per-share asset value, according to analyst Howard Rosencrans of H. D. Brous & Co. Stater’s operating earnings plunged 28% in the six months ended March 31, as the chain was hurt by the recession, new labor agreements and the Persian Gulf War’s effect on Inland Empire military bases.
Only the huge jump in Reading’s earnings in that period--thanks to its property sales--allowed Craig to show higher earnings.
Whether Stater’s fortunes have turned around isn’t clear, and Cotter doesn’t allow specific earnings forecasts. But Kane is candid that Craig’s net income of 77 cents a share in the six months ended March 31 probably won’t be repeated in the second six months since Reading has few assets left to sell.
Will that matter? Craig is still a long-term asset play, not an earnings story. The question is how long the patient Mr. Cotter is going to wait to put those assets to work--and whether enough shareholders will stick around.
Waiting on Cotter Craig Corp. shares have rocketed in recent years, waiting for asset-gatherer and chief executive James Cotter to make a move with his shell company. Thurs. close: $20.625 Source: Standard & Poor’s
