The Idea List: Issue #4
This week I analyze Easterly Government Properties, Parks! America, and Saker Aviation Services
In this post I want to share three stock ideas that appear to be undervalued. These companies came from the “top of the funnel” of my research process, meaning they came from stock screeners, or recommendations from Twitter and Substack. What I want to do here is present some qualitative and quantitative metrics that determine if I should keep researching the stock or take a pass on it. Further, I want to do a basic valuation to verify that the company is actually undervalued. The end goal is to have some semi-vetted stock ideas that I can add to a watchlist and start doing more thorough research on.
Easterly Government Properties (DEA)
Easterly Government Properties (DEA) is a real estate investment trust (REIT) specializing in office buildings leased to Government agencies. This stock caught my eye because office properties are extremely out of favor due to perceived work from home trends, plus the general difficulties real estate is facing with higher interest rates. The prevailing sentiment suggests a significant shift towards remote work, but I hold the view that the work-from-home concept may be exaggerated. While remote work is more accepted now, I believe traditional offices will continue to be relevant. DEA stands out among office REITs due to its tenant being the Government with long-term leases.
Currently DEA trading at 0.75x book value and has a 9% dividend yield. Easterly’s stock price has experienced a considerable decline from around $20 in 2021 to its current price of $11.60. To assess DEA's value, I am estimating its net operating income (NOI) and then applying an 8% capitalization rate to determine the value of its property. While a more conservative capitalization rate could be considered, DEA's long-term government contracts mitigate some of the typical risks associated with generic office buildings. With an estimated NOI of approximately $161 million for the year, applying the cap rate yields real estate asset values of $2.0 billion. Factoring in other assets and liabilities results in an estimated equity value of $1.19 billion.
This analysis suggests that DEA's real estate assets are not significantly discounted at the current price. However, if occupancy and rents remain stable, the company could sustain its dividend, offering an attractive yield to investors. Moreover, a potential decrease in interest rates could lead to the stock price reverting closer to 2021 levels, providing additional upside potential.
Parks! America (PRKA)
Parks! America (PRKA) has recently garnered attention, notably due to the activist campaign launched by the Focused Compounding Podcast's fund against the company. PRKA owns and operates three drive-through safaris located in Georgia, Missouri, and Texas. While the Georgia park contributes the majority of revenue and profits, the other two parks often struggle financially.
One of the key grievances raised by Focused Compounding is the company's management of costs, advertising inefficiencies, poor capital allocation, and the practice of allowing the profitable Georgia park to subsidize losses from the other parks. Following the public announcement of Focused Compounding's involvement, PRKA's stock price surged from around $0.30 to $0.55 per share, resulting in a current market capitalization of $42 million.
Analyzing the financials, PRKA experienced a doubling of revenue to approximately $12 million in 2021 compared to 2019 levels. However, sales have since declined a bit, with trailing twelve-month sales at $9.5 million. Historically operating profits ranged between $1.5 million to $2 million, yet recent years have seen a significant decline in profitability.
In my quick valuation estimate, I assume operating profits can rebound to $2 million, yielding approximately $1.5 million after tax. Applying a 10% discount rate would result in an enterprise value of $15 million. Netting out cash and debt, the equity value stands at $15.3 million. At its current price, the stock does not appear to be cheap, with a fair value estimated closer to $0.20. However, there may be potential if the stock price reverts to pre-surge levels and operational improvements, alongside cost reductions, are implemented. I probably will not add this company to my watchlist, but I will follow the activist campaign to see how things play out.
Saker Aviation Services (SKAS)
Saker Aviation Services (SKAS) operates a helipad in NYC and provides aircraft maintenance, refueling, and storage services. The company has recently surfaced on the net-net screener, although it trades slightly above its NCAV. Currently, the stock is trading at $8.50 with a market capitalization of $8.3 million, and the number of shares outstanding has remained consistent.
In terms of financials, SKAS reports current assets of $9.46 million and total liabilities of $1.89 million, resulting in an NCAV of $7.57 million or $7.63 per share. Notably, the company holds cash and equivalents totaling $8.58 million, which nearly matches the current market capitalization.
Unlike many net-nets that heavily rely on inventory, SKAS stands out as most of its current assets are in cash. This makes it an attractive option for potential investment, possibly considering purchasing the stock below its NCAV. However, it's worth noting that the stock is trading close to a decade high, indicating it may not be significantly undervalued at the moment. That being said, Saker seems like a good company trading close to its NCAV, so I will add it to my watchlist and try to pick up some shares closer to $5.