CKX - An Undervalued Land Holding Company

• The implied value of the land held by CKX Lands is severely undervalued compared to market prices.

• CKX Lands base case scenario implies a margin of safety of 46%.

• CKX offers entry into land ownership and diversification for a bargain price.

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Background

CKX Lands, Inc. is a Louisiana based land holding company that holds a lot of cash, a lot of land, and a few liabilities. The following is an excerpt from their website, which provides a little background on the business:

"CKX Lands, Inc. is a Louisiana corporation organized in 1930 as Calcasieu Real Estate & Oil Co., Inc., to receive non-producing mineral royalties spun off by a southwest Louisiana bank. Over the years, as some of the royalties yielded oil and gas income, the Company used the proceeds to purchase land. On May 17, 2005, the Company changed its name from Calcasieu Real Estate & Oil Co., Inc. to CKX Lands, Inc. The primary reason for the change was to help clarify that the Company is not directly involved in oil and gas exploration or operations. As used herein, the "Company" or "CKX" refers to CKX Lands, Inc.

The Company owns land and mineral interests and collects income through its ownership in the form of oil and gas royalties, surface leases for farming, right of way and other uses, and timber sales. The Company is not involved in the exploration or production of oil and gas nor does it actively farm its lands or manage its timber. These activities are performed by others for royalties and management fees."

Source: Yahoo Finance

The following is the balance sheet from the Company's 2018 10-K:

The Company has roughly $5.8 million in debt-free cash. Based on 1,942,495 shares outstanding, this equates to $2.98 in cash per share. The net asset value of the Company is $15.2 million or $7.82 per share. This implies the Company is trading at roughly 1.3 times its book value. Due to historical costing, the book value of the land could be materially understated depending upon when the land was purchased. In CKX Lands' case, much of the land was purchased decades ago.

The following is the income statement from the Company's 2018 10-K:

Oil and gas revenue, which represent mineral royalties, make up roughly half of the Company's revenue. Timber sales and surface revenue make up the other half, but fluctuate significantly from year to year. The oil and gas revenue is very volatile as it fluctuates with the price of oil and gas. The Company's historical stock price shows some correlation with the highs and lows of the energy market. Unfortunately, this oil & gas revenue cannot really be depended on due to the commodity price volatility along with a declining amount resources under the land. In my analysis, I did not spend much time analyzing or considering the income statement or cash flows from the business as I believe the value of the Company is better understood by an asset/market approach.

Valuation and Analysis

The better method to understand the value of the Company is to try and place a rough value on the Company's real estate. The following table highlights the amount and location of the Company's land:

Source: 2018 Form 10-K

Source: Google Maps

Source: Printable Maps

The above image from Google Maps shows the location of Calcasieu Parish. Jefferson Davis Parish is located directly to the east; Allen Parish to the northeast; and Beauregard Parish to the north. The Louisiana Parish map provides more context on the location of the Company's lands.

Next, I utilized websites, such as Land and Farm, to help derive a price per acre value. This website listed Louisiana property for sale and I was able to filter the search results down to undeveloped or natural forests. Also, I was able to specify my search to the individual parish. In my analysis, I utilized the listed sales price which may have some upward basis on the results. The results from my land value analysis are as follows:

The lowest price per acre from all the different listing I could find was $1,500 per acre. The weighted average price per acre was $2,506. I made three separate scenarios to value the land held by the Company.

Scenarios:

1. Low Case - Value the land at the minimum price from the data set, $1,500 per acre.

2. Base Case - Value the land at the weighted average price from the data set, $2,506 per acre.

3. High Case - Value the land by each parish's weighted average price per acre and apply the overall weight average price per acre of $2,506 to the smaller parishes.

As can be seen above, the base case scenario provides a margin of safety of 46%. Even when considering the low case scenario, CKX Lands is priced fairly. This indicates that there is little downside risk of permanent capital loss. Even if the revenues of the business fluctuate wildly, the land value provides a floor for the price of the stock.

I also applied a discount for lack of marketability (DLOM) and control (DLOC). The reasoning for the DLOM relates to the value of the real estate value that would potentially go to a broker in the event of a sale. I estimated the DLOM to be 5%. The DLOC relates to discounting the price of the land for a lack of control. The list prices for land I used were based upon what one would expect to transact if they were buying the land with full control. In becoming a shareholder of CXK, one would not have the control to buy or sell any land and would corresponding pay less for the land. The DLOC was estimated to be 30%.

Conclusion

I believe that CKX Lands provides an interesting and lucrative opportunity to diversify an investor's portfolio with an allocation to land at a bargain price. I do not believe the stock price will jump up to the base scenario price of $14.72 overnight, but in the long-term the intrinsic value of the Company will tend to influence the stock price in the appropriate direction. Also, an investment in CKX Lands should be viewed almost as an alternative asset that will provide exposure and correlations not found in the rest of the investor's portfolio. Barring Louisiana becoming a new part of the Gulf of Mexico, there is little risk in owning key land between Lafayette, Louisiana and Houston, Texas.