A couple of months ago, we had an article regarding invisible assets of Pharmaceutical companies. While it was one example of hidden assets in business, there are a lot more assets hidden in business more than you think. For an asset play, as described in One Up On Wall Street by Peter Lynch, it is important to discover this hidden asset neglected on the balance sheet. Several commonly found hidden assets are:
1. Companies that own natural resources such as oil, timber, precious metals. For example, oil companies record their oil reserves at the day they made the acquisition. With oil price at $ 60-$70 per barrels now, that oil in the ground will be worth more than is recorded in the book value. How about an example? Chevron Corp. (CVX) has revenue of $ 198 Billion in fiscal year 2005 almost entirely from extracting oil and natural gas from the People Investigator ground. Meanwhile, Chevron entire asset is worth only $ 125 Billion. Furthermore, Yahoo! Finance states that Chevron has 9 Billion barrels of oil-equivalent on its possession. With $ 60 per barrel of oil price, Chevron’s oil asset is worth $ 540 Billion already. Of course, this does not count the cost of extracting that oil from the ground but it is worth noting that companies that own natural resources generally understate their book value. You can find similar situation at Exxon or ConocoPhillips.
2. Companies with real estate holdings. The most recent example would be the now-acquired K-Mart, which emerged from bankruptcy, only to be acquired by Sears Holding (SHLD). Railroad companies such as Union Pacific (UNP) and Burlington Northern Santa Fe (BNI) owned a vast amount of land since the 19th century.
3. Distribution Channel. This is harder to quantify. As we have discussed before, you have already depreciated the cost years in advance. When you have giants with excellent distribution channel, that should worth something. It can distribute new products quickly at relatively low cost since the asset is there already. How about pharmaceutical companies tens of thousand strong salesman? It forms its own assets by itself. When new product comes online, pharmaceutical companies can efficiently relay the information to its sales man which in turn will visit individual doctors for prescription. That ought to save advertising cost! These assets cannot be taken since there is small possibility that all of the pharmaceutical salesmen quit the job at the same day as their counterparts.
4. Subsidiaries of the companies. The saying that the sum of its part is worth more than the whole may be true. If a company owns various assets or subsidiaries, it will be difficult for investors to sum the whole parts. Sometimes, investors merely focus on the short-term trouble of one subsidiary and drive the stock price down. This creates hidden asset opportunity, which may be worth a lot more than stock price. For example, Altria Group Inc. (MO) (Then called Philip Morris) was trading at $ 20 per share in year 2000. At the time, the value of Kraft division was estimated to be worth $ 24 per share, already more than the value of its stocks. Furthermore, Altria also owned Miller Brewing Company, estimated to be worth $ 3 per share. Others include its hugely profitable US tobacco division and international tobacco division. With the fear of lawsuit driving the stock price down, the sum of Altria’s business is worth a lot more than its stock price thereby creating a hidden asset opportunity.