We initiated the position in CRC in December last year (see the post archive here) because it was trading at a substantial discount to its liquidation value and a substantial stockholder had called for its sale or orderly liquidation. Aldebaran Capital, LLC, a 7.7% stockholder, sent a letter to the company on October 29 last year arguing that if CRC is unable to “promptly stabilize its business and rationalize its cost structure” it should be sold or liquidated. Neither of those two events has occurred and the company now appears to be trading at a premium to its value in liquidation. We initially estimated the company’s liquidation value at around $15M. We’ve now reduced our valuation to $2.8M or $0.35 per share. The problem we identified when we opened the position persists: The company is in a liquidity crisis and risks entering bankruptcy. For these reasons, we’re exiting.
We opened the CRC position at $0.46 and it closed yesterday at $0.48, which means we’re up 4.8% on an absolute basis. The S&P500 Index was at 909.7 when we opened the position and closed yesterday at 832.39, which means we’re up 12.8% on a relative basis.
The value proposition updated
The company appears to have some value on its balance sheet, but much of that value is illusory for the reasons we’ll outline below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):
The $7.2M in liquidation value above doesn’t take into account CRC’s non-cancelable operating leases for office space, showroom facilities and transportation and other equipment. The future minimum lease payments under these leases for the years ending December 31, 2009, 2010, 2011, 2012 and 2013 are $1.9M, $1.1M, $0.8M, $0.6M, and $0, respectively, or $4.4M in total. Deducting the $4.4M from the $7.2M in balance sheet value leaves just $2.8M or $0.35 per share.
A slightly disappointing outcome, but we’re happy to take a small gain given the reduction in value.
[Full Disclosure: We do not have a holding in CRC. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]