Updates on Oil and Housing – Auto Pain and Housing Pleasure!

By: Steve Rubis

Recently, here at Researching Stocks, we ran a few articles touting a couple of stocks. At this time it seems prudent to give an update on two positions we described: Abraxis Petroleum and William Lyon Homes. Unfortunately, your editor failed to write anything about Sierra Wireless or Arrythmia Research Technologies, tickers SWIR and HRT respectively. These unwritten wonders have gone on to produce immense gains with a possibility of going higher – stay tuned for more research. Our discussion of Abraxis, ticker ABP, did not pan out and it is now time to think about closing the position. Secondly, last year we profiled William Lyons Homes, ticker WLS, the stock quickly moved from $75 to $150 at that time. Recently, WLS dropped back to $75 and is back to $109. We think that WLS is a buy based on EBITDA multiples used for private equity valuations, lets get to the analysis.

William Lyon Homes – WLS
Market Cap: 942.20M
EBITDA: 359.1M
Industry EBITDA multiple: 10
WLS Valuations:
EBITDA (Take out Value): $158.72
Relative P/E: $175.84
Relative P/B: $150.60
Relative P/S: $120.42
Average Price: $151.39
Buy Out Price: $109.00

We wish to call our readers attention to a stock that we discussed in past articles – William Lyon Homes. This has been quite an interesting stock for many reasons, not the least of which being a home builder. Currently, it is the only housing stock that we think provides an investment opportunity.

The main reason for our bullishness comes from the fact that WLS is in play. Owner and CEO William Lyon offered to take the company private at $109; this is about $27 higher than his take out offer of a year ago. Last year, the stock skyrocketed on the take out offer, moving from $82 all the way to $160. Recently, WLS traded as low as $73, which at that point the stock screamed buy; the $73 price was only $2 above its Net Current Asset Value (NCAV). We think that the $109 offer represents an undervaluation of the company, just as the $82 offer did as well. A quick glance at the analysis above suggests that the company is worth about $150, well above the take out offer.

We would encourage any would be investors or current shareholders to inquire as to how William Lyon came to the $109 take out value. Taking the company private at $109 would be equivalent to highway robbery. For the most part, when a company is taken private a moderate to substantial premium is paid to do so; we think that this case should be no different. WLS seems to have the highest EPS of the Residential Construction industry; furthermore it is in very lucrative markets: California, Nevada, and Arizona. We would advise that investors accept an offer of no less than $150 per share to take the company private.

Abraxis – ABP
Market Cap: 243.18M
Reserves: 808.72M, based on $70 oil and $7 gas

We are quite conflicted in our thoughts on Abraxis. There seem to be numerous issues going on at Abraxis. First, we still think that the company offers a great opportunity to invest in an American oil driller. They have undeveloped land in Wyoming, which should prove to be a lucrative opportunity. Secondly, the stock seems to offer an undervalued reserve of oil and gas. Certainly, our estimate of $808m for their oil and gas reserves is rosy. It seems prudent to assume that the reserves are worth more than the roughly $330m reported in the annual report. Even if we value the reserves at $330m, then the company is obviously trading at a discount. The problem is that ABP does not seem able to turn a profit during a bull market in oil. This is a major problem in our eyes here at Researching Stocks. However, we continue to stand pat with our investment in ABP. The technicals coupled with the seemingly undervalued reserves keep us in our position.

Please stay tuned for some interesting articles. We will run a piece on Sierra Wireless (SWIR), Arrythmia Research Technologies (HRT), and BTU International (BTUI). Some other articles that we are working on are: a book review of Reminiscences of a Stock Operator, a discussion of the recent exchange mergers and the NYSE operating for profit. We hope that our work at Researching Stocks will continue to provide value to its readers.

Please note that the purpose of this research is educational and meant to discuss a possible outcome. There is no guarantee that what is described above will occur. The author cannot be held responsible for any gain or loss that occurs from purchase of the above shares. The author holds 110 shares of Abraxis, ABP, at the time of writing.