CCUR Holdings: 2019 Annual Meeting Trip Report
Having written previously about CCUR Holdings (ticker CCUR), including a full investment writeup posted in July 2019 in SCC's Research section, this is a follow-up post regarding the company's recent annual meeting. [In a subsequent blog post, I will review CCUR's Q2 FY2020 quarterly earnings--for those who just can't or won't wait, please see the company's earnings press release and Form 10-Q filing.]
For reference, below is the YTD performance for CCUR, showing that shares are up about 19% (note that, despite what is set forth immediately below, the company does not currently pay a regular dividend):
The annual meeting [see proxy statement here] was held on October 24th in an industrial park located in gorgeous Duluth, GA, a suburb of Atlanta (shout out to my three Lyft drivers: Katherine, Yolanda and Emily, you ladies rock!). It was tough wading through the hordes of rabid CCUR shareholders attending the meeting at CCUR's palatial HQ (think Versailles, only nicer), many of whom had elaborate lists of multi-part questions they wanted to ask management regarding their company, however somehow I managed to snag the last available chair in the house. (Actually, out of several thousand beneficial owners of CCUR stock, I was the only non-insider shareholder to appear at the annual meeting - "yay" me...or, rather, "boo" other shareholders [especially those located in the greater Atlanta area]--why so lazy, guys? Also, CCUR's offices are--thankfully, from a shareholder perspective--far from palatial [think "modern cubical"]). Also at the meeting were CCUR Chairman & CEO Wayne Barr, CCUR directors Steven Singer and David Nicol, CCUR's CFO and general counsel and the company's auditors from Marcum LLP (don't forget the auditors!). Chairman Barr expeditiously dispensed with the formalities of the meeting itself and then the spotlight was on me to ask some penetrating questions. After all, I didn't travel all the way from New York to Atlanta just to hear in person that the directors had been re-elected and Marcum LLP approved as auditor for another year. Thus, for the benefit of any other CCUR shareholder who may happen upon this blog post (perhaps a vain hope), I present a few key takeaways from the meeting:
1. As an initial matter, Chairman Barr was extremely welcoming of shareholder participation at the meeting and answered everything I threw at him (indeed, the other directors were equally cordial towards me after the meeting, when we enjoyed some pleasant informal conversation). This is not the norm at tiny pubic companies, in my experience, where minority shareholders are viewed by insiders with a mixture of suspicion and disdain ("what the heck do these guys want?"). Indeed, I attended another not-to-be-named micro-cap company's annual meeting just the the week prior to CCUR's, and the CEO, while polite, made it obvious that my questions were not entirely appreciated. [Note to other CCUR shareholders: PLEASE SHOW UP NEXT YEAR, IT'S WORTH IT.]
2. The company does not plan to do earnings conference calls anytime soon. I guess this makes sense, since it does not appear that any analysts (other than yours truly) cover CCUR right now, so there's little point in having a call where the CEO and/or CFO simply reads off of a script. Eventually, once the business model is fully developed, I hope the company will get analyst coverage and do regular quarterly calls (in addition, a few other long-term goals would be to hire an investor relations firm to assist with PR matters, etc, and to uplist the stock to a major exchange; both of which should make shares more marketable and appealing to institutional holders).
3. The company will not disclose additional information regarding performance metrics, etc, under the JDS1 management agreement. To refresh the reader's recollection, Julian Singer, a ~40% CCUR shareholder, manages the company's assets pursuant to an external management agreement between CCUR and JDS1, LLC (wholly-owned by Mr Singer). Mr Singer receives a 2% management fee (paid in SARs and only realizable upon certain changes of control of the company), $200K per year in expense reimbursement and an incentive fee equal to 20% of the annual increase in the company's NAV (subject to certain adjustments), to the extent NAV is above the then-current high-water mark. My main ask of CCUR here would be something similar to what Pershing Square Holdings provides its holders, i.e., periodic NAV calculations and disclosure of the NAV high-water mark as of any particular date (see PSHZF's regular disclosures here and here). Weekly NAV reports seem unnecessary in CCUR's case, however it would be nice if they could (eventually) disclose the following in their quarterly earnings press releases: (1) NAV/share at quarter end, (2) current NAV high-water mark under the JDS1 management agreement and (3) relevant calculations regarding the quarterly fees accrued under the JDS1 management agreement.
The main fly in the ointment with the CCUR long case in my view (and likely why the stock trades below book) has been the foregoing fee structure. If an investor has a threshold goal of making 8% per annum on average (on a pre-tax basis) investing in stocks over the long term, CCUR's underlying assets will need to appreciate at a much higher intrinsic rate to beat this bogey. If, for example, the company generates a 14% annual NAV return and 2% is taken immediately for the management fee and an additional 2.8% (14/5) is paid out to JDS1 as an incentive fee, the return for shareholders is reduced to just 9.2% (14% minus 4.8%). At a 12% annual NAV return, after management fees the company is effectively generating less than its cost of capital (which I have arbitrarily pegged at 8%). Berkshire Hathaway has generated a ~20% annual NAV return over the past 50 years, so 14% or higher off of a comparably tiny asset base (currently just $66 million) is certainly doable (as Buffett says, size is the enemy of outperformance). Essentially, CCUR investors like me are betting that Mr Singer and Mr Barr can together generate much higher returns on equity and assets (at least in the low teens annually) than would a "normal" executive team. In light of this fact, more disclosure would be better for shareholders, because with it they can better understand what they own and price the stock accurately (if pre-fee NAV is increasing at a low teens rate or greater, the stock should appreciate substantially; if not, it is likely accurately priced at less than book value).
In this context, I would also reissue the admonition (included in my original investment writeup) that the company treat its minority shareholders scrupulously fairly, for several reasons. First, it is highly unlikely that CCUR's stock price will ever rise if only certain large shareholders benefit from the company's assets (i.e., JDS1), because the investing community will catch on and bid the price down accordingly (probably permanently). One glaring example of this phenomenon is Biglari Holdings (ticker BH); here the CEO, Sardar Biglari, once hailed as the next Warren Buffett, took the reins in mid-2008 and saw BH's stock shoot up from $115 to $415 (split adjusted) in just 2.5 years (i.e., January 2011); thereafter, unfortunately, he engaged in numerous egregious related-party transactions that benefited only himself and the stock has sunk 60% in the nearly 9 years since, despite a near constant bull market. If Julian Singer truly wants to see his net worth skyrocket, clearly the quickest (although not the easiest, admittedly) path would be to have CCUR's stock price skyrocket. A re-rating of CCUR shares to just 1.5X book value would equate to a ~$20 million increase in the market value of Mr Singer's CCUR position from prevailing levels (over 16 years worth of the current annual management fee). Thus, over the long run it is actually in Mr Singer's own financial best interest to protect the rights of the rest of the other shareholders.
The second reason to err on the side of protecting minority shareholders is because the resulting reputational benefits should make future deal-making much easier and more lucrative, as (1) a richly-valued stock is the best acquisition currency and (2) sellers of businesses will trust CCUR to treat their stakeholders fairly following a change of control. Just look at the many sweetheart deals Warren Buffett has received over the years, often based primarily on reputation rather than access to funds (his 2011 Bank of America bathtub deal will go down in financial history as particularly glorious). Conversely, one seriously doubts that Mr Biglari can now effect any major acquisition using anything other than cash, and many sellers likely won't even consider him at all as a prospective buyer due to his reputational baggage. [Side note: At the annual meeting, CCUR's CEO Barr stated that while he definitely wants to see the stock go up, using it as a potential acquisition currency will be restricted for awhile (for tax reasons, due to the need to protect the company's NOLs).]
Luckily, my interaction with Mr Barr and the other directors lead me to believe that minority shareholders will be looked out for and protected from Biglari-esque conflicts of interest and self-dealing. If so, there is every reason to think that the stock price should appreciate over time to above book value (assuming CCUR's assets generate high returns on capital). The CEO's recent open market purchase of CCUR stock (albeit small) seems to be one clue that he shares my opinion. At the meeting I mentioned that one way to promote CCUR within the investment community as a "good actor" would be for the company to pay a regular dividend. Paying out just $1 million per year (<1/60th of the company's assets; CCUR is close to debt-free, so can freely make restricted payments) translates to a ~3% dividend yield at the current stock price. This would have a two-fold benefit: it would indicate that (1) management confidently expects long-term prosperity and profitability (otherwise, the company would hoard cash) and (2) all shareholders will be treated fairly by insiders.
Following the annual meeting I managed to squeeze in a quick visit to the World of Coca Cola in downtown Atlanta prior to my flight back to NYC. [Warning: Don't try to bring in Pepsi products, such as Mountain Dew. They will get out the knives! (To remove the label, of course).] Below is a view of the facility:
Of interest (and as a warning) to investors, they had an exhibit regarding the corporate history of Coca Cola. In 1888, the founder, an Atlantan named John Pemberton, sold the entire business to the Candler family for $1,750 just two years after starting it, at least in part in order to fund his morphine addiction (he would die shortly thereafter). Suffice it to say, from an investment perspective this was a decidedly bad decision, given that the company's overall equity value has appreciated by 127 million times [sic] since then. Lesson for investors: The best time to sell your interest in a demonstrably great business is NEVER. Below is an 1887 document from the exhibit whereby Pemberton grants the right to sell Coca-Cola to a third party:
Disclosure: Long CCUR.