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Premier Exhibitions: An Undervalued Stock with a Clear Near Term Catalyst

"In the short run, the market is a voting machine, but in the long run it is a weighing machine" (famous quote by Benjamin Graham)

This is not the first article written about Premier Exhibitions (PRXI). My friend, Ryan O’Connor did a fantastic write-up of the company on his blog http://www.aboveaverageodds.com, in August 2010. Many readers, who follow the value blogs, have probably seen some other write-ups on Premier Exhibitions.

However, no one has written up about Premier Exhibitions on GuruFocus (in over a year), and more importantly, I believe I have some new and insightful information. I relied on my own research for this article instead of taking tid-bits from other write-ups. The only write-up I read on Premier Exhibitions was by Ryan.

Additionally, the catalyst is getting closer every day with the court decision due by Aug. 12, 2011, the latest. I am submitting this idea for the April contest. With the market overvalued, and value stocks hard to find, Premier Exhibitions seems to offer a compelling value.

This is a special situation, which IMHO is based almost entirely on the court ruling issued in August 2010 and some scuttlebutt that has been done to find out what is the most likely scenario. Therefore, most of the discussion will focus on valuation and the court decision, and there will be less attention on the company’s margins, competitors, etc. However, I will get more into the company description later in the article.

Premier Exhibitions Inc. develops and tours museum quality exhibitions worldwide. The company creates, designs, markets, and presents educational and entertaining exhibitions; sells apparel, posters, and Titanic-related jewelry; publishes exhibition catalogs; and provides ancillary services, such as audio tours and photographs. It operates and promotes various exhibitions, including Titanic, the artifact exhibition, which features the artifacts recovered from the wreck site; Bodies Revealed and Bodies, The Exhibition, the exhibition that display multiple human anatomy sets, which contain a collection of whole human body specimens, single human organs, and body parts; and Dialog in the Dark that is intended to provide insight and experience to the paradox of learning to see without the use of sight. The company’s exhibition products are presented to the public in exhibition centers, museums, and non-traditional venues, as well as other venues with high traffic, such as hotels and casinos. Premier Exhibitions Inc. was founded in 1987 and is based in Atlanta, Georgia.

I could write a lengthy piece but I will make it as succinct as possible while providing the most relevant information. As, it turned out this piece was a lot longer than I expected, and I did not cover a lot of the business aspects, but I am not posting to win the prize (I doubt I will since special situations are hard to fit into the criteria for GuruFocus outlines), but to give people interested a chance to ask more questions or research the company in more detail.

There has been numerous litigation cases since the first assets of the titanic were discovered in 1985. In 1987, TVLP - Titanic Ventures Limited Partnership recovered 1800 artifacts. TVLP was purchased by RMS Titanic Inc. The 1987 assets were not included in the recent court decision stated below.

RMS started to salvage further assets of the wreckage in 1994, and was therefore considered salvager in possession of the assets. They made several other journeys over the ensuing years, uncovering over 5,000 artifacts.

There were numerous court cases over whether RMS had rights to the Titanic wreckage. In the most recent ruling Judge on Aug. 12, 2010, Judge Rebecca Smith, a federal judge for the United States District Court for the Eastern District of Virginia ruled that RMS (now a wholly owned subsidiary of Premier Exhibitions), ruled that Premier Exhibitions was entitled to 100% of the fair market value of the titanic assets.

This is an important point: This is the final ruling, by Aug. 12, 2011, the company will be receiving the assets or the cash value. It is also important for investors to realize that this is not the actual date of the ruling this is the final date. The ruling could come out tomorrow, or in a few months, but it has to come by August 12.

The judge strangely stated that the decision about whether to award the actual assets or the cash value would be decided within a year (Aug. 12, 2011).

Why is it taking the judge so long to make the decision? Why does it take a year? She should have ruled on the spot. The judge is likely trying to assemble a buyer since the judge wants the assets protected and stated that they should all be kept together.

This means that either the court is arranging to find a buyer for the assets from Premier, or the court will sell it and award the cash to Premier. The buyer might be a government, a large museum, or a consortium of buyers that will host the assets in one place.

First, let us look at the value of the Titanic assets. According to the appraisers they are worth $110 million (which would also “likely” be the cash awarded). One could argue the assets are worth nothing, but I would bet any museum would die to have them. The Titanic has historical significance to three nations: France, the UK, and America. It also got enormous publicity from the 1997 film by director James Cameron, which has grossed close to $2 billion. The movie is being released in next year, which coincides with the 100 year anniversary of the sinking of the ship. Just for comparison, the Mona Lisa was assessed at $100 million in 1962!

Now for the less speculative aspects, let us examine the appraisal with numbers. The appraisers, Paul Zerler and Stephen Rogers, came up with an appraisal of $110 million. They began the appraisal in 2000, and therefore, have ten years of experience with the assets of the Titanic. They individually inspected every single article, and used “the character of the object, its state of conservation, the scarcity of the item, and other relevant factors.”

The appraisers additionally took into account assets sold by the survivors of the Titanic in the valuation. Another independent appraiser testified before the court and stated that he agreed with Zerler and Rogers’ estimates. Zerler was not able to testify in court due to health issues, but Rogers stated that Zerler’s estimates usually sell within 10-12% of their appraisal value.

There is another factor, which I have considered based on recent events. The appraisal was made over the course of several years, and the court decision was in August 2011. Since August 2011, nearly every asset class has gone up tremendously in value. There was a great WSJ article from Aug. 29, 2011, giving some data about fine arts. Here are some of the important quotes from the article:

“Just as the stock market is setting new post-crash highs, the art market has largely recovered from the recession.”

“Record prices are being paid for individual favorites like Pablo Picasso, whose "Nude, Green Leaves and Bust" sold at Christie's last May for $106.5 million, the most ever paid at auction for a work of art.”

“What's selling overall? Auction houses say newcomers are asking for large-scale pieces—possibly wanting to get their money's worth on an inch-by-inch basis.”

While, this is could be a sign of a bubble, it is great for Premier if they are awarded the assets, as the Titanic assets have almost surely gone up in value as well since the appraisal.

Additionally, the S&P500, gold, and silver are up approximately 25%, 28% and 169% since Aug. 12, 2011. However, for the sake of being conservative I will assume that the assets of the Titanic are valued at $110 million.

The judge, as stated above, has not decided whether Premier will get cash or the assets. However, from the court ruling it appears that they will get the cash. The judge had some harsh words about Premier and how they handled the assets of the Titanic in the past, and I therefore believe the judge will award them cash, or make sure the assets are sold. I recommend the readers view page 39 of the court ruling for some statements by Judge Rebecca Smith about Premier’s handling (or mishandling) of the Titanic’s assets in the past.

Valuation is tricky for this company because I am uncertain about the possible scenarios and whether there is a cash award taxes that must be paid. I believe the company will set up some vehicle to avoid taxes, but to be very conservative, I will assume that they will pay 40% on any cash received. Management has not given much guidance on this matter.

I assume the company is going to liquidate. They have no debt, and unless they are planning a disastrously large acquisition, the only thing to do with the cash is to give it back to shareholders.

Here is some further reason for my thinking from the 10-K:

The Company’s largest shareholder, Sellers Capital Master Fund, Ltd. (“SCF”), informed the Company that at the request of the fund’s investors it intended to return all capital to them. When SCF initially reached this decision in June 2010, it had planned to attempt to locate a single purchaser for the fund’s 46 percent equity investment in Premier’s common stock over the next 12 to 18 months. On October 7, 2010 Mark Sellers, Chairman of the Board of Premier Exhibitions, Inc. and Managing General Partner of Sellers Capital, informed the Company that Sellers Capital is no longer marketing its 46 percent ownership stake in Premier, and further that Sellers Capital no longer has a specific time frame within which to sell its stake in Premier. Instead, Mr. Sellers indicated that Sellers Capital would retain its shares in the Company until such time as it could obtain what he believes to be a better value for the shares.

Sellers wanted to sell his entire stake in the company, and then only two months after the court ruling (August 2010) he completely reversed his decision. Did he change his mind on a whim? Or did he realize how good the court ruling was, and wanted to get the cash and then get out? The best way to accomplish this would be an orderly liquidation and not through dividends, which are taxed.

Here is the current balance sheet of Premier (I used Yahoo Finance as it was easier for formatting than Edgar fillings):

Period Ending Nov 30, 2010 Aug 31, 2010 May 31, 2010 Feb 28, 2010
Assets
Current Assets
Cash And Cash Equivalents 6,329 4,809 9,134 10,339
Short Term Investments 803 3,312 3,304 3,308
Net Receivables 2,109 6,218 5,967 5,774
Inventory 1,127 838 766 845
Other Current Assets 4,197 2,843 2,771 1,866
Total Current Assets 14,565 18,020 21,942 22,132
Long Term Investments - - - -
Property Plant and Equipment 12,108 12,281 12,875 13,545
Goodwill - - - -
Intangible Assets 2,890 3,276 3,278 3,269
Accumulated Amortization - - - -
Other Assets 7,733 6,425 3,871 3,878
Deferred Long Term Asset Charges - 928 928 927
Total Assets 37,296 40,930 42,894 43,751
Liabilities
Current Liabilities
Accounts Payable 8,428 5,336 6,111 5,518
Short/Current Long Term Debt - - - -
Other Current Liabilities 961 666 1,502 1,705
Total Current Liabilities 9,389 6,002 7,613 7,223
Long Term Debt - - - -
Other Liabilities 3,163 4,555 4,704 4,880
Deferred Long Term Liability Charges - - - -
Minority Interest 233 274 291 -
Negative Goodwill - - - -
Total Liabilities 12,785 10,557 12,317 12,103


I am going to use very conservative method for a liquidation valuation:

6.2 million cash 100%

S/T investments .8 million 100%

A/R 75% 1.6 million

Inventory 50% .5 million

Other current 25% 2 million

PPE 25% 25% 3 million

Intangibles 0

Other assets 25% 1.9 million

Total liquidation value of assets is $16 million

Liabilities are $13 million, so total liquidation would leave investors with $3 million.

Outstanding shares — 47 million* at a current share price of $1.80, which equals a market cap of ~$85 million. EV is ~$79 million.

Premiere has $35 million of Titanic assets aside from the court ruling (this does not appear on the balance sheet because the assets are recorded at cost). It seems that if the judge wants to keep all the assets together if Premiere is awarded cash, they will really get $145 million and not $110 million. Although the judge does not discuss where the $35 million will go, it is likely that they will be kept together with the other $110 million since the judge repeatedly stated she wants the assets to stay intact. Digital archives (which consists of additive value from the company due to intellectual property, costs of salvage, exhibition displays and lab operations) associated with the $110 million are worth ~$45 million (2007 appraisal).

Here are the two scenarios I see:

Best case 1. Court awards $110 million and lets Premiere keep the $35 million original assets they already own, or purchased by the “buyer.”

Case 2. No cash but they get the assets, which I think with the original assets and digital archives, are appraised at close to $200 million.

In all these cases I would prefer liquidation, and think it is likely based on Sellers’ actions and hints from management.

Let us examine these scenarios:

Case 1. The company gets $145 million and has $3 million left after liquidation; the company is worth $148 million. Premiere’s intrinsic value would be $148 million/47 million o/s= $3.15.

Case 2. The company has close to $190 million in assets including digital rights; if the company could sell for full value the stock should rise 140%, and IV is $190 million/47 million o/s=$4.04. (However, I consider this worst case, because if the judge is not arranging a buyer, the company might try to monetize the assets, or the assets might be worth far less than $110 million.)

Taking taxes into account makes the investment less attractive. As stated above, I doubt the company will have to pay taxes but to be conservative let us say they have a tax rate of 40%.

1. $148 million*.6=88.8 million. The market cap, however, would be completely cash, making it have a negative EV! While it might not make sense to liquidate for the exact market valuation in this case, we will have to treat the company as a going concern. While the company is burning through cash flow, things appear to be starting to rebound. FCF (OCF-Capex was about even for the latest Q ended November 30, even though operating income was negative $2 million). Assuming that we are looking at the company as a going concern (which we only have to do in one out of four cases), assets minus liabilities are $25 million; add in the $88.8 million and the market cap should be ~$114 million, which would equal a share price of $2.50. This assumes the company trades at book which is very low for a company, where 85% of the market cap would be cash.

2. $190*.6=$114 million/47 million=$2.50

For final valuation I am going to do something funny. I assume case 1 is the most likely. To be conservative I will assume it is more likely they will pay taxes; I will assume this to be a 75% chance. .75*2.50+.25*$3.15 equals approximately $2.70 per share. This would mean the stock has a 50% upside guaranteed by Aug. 12, 2011 (136 days from the time of this writing). If you annualize the numbers that is close to a 200% return.

The only bear case I can see is that the company wins the assets and unsuccessfully tries to monetize them.

Why is the stock so cheap? I think it is mostly due to the fact that it is illiquid. I purchased stock recently and the order only got partially filled. This has never happened to me before. Also, there is concern that the assets of the Titanic have no real intrinsic value. However, I discussed this above, and think that many museums would jump at the opportunity. Since, these assets will be sold on August 12 even if they are awarded to the company; the value has only probably gone up since the original appraisal. These assets could be worth an additional 25% just based on the rise in the stock market and the (temporary) “wealth effect” associated with it.

Final words about management:

As I mention about Sellers, the largest shareholder, the chairman of board has a clear interest to maximize shareholder value. Eight out of the nine directors are independent, which is not bad for a small cap company. Many small cap companies have boards almost entirely consisting of executives from the company. The board actually meets as opposed to other companies, where the board just receives pay checks and speaks a couple of times a year. According to the proxy, the board met 19 times during FY10!

Sellers also made some significant changes to the board. According to the p,roxy, “The directors strongly criticized the compensation that we paid to our senior executives, our hiring practices, and the governance that we followed in making compensation and hiring decisions. These directors expressed their intent to reform our practices in these areas and to provide compensation for our senior managers that is more clearly aligned with the interests of our shareholders.”

The CEO, Christopher J. Davino, was appointed on Jan. 28, 2009. With the help of Sellers and the board, they have done a remarkable job turning around the company. The touring and stationary Titanic exhibitions as well as solid performance the stationary Bodies exhibits have been doing well, and had a GP of $10.2 million for the nine months ended November 30. However, these results were hampered by poor performance in the touring Bodies portion, which had a loss of $1.0 million.

Some other highlights of the great progress of the new CEO (all data is from Q310):

Revenue increased to $10.2 million compared to $8.7 million.

Total exhibition days increased 19% to 1,613, as a result of better deployment of the entire capacity of touring exhibitions.

Total attendance increased 20% to 980,506.

While ticket prices declined 7%, with the uptick in the economy and inflation I expect this number to rise in the future.

The CEO stated in the most recent press release:

“Having identified the main area of challenge within our business, we have decided to discontinue any further self-operated touring Bodies exhibitions, which will materially lessen our financial exposure. We will reduce our inventory of specimens and cut the fixed license costs by $4 million annually. In addition, we are also reducing General and Administrative costs and expect to drive further efficiencies throughout the business over the coming months. These decisive actions will generate a runrate cost savings estimate of $3.0 million to $3.5 million beginning in the second quarter of fiscal 2012. In addition to lower fixed costs, we will also benefit from the ability to reallocate our resources toward performing assets such as the Titanic and other new and exciting content opportunities. As we complete these efforts in the fourth quarter, we expect to emerge in fiscal 2012 as a leaner, consistently more profitable company, one that’s squarely focused on expanding our market opportunity.”

The current CEO is not trying to throw cash at bad segments, in the hopes trying to desperately turn them around; he is making smart decisions that are in the best interests of shareholders.

This article is supposed to discuss competition; however, as I see liquidation as the most likely scenario, this is not a concern. Just for comparison sake, no company in the world has the assets of the Titanic, nor do they have any publicly traded companies that have similar business models. One competitor is Musee Grevin SA; however, I do not see this company having any chance of a 200% annualized return this year, with a clear and defined catalyst coming in 136 days from now.

Disclosure: I am long PRXI.

Longer for stock posts: I am NOT an investment, trading, legal, or tax advisor, and none of the information in this post is intended to provide tax, legal, investment or trading advice.

This article is not a buy, hold or sell recommendation for PRXI or any other stock. The data and information presented in this article is believed to be accurate but should not be relied upon by the user for any purpose. Any and all liability for the content or any omissions from this web site, including any inaccuracies, errors, or misstatements in such data or information is expressly disclaimed.

http://www.valuewalk.com/

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 4.0/5 (19 votes)

Comments

Mariusz Skonieczny
Mariusz Skonieczny - 3 years ago
Nice job Jacob. I believe that as we get close to August 12, investors will get more interested. In these days, waiting three months is out of question to investors who are only interested in stocks that are going up.
yswolinsky
Yswolinsky - 3 years ago
Thanks Mariusz for the compliments, and your help. I hope you found this somewhat insightful.
Investex
Investex premium member - 3 years ago
Jacob, thanks a lot for writing about PRXI ! If we forget about Titanic treasures completely like this fact doesn't exist, how do you estimate downside risk of stock dropping more from current 1.8 based solely on company performance ? Do you think it would be better to get in after Q4 results release ? Do you think we will see Q1 results release before the magic day in August ?
yswolinsky
Yswolinsky - 3 years ago
Thank you Ilia,

I really only evaluated this company as a liquidation, as a going concern I would not be too optimistic, in fact that is the really only bear scenario that I see with this stock.

I do not know exactly what you mean by "the titanic treasures don't exist", if you would clarify the point I would be glad to address it.

When it comes to buying companies I never wait for dates, unless I am concerned about something and want to see how the company did this quarter (this is not really the case here). I was buying a lot of stocks in late 08 and early 09, and they just kept tanking and tanking. I said to myself at a certain point "why do I keep buying if the market (and these stocks are going) to down more and more. The day I said that was either March 6th 2009!

Additionally, the magic date is not really magic because the judge could issue the ruling any day, so while everyone must do their own research they should not take too much time with this one, because if they are interested and the bulls are right they could miss out. That being said Q4 results are coming out soon, so it is your decision whether you want to wait or not.

Investex
Investex premium member - 3 years ago
Also while listening to the court ruling call with investors I got the impression that the most likely scenario will be to give them Titanic assets and not the cash. Because court is interested in preserving the assets in one place it would be the most logical to give it to the company which could continue with exhibitions etc.

Trying to analyze the risk of buying this stock not taking into account Titanic assets I'm coming to conclusion that even after they cancel Body Touring exhibitions and save 4 million annually on fixed costs and lets assume avoid 3.4 million losses, they could still to continue losing about 13-7.4=5.6 million. Is that why you think they are going to liquidate ? Because it doesn't make sense to keep loosing money ?

if they decide to continue business the message to investors will be mixed: money loosing company with huge increase in assets. Chances are the stock will rise but how much is the million dollar question. Right after press release about the court ruling the stock jumped 70% so it seems that investors have high confidence in the situation
Investex
Investex premium member - 3 years ago
Thanks for the response Jacob, what I'm meant by saying "lets forget about Titanic treasures..." was that I wanted to analyze the company future regardless which seems to be bearish to me for the time being
yswolinsky
Yswolinsky - 3 years ago
Hi ilia thanks for your response, and thanks for helping me sharpen my thinking. I do believe that this company as a going concern is not terribly cheap. In fact, the bear scenario that I imagine is that they get the assets and try to monetize it.

I think the company will get cash for the following reasons:

A. From the court ruling the judge does not seem to like Premier too much. While, she did praise them, she harshly criticized how they treated the assets in the past. I just think from the wording of the document you see it. She even threatened legal action in the future.

B. Why does the judge need a year to decide? From my research I have heard form several sources that they are likely arranging a buyer

The company in the past has closed down exhibits which were not profitable so even if they get the assets they will likely sell them.
tonyB
TonyB - 3 years ago
I've followed this company closely and see no evidence that the company plans to liquidate; I think it's more likely Sellers will try to liquidate his position through an acquisition of the company. There are numerous instances in the conference calls where management speaks about plans to monetize the upcoming 100th year anniversary of the sinking in 2012.

Whether they get the assets or the cash, I think, depends on judge's assessment of their ability to safeguard the artifacts and keep them intact given PRXI's relatively small size. Her criticism of their treatment of the assets in the past is based on the actions of previous management which felt it necessary to compromise the archaeological integrity of the site in order to bolster their claims to title over the wreckage. Current management, however, has done a much better job in this regard, as evidenced by their recent expedition to map the wreckage and in general promote the educational and cultural significance of the site, which is what the judge wants.

I don't think there's any doubt the artifacts have an enormous monetary value not reflected on the company's balance sheet, as per the appraisals of the individual objects, but the need to keep them all together could lead to an illiquidity discount if it needs to be sold.

I have a large position in this in this stock and am somewhat worried about the resignation of the CFO in January.
Mariusz Skonieczny
Mariusz Skonieczny - 3 years ago
Why would you expect them to buy back stock when they are bleeding cash? Only recently, they reported a positive bottom line.

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