Two of the gurus that I follow at GuruFocus are David Einhorn and Daniel Loeb. They are both considered to be activist investors and their hedge funds have experienced extraordinary results. Loeb started Third Point Capital in 1995 and Einhorn started Greenlight Capital in 1996. Third Point Capital has returned 20.4 percent annulized since its inception in 1995, and Greenlight Capital has returned 19.5 percent annualized since May of 1996.
Together they hold 52.8 percent of BioFuel Energy Corp (BIOF) with Einhorn holding 35.4 percent and Loeb holding 17.4 percent of the shares outstanding (including B Shares) according to the Form S-1 filed with the SEC on 7/16/2014. BioFuel is going through some major changes and will be reinventing itself as a real estate company. With the exceptional track record of the two hedge fund managers, Biofuel Energy is going to be a stock to keep an eye on.
Company Background
BioFuel Energy’s stock has been a loser since it started trading in June of 2007, about a year after the peak in the ethanol stock boom and just months away from the start of the recession. In 2012, the company had to do a 1 for 20 reverse split to get its price over $1.00, so it can remain listed on the NASDAQ. BioFuel’s business of producing ethanol officially came to an end in November of 2013 when it announced the sale of its ethanol plants. The company’s senior credit facility was secured by its ethanol plants and the lenders exercised their right to acquire them.
Today, the company does not have any operations. According to their latest filing, as of March 31, 2104, what the company does have is $10.1 million in cash and cash equivalents and $179 million in a retained federal net operating loss carry forwards. At the maximum tax rate of 35 percent, the tax loss carry forward would have a value of $62.65 million if fully used within the fiscal year. It would not realize its full value if the loss was carried forward for multiple years, or used against a lower tax rate. Adding the cash balance and the tax loss carry forward results in a value of $72.75 million. The company currently has a market cap of $50.73 million. At the current valuation for the stock, the market is valuing the carry forward at $40.63 million. It could be a reasonable valuation given the uncertainty over when the carry forward will be used.
The S-1 that was previously mention is for an upcoming rights offering where the proceeds will be used in combination with a loan from Greenlight Capital to acquire the equity interests of JBGL Builder Finance LLC and certain subsidiaries of JBGL Capital, LP (collectively, “JBGL”) from Greenlight Capital and James R Brickman for $275 million. JBGL is a series of real estate entities involved in the purchase and development of land for residential purposes, construction lending and home building operations. The $275 million purchase of JBGL will be made in cash and stock.
JBGL Capital was formed in 2008 and JBGL Builder Finance in 2010 with Greenlight providing a majority of the capital and Brickman providing the remaining capital. The company currently owns approximately 4,600 home sites in prime locations in the DFW and Atlanta markets. JBGL also owns 50 percent controlling interests in several builders and provides construction financing for approximately 900 homes annually.
Financial Strength
Since JBGL was formed, the business has grown rapidly. Over the past year, the book value has grown from $137.98 million to $206.6 million, a 49.7 percent gain. For the last reported quarter (Q1 2014), revenue increased from $27.13 million to $49.64 million, an 83 percent gain. For the full years of 2012 to 2013 net income attributable to controlling interests increased from $17.19 million to $32.01 million, an 86.2 percent gain. Q1 of 2014 income was $7.35 million compared to Q1 of 2013 income of $6.03 million, a 21.89 percent increase. Projecting the gains in the first quarter of 2014 throughout the rest of the year leads to a full year income of $39.02 million.
The bottom line is that the business that will be moving into BioFuel Energy is estimated to make $39 million. BioFuel Energy currently has a market cap of $50.73 million. At first, it looks like there will be a P/E of 1.3, but that is not the case. There is still more work to be done. The rights offering and purchase of JBGL is going to increase the market cap and dilute the value of the shares. As of March 31, 2014, the net tangible book value was $10.25 million, or $1.64 per share. After the rights offering and purchase of JBGL, net tangible book value will be $138.96 million, or $4.42 per share based on the reported data of Q1 of 2014 and S-1. That also means that the expected number of shares outstanding after the rights offering will be 31.44 million. These figures do not contain the value of the $179 million loss carry forward.
Valuation
Let’s take those numbers, find comparables and come up a valuation. Getting back to the business of JBGL, it owns residential land for the use of building homes by independent homebuilders and other builders of which it has a 50% interest. The company also provides financing to the builders. With this information, I am going to compare it to other home builders.
| Company | P/Tangible Book | P/S | P/E |
| Lennar (LEN) | 1.8 | 1.3 | 17.9 |
| DR Horton (DHI) | 1.8 | 1.3 | 16 |
| PulteGroup (PHM) | 1.6 | 1.3 | 2.9 |
| Toll Brothers (TOL) | 1.7 | 1.98 | 25.4 |
| NVR (NVR) | 4 | 1.25 | 20.8 |
| Standard Pacific (SPF) | 1.5 | 1.2 | 16.2 |
| Median | 1.75 | 1.3 | 17.05 |
Using the median price-to-tangible book value of 1.75, BioFuel energy will be valued at $7.74 per share after the rights offering and acquisition of JBGL. With an estimated net income of $39 million, the stock would be undervalued with a P/E of 3.56. A value in line with the median P/E of 17.05 would be $21.15 per share. If the revenue of JBGL for full year 2014 increases at the same rate of its first quarter of 2014, a price-to-sales (P/S) ratio of 1.3 would price the stock at $12.76. Using the average of the three valuations gives leads to a price of $13.88 per shares.
| Price at Median Valuations | ||||
| Ă‚ | P/Tangible Book | P/S | P/E | Average |
| BioFuel Energry (BIOF, Financial) | $7.74 | $12.76 | $21.15 | $13.88 |
Conclusion
David Einhorn (Trades, Portfolio) and Daniel Loeb (Trades, Portfolio) have been two of the most successful gurus since the mid 1990’s and together control over half of BioFuel Energy with Einhorn having the largest stake. BioFuel Energy has struggled since it became public in 2007, and its ethanol plants were taken over by creditors last year. The company has no operations, but will be issuing rights, getting a loan from Greenlight Capital, and purchasing the very profitable business, JBGL. The current shares that are outstanding are going to be diluted during the process, and shareholders are at the risk of large short-term losses. After the process is over, the shares could have an average value of $13.88 based on comparable valuations providing an excellent opportunity.
