Revisiting the Stock Reports at Focused Compounding: Ark Restaurants (ARKR), BWX Technologies (BWXT), and Bank of Hawaii (BOH)

by Geoff Gannon


When someone joins Focused Compounding – use the promo code “BLOG” to save $10 a month – they get immediate access to the Singular Diligence archives. These are found in the “Stocks A-Z” section of Focused Compounding where we alphabetically list every stock write-up on the site. While there are plenty of write-ups on the site not written by me – and plenty of write-ups I’ve done for Focused Compounding that aren’t as long as the Singular Diligence reports – there are enough stock ideas in the Singular Diligence archives that I thought I’d spend a whole blog post just quickly re-visiting every report in there.

Each report is over 10,000 words.

There’s a bunch of past financial data at the front of each report.

And then there’s an “appraisal price” at the back of each report.

Some reports also include a “notes” section which includes quotes, data, and sources I used in writing the report but were too detailed to include in the report itself.

So, here are the stocks we have full reports on at Focused Compounding. Since we order them alphabetically on the site, I’ll order them alphabetically here too.

To keep these posts short enough – I’m just going to do revisit 3 stocks per day.

Come back tomorrow for another 3 stocks.

 

Ark Restaurants (ARKR)

Written up at: $22.20 a share

Now trades at: $23.13 a share

How I originally described it: “Ark Restaurants operates mostly very large restaurants in mostly landmark locations.”

A lot has changed at Ark Restaurants since I wrote it up. The company is a partner in the Meadowlands racetrack (a quarter horse race track in Northern New Jersey) and would have nearly exclusive rights to any food and beverage at a planned casino there. I say “nearly”, because another partner in the racetrack is Hard Rock and Hard Rock has the rights to put in a Hard Rock restaurant there. This is the “lottery ticket” portion of Ark I wrote about in the report. Allowing casino gambling outside of Atlantic City (where it’s long been legal) was put on the ballot in New Jersey. The measure failed. Sports betting became legal. Ark’s interest in the Meadowlands racetrack remains a “lottery ticket”. The company owns about 10% of the equity in that project – though this might be watered down by future dilutions if any project really did materialize. Casino gambling can be put back on the ballot in New Jersey again (just not immediately). I have no idea if it’d ever pass. The value in 10% ownership plus the food and drink concession would be huge for such a small company. But, a Meadowlands casino project remains 100% a lottery ticket – and not something any investor should count on. The company has also shifted its strategy by buying more restaurants outright. Previously, it had only long-term leases. The balance sheet of the company now looks different because it takes debt directly on to the balance sheet and also takes the land on to the balance sheet. Some of the locations the company has bought are pretty valuable. Overall, the stock continues to plod along as generally a pretty safe dividend paying stock with extremely limited growth prospects. I recommend researching this stock if you don’t know it, because there are very few public companies out there that operate non-chain restaurants. It’s an interesting business model to study. Though – as you can see in the stock’s long-term compounding record for the last 25 years or so – it’s not been an especially lucrative one.

What I originally concluded: “it is appropriate to value Ark as a high dividend yield stock. The company should be capable of paying $2 a share in dividends in the future. In normal times, a 6% dividend yield is considered high. That would value Ark at $33 a share.

That certainly hasn’t happened yet. Ark only pays a $1 dividend and only trades for $23 a share. This gives it a dividend yield of 4.3%.  Since I wrote that report, Atlantic City has certainly gotten worse. Some things have changed at the company – like the referendum failing and sports betting becoming legal – but, overall I’d say the stock is both similarly priced and similarly attractive now as when I wrote the report. For the most part, you can read that report and then read the most recent earnings call transcript, 10-K, etc. update some figures and come to your own conclusion about Ark. There hasn’t been a ton of change in either the stock price or business value here. This is still a stock idea it’s fine to research today.

 

Babcock & Wilcox – Now BWX Technologies (BWXT) and B&W Enterprises (BW)

How I originally described it: “The single most important line of business for Babcock…is providing critical nuclear components for nuclear powered military ships…Babcock is completely dependent on the U.S. Navy as its sole customer in this business…(and) the U.S. Navy is completely dependent on Babcock as its sole supplier.”

This is a rare case where I actually bought the stock I wrote about. There’s no reason to do the “written up at” and “now trading at” for this one. The BWXT half surged in value. The BW half plunged to almost nothing. I sold my BW shares and kept my BWXT shares. I also wrote up the BW – “bad Babcock” – half for Focused Compounding. In that write-up, I said I was not interested in the stock at all because it was far too risky. That turned out to be a good choice because the stock fell a lot further.

Should you read this report? To learn about the BWXT side, sure. BWX Technologies does a few things. The most important thing it does is build all of the U.S. Navy’s nuclear reactors for submarines and aircraft carriers. BWXT has long had a monopoly on that. And it has a monopoly, or oligopoly – as part of various consortiums bidding for government work – on just about everything else related to the U.S. government’s use of nuclear power and nuclear weapons. For example, BWXT does all the down blending of U.S. weapons grade uranium into uranium that can be used for other purposes. Since I wrote about the stock, two things have happened. One, BWX Technologies acquired a medical isotopes business called “Nordion”. Here’s a quote from the press release announcing the deal:

“Nordion’s medical radioisotopes business is a leading global manufacturer and supplier of critical medical isotopes and radiopharmaceuticals for research, diagnostic and therapeutic uses. Its customers include radiopharmaceutical companies, hospitals and radiopharmacies.”

And then the other thing that happened is BWXT was awarded a (very small) NASA contract to do work on nuclear propulsion for manned spaceflight (such as a future mission to Mars). You can find information about BWXT’s work on a mission to Mars here:

“BWX Technologies, Inc. (BWXT) is working with NASA in support of the agency’s Nuclear Thermal Propulsion (NTP) Project. BWXT is responsible for initiating conceptual designs of an NTP reactor in hopes of powering a future manned mission to Mars.

NTP possesses numerous advantages over traditional chemical propulsion systems. With NTP technology’s high-energy density and resulting spacecraft thrust, NASA is projecting up to a 50 percent reduction in interplanetary travel times compared to chemical rockets, significantly increasing the crew's safety by reducing exposure to cosmic radiation.

For this latest interplanetary endeavor, BWXT is drawing upon its extensive space nuclear reactor experience. While previous projects utilized high-enriched uranium, the current NTP Project relies on low-enriched uranium.”

So, how much has Babcock & Wilcox changed since I wrote the report?

Well, a huge amount overall. That’s because the company split off into two parts after I wrote that report. The BW part pursued new (non-coal) projects like waste-to-energy in a big way. It had disastrous losses on those engineering projects which may eventually bankrupt the company. Meanwhile, the market quickly valued BWXT – the Navy nuclear reactor business – like some sort of ultra-predictable high ROE, high growth blue-chip type company. BWXT is now pretty expensive. But, I would recommend reading the report to learn about BWXT – because, I believe it has the widest moat of any business I’ve ever seen. I would not recommend paying any attention to the power / coal – BW – part of the business. As soon as it was spun-off, it embraced a really risky strategy of straying from its circle of competence (which is an ultra-risky move for an engineering company) and is not a safe enough stock for investors to even consider right now.

What I originally concluded: “Once the nuclear operations unit is split from the power generation business, it will suddenly be seen as one of the most predictable stocks around.”

That happened. BWXT is still the widest moat business I know. Everyone reading this should learn about the company. You should read the 10-K, the investor presentations, etc. But, should you buy the stock today? It’s not cheap. But, it might be cheap one day in the future. Research it now. Remember it for later.

 

Bank of Hawaii (BOH)

Written up at: $73.99

Now Trades at: $75.57

How I originally described it: “Bank of Hawaii is the second largest bank in the island state of Hawaii...From 1994 through 2015, Bank of Hawaii’s deposit share in that state ranged from 27% to 32% ….Hawaii’s banking industry is much more consolidated than the banking industry in other U.S. states.”

Finally, an immediately “actionable idea”. You can buy this stock today if you want. Bank of Hawaii is one of my favorite bank stocks in the sense that it has one of the two best deposit bases – outside of the giant U.S. banks like Wells Fargo (WFC) – I’ve ever seen. The two regional (really one-state) banks I recommend every investor should learn about are Frost (CFR) in Texas and Bank of Hawaii in Hawaii. These banks always have cheap, sticky, and stable deposits. They have really, really low costs of funding. Part of this is because they have really, really high deposits per branch (so, expenses relative to deposits can be low) and the other part is that they have a lot of deposits – from business customers who are also often borrowers from the bank – who aren’t paid much in interest to keep money at the bank. The interesting thing about BOH and Frost is that things on the deposit side change very, very little over time. But, the stocks bounce all over the place because of the asset / yield side (loan demand, interest rates, etc.). Bank of Hawaii is much more growth constrained by its state than Frost is. So, I like Frost’s odds of compounding intrinsic value per share at a nice rate over a decade or something better than BOH.

But, BOH has a weapon that Frost doesn’t use. BOH buys back its own stock. So, if BOH stock gets cheap and stays cheap for a while when bank stocks are out of favor, you – as a new BOH investor – can get a double boost from the stock coming back into favor and EPS growth coming from cheap share buybacks. Bank of Hawaii stock is down 15% this year. Now is a great time to look at banks – they can be BOH, Frost, or some of the others I’ll write about in the week ahead – because stocks in general are down for economic reasons that aren’t bad for banks. Higher interest rates and higher inflation and things like that are truly bad for some U.S. companies. They’re not bad for banks that have a lot of deposits they pay very, very little on and yet haven’t been able to put to good use on the asset side. I don’t spend a lot of time thinking about big stocks like BOH and Frost. But, if I was looking for big stocks to buy – this month, I’d be looking at U.S. banks. And BOH would be very close to the top for me. This is never a very exciting looking bank stock in terms of upside. But, this is the kind of bank stock I think you should own if you can get in at a decent price. As I write this, the dividend yield on BOH and the 30-year Treasury yield are both about 3.3%. When that happens, you should seriously consider BOH. The coupon on that 30-year is never going to go up no matter what happens with inflation. The cash available to pay out as dividends will go up a little in most years at BOH. And the number of shares outstanding will go down every year. So, that dividend per share is going to grow. You’re getting a 3.3% dividend yield that’ll grow over time. This is a stock where you can go out and read the 10-K, investor presentation, etc. (or my report on the company at Focused Compounding) right now. Put this one on the watch list. I makes little sense for a stock like this to be dragged down in any of the recent market wide volatility we’ve seen. So, down days for the market are good days to look at buying BOH for the long-term.

What I originally concluded: “It’s possible to come up with a scenario where BOH stock returns as little as 7% a year over the next 5 years. It’s also possible to come up with a scenario where BOH stock returns as much as 14% a year over the next 5 years.”

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