Cadiz, a Non-Profit Operating Model Failing in a Profit-Driven Universe
I shorted Cadiz (the "Company) back in 2007 because it's valuation seemed absurd and it's industry growth was lacking. Although quite novel, my original conclusions still stand. As I have developed my investment strategy and understanding, CDZI continued to generate new concerns that reaffirmed my short opionion.
CDZI is essentially a holding company that sits on land with potential, nothing more. It claims that it was founded originally to capture and control evaporation of water in an acquifer along an edge of the Colorado River. Vital and severely lacking in California, water is certainly a paramount commodity, one that falls under the radar because of its plentiful nature throughout much of the U.S. It's a commodity that is frequnetly taken for granted and in theory, Cadiz seemed to offer a promising investment opportunity.
However, the Company runs like a non-profit, trying to dabble and research what angle it should take, without actually producing anything of substance from its valuable assets. What started out as an irrigation type project to supply California farmers and residents with needed water, has morphed into a business that is exploring too many alternative purposes, including solar energy, hydro energy, and natural gas opportunities. Rather than picking a route and aggressively building that segement into a profitable, cash flowing business, CDZI appears content to continue hemoraging cash and sustaining signficant losses for shareholders.
Since I went short in early 2007, CDZI has dropped some 66%, with no real recovery from the financial crisis that sent the entire markets lower in 2008-2009. Meanwhile, the S&P has notched a 7% gain, including the deep sell-offs of 2008-2009 and 2011.
Examining CDZI today, yields the same results from nearly six years ago. CDZI hasn't recorded a positive return on assets or equity since 2002, when it produced a measly 1.1% ROA and 1.3% ROE. For a company that sits on such valuable assets (land), this is inexcusable. The company hasn't generated a positive EBITDA, approxmiately a measure of operating cash flow and/or income, since 2002, almost unheard of in the financial markets. Additionally, the company continues to see more cash exiting than entering through operations. These two factors indicate a company that has zero interest in its own shareholders and is clueless about how to run a business, let alone one that trades publicly. That should be quite clear, considering the company never delivered even one annual period of positive net income to its stockholders.
My sentiments are echoed by other investors, with a short ratio that has doubled since the beginning of 2012, from roughly 701 thousand shares short to 1.45 million, according to S&P's CapIQ.
As if things couldn't get worse, CDZI is extremely leveraged, trading below book value with total debt to total capital reading around 125%. How in the world is this company going to continue servicing its debt obligations without generating any cash flow? Worst of all, it's revenue is a paltry $725K. That's right, $725K, as in thousands of dollars. Yet, as of September 2012, it's long-term debt accounts for nearly $57 million. That means that Cadiz is generating 1% of its total debt through revenue, in a full twelve months. A shocking statistic. I challenge someone to find another company with that poor of debt coverage.
In sum, CDZI operates as a non-profit, disregarding shareholder concerns or demands. It has no interest utlitizing its valuable assets to generate sales, earnings and cash flow. Even worse for investors, with such a poor operating model and ability to service the debt, unless existing shareholders keep propping up Cadiz, it will likely default on its debt and those valuable assets will end up in the hands of creditors, not common stockholders.
If you own CDZI, it is best to cut your losses and move on. If you were thinking of buying, save your money. And if you were planning to short, the odds are ever in your favor.
Disclosure: MMCapitalMgmt is not currently short CDZI through any form of securities. However, it was short between January 2007 and May 2009.