Hidden assets in business

A couple of months ago, we published an article on the invisible assets of pharmaceutical companies. While it was an example of hidden assets in business, there are far more hidden assets in business than you might think. For an asset game, as described in One Up On Wall Street by Peter Lynch, it is important to uncover this neglected hidden asset on the balance sheet. Several commonly found hidden assets are:

1. Companies that own natural resources such as oil, wood, precious metals. For example, oil companies record their oil reserves on the day they make the acquisition. With the price of oil at $ 60- $ 70 a barrel now, that oil on the ground will be worth more than what is recorded in book value. How about an example? Chevron Corp. (CVX) has revenues of $ 198 billion in fiscal 2005 almost entirely from the extraction of oil and natural gas from the ground. Meanwhile, Chevron’s entire asset is worth just $ 125 billion. Additionally, Yahoo! Finance claims that Chevron has 9 billion barrels of oil equivalent in its possession. At $ 60 per barrel of oil, Chevron’s oil asset is already worth $ 540 billion. Of course, this does not count the cost of extracting that oil from the ground, but it is worth noting that companies that own natural resources generally underestimate their book value. You can find a similar situation at Exxon or ConocoPhillips.

2. Companies with real estate interests. The most recent example would be the now-acquired K-Mart, which came out of bankruptcy, only to be acquired by Sears Holding (SHLD). Railroad companies such as Union Pacific (UNP) and Burlington Northern Santa Fe (BNI) owned a large amount of land since the 19th century.

3. Distribution channel. This is more difficult to quantify. As we have discussed before, you have already depreciated the cost years in advance. When you have giants with an excellent distribution channel, that should be worth something. You can distribute new products quickly at relatively low cost, since the asset is already there. How about the pharmaceutical companies tens of thousands of strong marketers? Build your own assets yourself. When a new product goes online, drug companies can efficiently pass the information on to their salesperson, who in turn will visit individual doctors for prescriptions. That should save advertising costs! These assets cannot be taken as there is a small chance that all pharmaceutical salespeople will leave work the same day as their counterparts.

4. Subsidiaries of the companies. The saying that the sum of your part is worth more than the whole may be true. If a company owns multiple assets or subsidiaries, it will be difficult for investors to add all the parts together. Sometimes investors simply focus on the short-term problems of a subsidiary and drive the share price down. This creates hidden asset opportunities, which can be worth much more than the share price. For example, Altria Group Inc. (MO) (then called Philip Morris) was trading at $ 20 per share in 2000. At the time, the value of the Kraft division was estimated at $ 24 per share, already more than the value of your actions. Additionally, Altria also owned Miller Brewing Company, with an estimated value of $ 3 per share. Others include its highly profitable US tobacco division and the international tobacco division. With the fear of a demand that will drive the share price down, the sum of Altria’s business is worth far more than its share price, creating a hidden asset opportunity.

Hidden asset opportunities don’t appear very often. But when you find the opportunity, your reward will be rich.