GenCorp (GY): Paying fifty cents on the dollar

GenCorp’s primary business is in the aerospace and defence industry. It designs and manufactures missiles, rockets, propulsion systems, etc. Business has not been very profitable lately. GenCorp reported a loss of $ 23.3 million on sales of $ 167.4 million in 1H 2006, a FY 2005 loss of $ 230 million on sales of $ 624 million and a FY 2004 loss of $ 398 million on sales of $ 499 million.

I guess by now you’re wondering why I like GenCorp and why I’ve just gone long GenCorp at $ 15.25?

Well the answer is hidden in GenCorp’s Balance Sheet and notes to accounts. In the 1950’s as part of its aerospace and defence industry business GenCorp acquired around 12,600 acres of real estate near Sacramento, CA. This real estate is carried on GenCorp’s Balance Sheet for less than $ 30 million.

The 12,600 acres or approximately 21 square miles of raw land is adjacent to U.S. Highway 50 between Rancho Cordova and Folsom, California east of Sacramento. An acre of entitled land in this area is worth about $ 200,000 or $ 40 per share of GenCorp.

Given the fact that GenCorp has 51.51 million shares outstanding, the total value of land owned by GenCorp, if the land were to be split into finished lots and entitled is just over $ 2 billion at todays prices. Contrast that with the fact that GenCorp's market cap is only $ 850 million and EV is $ 1.26 billion.

So you're now thinking that may be this looks good but its probably not worth the investment unless GenCorp actually develops, entitles and sells off all that land. Well that is exactly what prominent activists shareholders are pushing GenCorp to do.

Major shareholders include Pirate Capital, Carl Icahn, Steel Partners, Sandell Asset Management et al. Almost, if not, all of these and other shareholders are pushing management to realize the value of the real estate owned by the firm. Steel Partners in the past has made an offer to take over the entire firm for $ 17 per share and recently after a proxy battle Pirate Capital managed to get three of its own elected to the board of directors.

Sandell Asset Management in one of its SCHEDULE 13D filings had this to say:

"We have a strong conviction in the view that the intrinsic value of the Company resides predominantly with its extensive and highly valuable 12,700-acre real estate holdings around the rapidly growing Sacramento, CA region .... Unlock the value of the Sacramento Property by separating out the assets in a tax efficient manner such as a spin-off, tracking stock, or via a real estate partnership"

Pirate Capital in another filing said:

"We see 2006 as a critical year for the Company to develop a thorough strategic plan for its vast real estate holdings ... the Company owns vast tracks of real estate in Sacramento, California, and real estate values in Sacramento increased 15% in 2003, 25% in 2004 and 19% in 2005"

By winning the proxy battle and getting its own nominees elected to the board Pirate Capital has made it clear to management that they must perform, realize the value embedded in GenCorps vast real estate holdings and start generating free cash flow or else they will be replaced.

In light of the above and also the fact that I have bought in to GenCorp at a much lower price than the activist shareholders mentioned above I am happy to sit back and go along for the ride knowing that these large shareholders are working to release the value locked up in GenCorps real estate holdings.