Tejon Ranch Shares Priced Right

Management is pursuing the real estate development of the 270,000 acre Tejon Ranch Company (TRC - Analyst Report) located in Southern California. The company’s three major development projects are the Tejon Industrial Complex, Tejon Mountain Village and Centennial. As commercial, industrial and residential entitlements are pursued, the stock’s valuation ought to expand significantly. The Buy rating is maintained.

The company's prime asset is approximately 270,000 acres of contiguous, largely undeveloped land that is 60 miles north of Los Angeles. Management is implementing a focused strategy aimed at transforming the company from an agricultural operations based company to a real estate development company. The company is pursuing three initial development projects: Tejon Industrial Complex (commercial /industrial development), Centennial (planned residential community), and Tejon Mountain Village (mountain resort community).

Since Tejon Ranch is in the early stages of developing 270,000 acres of largely undeveloped land, traditional valuation methods based on P/E, cash flow, or a dividend discount model are not appropriate. In addition, book value is distorted making P/B inaccurate. The land is being held on the balance sheet at cost or $7.9 million ($29 per acre), since it was acquired through Mexican grants in the 1840s.

Despite the facts that Tejon’s three development projects comprise less than 12% of the company and that approximately 240,000 acres may be set aside for environmental conservation and good stewardship, the stock should be valued on a Price/Acre basis. The stock’s valuation has moved up on a stair-step basis as development projects are being successfully pursued.

We expect the value of land to significantly increase as further entitlement processes are completed. As the management succeeds in its vision of developing Tejon Ranch over the next 25 years, the valuation per acre should dramatically increase. Over the next few years, we expect the valuation to increase to $6,000 per acre.

Read the full analyst report on TRC

Read the full analyst report on TRC