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General Host
1991-1993
Industry: Garden Nursery
Category: Relative Value
Context
General Host was a conglomerate that owned a bunch of random businesses, mostly food and gardening nurseries.
It once owned Calloway's Nursery (a garden nursery), which it spun off.
General Host had recently divested itself of all it's businesses to focus on the 280 Frank's Nursery outlets (a garden nursery) in 17 states.
Why the Company is Mispriced
Company was flirting at breakeven profitability.
Alternative View
The company bought back shares at $10/sh and was trading at $7/sh.
The company was working on profitability through technologization and Christmas kiosks in shopping malls.
On a relative basis, Calloway's Nursery were bigger stores than Frank's but at the market was valuing Calloway's at $40m, even though it only had 13 stores.
Lynch figured that Frank's had 280 stores, 1/2 the size of Calloways, but assuming they were half as valuable (1.5m/store), Frank's ought to be worth $420m or $14/sh.
Given the company's refocusing and retechnologization, he figured it was worth a shot.
Result
In 1992, Calloway's share price had fallen in half.
Lynch decided that his passion for the garden nursery industry was misplaced.
The industry was highly competitive. He underestimated the impact of the discount retailers who sold garden nursery products (Home Depot/Walmart) and the preseverance of the mom and pop gardening centers.
Notably
General Host was eventually acquired in 1997 for $5.5/sh.