From Big Five to Top Five

August, 2000

Fellow Shareholders

Alexander & Baldwin’s earnings for 1998 can be summarized in one word—disappointing.

—Alexander & Baldwin, Inc. 1998 Annual Report

Fellow Shareholders

1999 was a year of considerable progress. Before one-time items, earning per share increased 26 percent. This performance exceeded our targets for the year and was accomplished with little appreciable improvement in Hawaii’s economy.

—Alexander & Baldwin Inc. 1999 Annual Report

What a difference a year made for 130-year-old Alexander & Baldwin, Inc. (NASDAQ:ALEX). The conglomerate of shipping, real estate and agricultural interests was born out of a sugar-growing partnership formed on Maui in 1870 between Samuel T. Alexander and Henry P. Baldwin. The company was incorporated in Honolulu in 1900. The former Big Five powerhouse has been in and out of the Hawaii Business Top 5 over the years, but has held on to one of the top spots run since 1997.

Of late, the company has been involved in astute commercial real estate investments both in Hawaii and on the mainland. At the same time, A&B has shown good performance in its Matson shipping subsidiary. Agriculture, primarily sugar and coffee production, has produced less than stellar results.

A&B holds the No. 5 spot on this year’s Top 250 with 1999 sales of $959.3 million, a 27 percent decrease from last year when it was ranked Number 3 with 1998 sales of $1.31 billion. Yet, despite the $352 million sales drop, A&B still managed to generate a 26 percent increase in earnings per share in 1999 compared to the previous year. This was done under the leadership of President and CEO W. Allen Doane who was named to the position in December 1998. Doane had been serving as vice president and chief operating officer since 1991.

“We had to take decisive action to improve the results of the company. Part of the process was that we sold the majority interest that we owned in the C&H refinery. So we made a very major divestment of a business that we did not feel comfortable with strategically in having. At the same time, the remaining businesses that we have-shipping, real estate and agricultural-all performed very well last year,” says Doane.

“Management’s done a good job of working the cost side of the equation over the last several years given that they haven’t had a lot of growth in the top line of the business,” says Mary C. Fleckenstein, senior vice president of Ragen MacKenzie Inc. Fleckenstein upgraded her rating of A&B to “accumulate” in the fall of 1999.

Full of Ships
Shipping subsidiary Matson Navigation Company, Inc lead the way in 1999. Ocean transportation revenue was $746.6 million, a 3 percent gain over 1998. Matson’s operating profit reached $83.8 million in 1999, a 26 percent increase over 1998.

“Their maritime activities did improve quite impressively in 1999 and they continue to improve into this year. Basically, they won market share, especially in the automobile carryings. They won a nice contract from General Motors,” says Craig Sirois, senior equity analyst at Value Line, Inc. Sirois’ three to five year recommendation for A&B’s stock is a “buy.”

Matson’s total container volume for Hawaii routes was 5 percent higher in 1999 than in 1998 at 151,215 units. And total Hawaii service automobile volume was 37 percent higher in 1999 at 101,095 units.

Sirois thinks competition for Matson is going to be stiffer in Hawaii in the near future. Competitor CSX lines has the capability to add sailings although no plans have been announced. Pasha Hawaii, another automobile carrier with roll-on, roll-off capability, is poised to enter the market in 2002.

Matson made several large investments in its Hawaii operations in 1999 including: $13 million in information technology; $13 million in fleet improvements and $1.3 million in terminal improvements at its main facility at Sand Island.

Earlier this year Matson Navigation Company President and CEO C. Bradley Mulholland said, “Matson’s business objective remains focused on ensuring the company’s transportation services are among the best in the world.”

Adds Doane: “There are many opportunities for Matson to expand the business and do exactly what they do which is transportation of containers, but most of that expansion will be outside of Hawaii.”

Doane notes that Matson has expanded its service to the South Pacific and Guam. The company also entered a joint venture agreement to serve Puerto Rico through a separate company and it has expanded the intermodal business, or carrying containers from West Coast ports to interior locations in the United States.

Rocking Real Estate
According to A&B, it is the fifth-largest landowner in Hawaii with 93,000 acres. The bulk of the company’s land is on Maui with 69,000 acres. There are 22,000 acres on Kauai. At last count, A&B also had around 20 mainland properties in its portfolio. The company has office property, retail property, industrial and residential properties.

“We’re very quiet,” says Doane. “In the last year, we’ve made seven investments in Hawaii and this is in addition to the fairly large amount of internal development work that we’ve been doing on all of our own properties. So what we’re doing now is very different from what we did several years ago. We’re not only developing our own land holdings, but we’re investing outside of our company’s basic core of lands.”

Ragen MacKenzie’s Fleckenstein says, “I think they were smart in taking their knowledge of the Hawaii real estate market and choosing to make some investments there when things were cheaper and sowing some real estate here in the northwest.” Fleckenstein says A&B’s real estate holdings are growing nicely both from a lease and sales standpoint.

Subsidiary A&B Properties Inc. accounted for $93.1 million in sales in 1999, a dip from 1998 sales of $120.3 million. But analysts still give this sector high marks, noting that the company will benefit from Hawaii’s improving economy.

“Alexander and Baldwin appears to be a solid real-estate play,” says Value Line’s Sirois. “The prospects for the real estate division probably have never been better.”

Says Doane: “I see that our real estate business will expand both in Hawaii and on the mainland U.S. We have good growth opportunities and we’re optimistic that we’ll be able to invest a good amount of money into Hawaii as well as continue to invest on the mainland.”

Sweetening Agriculture

The line item “Food Products” accounted for $116.4 million in revenue in 1999, a steep dip from $465.7 million the year before. A number of factors came into play including: the December 1998 sale of the company’s majority interest in C&H; a 20 percent nosedive in sugar prices; and operating losses at Kauai Coffee (the largest coffee estate in the nation, accounting for 60 percent of the coffee grown in Hawaii). Doane says that even though the agriculture part of the conglomerate represents less than 10 percent of its business today, “It’s really the foundation of where our company came from, so we’re quite committed to it.

“We’ve invested a tremendous amount of money into our agricultural activity on Maui, our sugarcane operation. In fact, we’re doing something now that is certainly the most aggressive, far-reaching thing that we’ve ever done.”

A&B has invested $11 million into a new process that takes bagasse (cane fiber) and makes it into Hawaiian Duragreen, a composite panel board. The manufacturing plant should be up and running before the end of the year.

“We’re going to have something that we can export out of Hawaii for sale. So the market will tell us how successful we’re going to be with this product. We’re doing something that is very aggressive, completely different and somewhat risky to support our agricultural activity,” says Doane.

New Economy Future
A&B’s stock price hit a high of $27 in July 1999 and a low of just below $18 in March of this year. Doane recognizes what he calls a normal up and down that goes along with broader market, but there’s also the big technology gorilla on every traditional business’ back.

“I didn’t realize before that I was considered to be a legacy company and that A&B is an “old economy” company. I think that the investors are really so enamored with the dot-coms that there was virtually nothing you could do to attract interest by investors, if you are a traditional company and clearly that’s what A&B is from an investor standpoint,” says Doane. But he thinks the pendulum is swinging back and people are going back to old favorites that have performed well for years.

Burton Strauss, managing director for Dominick & Dominick, LLC, has been covering A&B for about 20 years. He’s been recommending A&B as a “buy” since March. Strauss says, “It’s a reasonably priced stock with great assets and I think the market is really more concerned with current earnings than they are with the value of real estate. The only thing that will make the stock appreciate further is to continue the improvement in their operating results.”

Technology will be key to creating operating efficiencies. Doane says the company offers Matson’s transportation services over the Internet should be making announcements about new service offerings in the next few months. A&B is also looking at how to use the Internet in its other lines of business.

Says Doane: “We all know and we all should be uncomfortable with the fact that there is a revolution occurring and if we are uncomfortable, and if we put the effort and work into searching then we’ll come up with the right solutions. But you just can’t sit these days and let it pass you by. We expect to stay on the front end of the technology curve for our industries. We’re not going to become a dot-com, but we’re going to use technology in our industries to make us much, much better.”

Doan is predicting better years ahead for A&B’s home state of Hawaii. “While it’s not going to be rebuilt overnight, I really do believe that in some sort of mysterious way we’re finally going through the process of rebuilding our self confidence in this state, its uniqueness and its enduring value. I think that’s a prediction I’m willing to make: That we’re all going to be more optimistic about Hawaii’s future a year from now,” he says.


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