Castle & Cooke’s Initial Offering Stumbles at Gate

The initial stock offering by L.A.-based Castle & Cooke Homes, priced at $15 to buyers last Thursday, is looking like a dud so far. Or rather, it’s a dud for everybody but Castle & Cooke’s parent, Dole Food, which spun off 18% of its C&C; holdings to facilitate the deal.

C&C; stock, traded on the New York Stock Exchange, has sunk as low as $14.50 since the offering, despite the booming stock market in general. Investors who buy new issues usually expect to see the price jump sharply once trading begins. The last thing they expect is to see the market price the stock for less than they paid.

Worse, C&C; shares have gone nowhere while other builders’ stocks have risen significantly since Thursday. With interest rates way down and the economy improving, home sales in many areas are expected to rise markedly this year.

Neither C&C; nor its underwriters (Merrill Lynch and Goldman, Sachs) can talk about the stock, because of federal “quiet-period” rules governing new issues. That leaves Wall Street to speculate about what happened.

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James Wilson, analyst at Montgomery Securities in San Francisco, says investors have simply demonstrated that they aren’t nearly as enamored of C&C;’s two housing markets--Oahu, Hawaii, and Bakersfield--as is David Murdock, the legendary investor who built (and still runs) C&C; and Dole.

While C&C; is the biggest residential builder in Bakersfield, and one of the biggest on Oahu, it sold just 581 homes last year overall. Wilson notes that what you’re really buying in C&C; is land in those two areas: 5,135 acres in Bakersfield and 5,585 acres on Oahu. The company figures that it will take 10 years to fully develop those properties.

But given the weak housing markets in Hawaii and California, investors are showing that “they have a different perception of land values now than Mr. Murdock may have had,” Wilson says.

Robert Natale, who tracks new stock issues at Standard & Poor’s Corp. in New York, told his clients to avoid C&C.; He notes that C&C; originally expected to get $18 a share in the offering, but Wall Street balked. Even at $15, the stock trades for 15 times the $1 a share the firm earned last year. In the volatile building business, that isn’t a cheap price-to-earnings ratio.

What’s more, C&C;’s earnings this year aren’t expected to be much more than $1.20 a share. C&C; has warned that its profit growth from Oahu operations may be limited in 1993 because it will deliver more lower-priced homes there. That puts the onus on C&C;’s Bakersfield operations, which are just revving up.

Still, it’s worth noting that the 69-year-old Murdock has made his fortune as a classic long-term investor. And, in the long run, there’s no denying that Oahu real estate, in particular, has great appeal. It’s also worth noting, though, that Murdock knows how to take care of No. 1: Prior to the stock offering, C&C; paid parent Dole Food a tidy $67 million dividend.

Coming Soon--Mini-Muni Bonds:

Californians hunting for a better return on their money will get a new pitch from the state today: Buy mini-muni bonds at just $250 each and earn interest free from federal and state tax.

The catch is that these will be zero-coupon bonds, meaning you’ll get your interest earnings all at once, when the bonds mature in eight to 18 years (you pick the maturity). Yields will be set on April 1, but non-binding “orders” for the bonds will be taken between now and March 30.

State Treasurer Kathleen Brown will announce the program today in Los Angeles. The bonds will be patterned after the “college saver” zero-coupon bonds the state has sold before, except that the minimum investment of $250 is the lowest ever. And rather than sell bonds direct, this program gives each buyer a piece of a “pool” of bonds, through what’s called a unit trust.

Brown’s idea is to make state bond ownership available to small investors who can’t plunk down the $5,000 minimum for a standard California general obligation bond. And buyers should bite: Yields should be attractive relative to alternatives.

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The annualized yield on standard California munis maturing in eight years now is about 4.6%. If you earn $30,000 ($60,000 for a couple), your federal/state tax bracket is 34.7%. In that bracket, a 4.6% tax-free muni yield is equivalent to a 7% taxable yield, such as on a CD. Even 30-year Treasury bonds pay less than 7% today.

But because you get no interest until the mini-munis mature, these bonds won’t be suitable for investors who need current income. “You’ve got to be saving for college, retirement or some other specific goal” way down the road, notes Zane Mann, publisher of the California Municipal Bond Advisor newsletter in Palm Springs.

The bonds will be sold via Bank of America’s brokerage arm, Merrill Lynch, Kemper Securities, A. G. Edwards and many other brokers statewide.

Builders Rally--Except One

Home builders’ stocks have mostly risen sharply since last Thursday. Yet the new shares sold by Southland-based Castle & Cooke Homes are stuck at their offering price of $15.

Stock price: Builder Thurs. Tues. Change Continental Homes 13 1/8 16 3/4 +28% Del Webb 15 3/8 17 1/2 +14% Kaufman & Broad 19 20 5/8 +9% PHM 28 3/4 31 +8% Ryland 20 5/8 22 +7% Standard Pacific 8 3/4 9 1/4 +6% Centex 31 1/4 31 7/8 +2% Castle & Cooke 15 15 unch.