NRCIB: the business has grown but the share price has stayed the same

(*Disclosure:  Long NRCIB.)

Idea type:  GARP and/or share class arbitrage

Three years ago, I wrote about National Research Corporation, an obscure and illiquid company with a market cap of half a billion.  Since then, the company has continued to grow (around 11-14%/year) while the share price has stayed the same.  According to the 2015 10-K, EPS for class B shares was $2.52 so the GAAP P/E is around 14.  However, due to this company’s unusual structure, GAAP earnings overstate the true P/E.

The arbitrage trade might also be interesting since the spread between the B and A shares should be somewhere around 1:1 to 6:1 or higher (arguably close to 6:1), but is currently 2.16:1.

Here’s a recap of the capital structure:

  1. If the company distributes ALL cash flows via dividends, then each B share will receive 6X the cash that each A share will.
  2. If the company is immediately liquidated or sold, then each B share will receive 1X the cash that each A share will.
  3. The B shares have more voting power.  So, the class B shareholders have a vested interest in ensuring that most of the company’s cash flows will be distributed via dividends.
  4. The CEO may be an extremely ethical individual- his excellent shareholder letters talk about how he doesn’t want to rip off his shareholders via share repurchases.  He may not necessarily abuse his voting power to ensure that the B shares are worth closer to 6X rather than 1X.

So, the economic value of the B shares is somewhere between 1:1 to 6:1 that of the A shares.  In my opinion, it should be closer to 6:1 since the B shareholders will likely avoid a liquidation or sale of the company as mentioned earlier.  GAAP earnings are calculated with a 6:1 ratio, though you should ignore that.

The B shares arguably deserve a premium for the higher voting power.  However, in practice there are situations where super-voting shares trade occasionally at a discount (e.g. the Malone empire, Lennar, etc. etc.).

Lending your shares out

If you lend out your NRCIB shares, your broker may pay you several percent.  This situation is a little strange to me.  It seems like somebody thinks that the shares should trade closer to a 1:1 ratio… which strikes me as misguided.

In any case, if you are able to lend out your shares, then you would enjoy a tailwind on a long position in NRCIB shares.


In my original writeup, I said that an increase in the share prices of both classes would cause your arbitrage trade to lose money.  That is not necessarily true.  Suppose you go long $1M of NRCIB shares and short $1M of NRCIA shares.  If the share prices of both share classes double, then your profit and loss would be flat.

Instead of shorting 6 A shares for every B share long, you can short ~2.7 A shares for every B share long.

Please do your own homework

I don’t understand National Research’s industry… so I’m at a disadvantage.

*Disclosure:  Long NRCIB.  No short position in NRCIA.




Original writeup on National Research

NRCIB: Closed my position for silly reasons

8 thoughts on “NRCIB: the business has grown but the share price has stayed the same

  1. Thanks for your post,

    In your last post on NRCIB you write their market cap is 101 Mil, and now, 3 years later, their market cap is almost half a billion but the stock hasn’t gone up. What happened? did they issue stock?

  2. An almost identical company, Press Ganey, has just agreed to be taken over for about 15x next year’s ‘adjusted EBITDA’… If Mr Hays decided to sell National Research for a similar multiple it would mean about $24 for each A and B share. Mr Hays still owns almost all the A shares he received in the recap (he put a lot in a trust for his grandchildren) and as long as this remains the case, in the face of a decision to sell the company, he will presumably behave as he would have had there been no recap. And he does not have an incentive to screw the A holders in order to benefit the B holders.

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