The author of this article is SHORT Boston Omaha Corp. (NASDAQ: BOMN)
Boston Omaha Corp. (NASDAQ: BOMN) has been trading at new highs and is considered by some to be a ”Buffett” stock…..but at this valuation we doubt Warren Buffet would be a buyer.
BOMN is an investment vehicle that is managed by co-managed by Adam K Peterson (35) and Alex Buffett Rozek (38), who is a grandnephew of Warren Buffett. Importantly, Warren has no involvement with the BOMN. Since IPOing in June 2017 at $13 (midpoint of the range) the stock is up 150% (despite not having done very much in the way of investing). The stock was recently written up in the Wall Street Journal which has given the stock an added boost. (https://www.wsj.com/articles/a-buffett-run-firm-is-on-a-roll-but-warren-has-nothing-to-do-with-it-1513938601)
BOMN consists primarily of cash and some investments in private companies in the billboard, insurance and real estate industries. The stock trades at approximately 3.1x book value of $10.42 per share, a valuation we believe is wildly excessive especially considering approximately $7.42 of its book value is cash. We wonder why investors would pay such a high premium for BOMN’s cash when other cash rich companies, Spacs and even Berkshire Hathaway trade at much lower multiples.
Besides insiders, the company appears to have little institutional ownership so we believe the investor base consists of a lot of retail investors who are enamored by Buffett and/or stocks trading at new highs but who likely have little understanding of the stock’s actual valuation.
Our short thesis is purely a valuation call and we have not found anything that would lead us to believe BOMN’s Managers are untrustworthy, etc.
BOMN has a market cap of $465 million. Last quarter’s revenue were $2.4 million and the company lost $1.6 million. We believe the company will likely need to grow significantly before it will stop losing money.
Last quarter’s revenue was derived from:
Billboard Rentals $1.5 million
Premiums Earned $0.6
Insurance Commissions $0.3
Total $2.4 million
Since the company has done some acquisitions, it may also be helpful to look at the pro forma results assuming all acquisitions had occurred on January 1, 2016.
|Three Months Ended||Nine Months Ended|
|September 30,||September 30,|
|Basic and Diluted Loss per Share||$||(0.10||)||$||(0.10||)||$||(0.42||)||$||(0.34||)|
|Basic and Diluted Weighted Average Class A and Class B Common Shares Outstanding||14,293,871||6,896,923||9,622,370||5,744,898|
As of June 2017, BOMN had invested approximately $54 million. Importantly, most of these investments have occurred rather recently, so we doubt they could have increased in value significantly enough to justify the current stock price value.
The Invested Capital has been in:
2015 $10 mm
Total $34 mm
2015 $0 mm
Total $18 mm
The company has also made a small real estate investment and some small investments since June, but that doesn’t materially change our valuation.
Stock Price $32.40
Shares outstanding 14.4
Equity market cap $465
Enterprise Value $359
Book Value $150 (include intangibles, goodwill, etc)
Book Value/ Share $10.42
Price/Book Value 3.1x
Cash/ Share $7.42
There are a few ways to value the company. We think the most logical way is to ascribe a value to the Invested Capital and subtract that figure from the current stock price which will show the valuation the current stock price is ascribing to BOMN’s cash.
BOMN has 2 groups of assets: (1) investments it has made to date (Invested Capital, as discussed above) and (2) Cash. To date, BOMN has Invested Capital of approximately $54 million or $3.76 per share. Most of these investments were made recently, so for simplicity lets assume they are worth 1x. That would imply the market is valuing the company’s cash at a staggering 3.9x book value.
Current Stock Price $32.40
Value of Invested. Capital/share ($3.76)
Stock Price – Invested Capital $28.64
Cash per share $7.42
Price/Book value of cash 3.9x
But we believe the guys running BOMN are bright, so what if the value of the Invested Capital is now worth 2x? That would imply the market is valuing the remaining cash per share at 3.4x book, which seems excessive to us. Think the Invested Capital is now worth 4x (even though it was only recently invested)? Well even under (what we consider to be a ridiculous scenario), it would imply the market is valuing the remaining cash per share at 2.3x book.
Another way to value the stock would be to assume the Cash is worth book value (a fair assumption) and see what the current stock price implies about the value of the Invested Capital:
Current Stock Price $32.40
Value of Cash/Share ($7.42)
Stock Price – Cash $24.98
Invested Capital/Share $3.76
Implied Value of Invested Capital 6.6x
So if you exclude Cash from the current stock price, the market is valuing the (recently) Invested Capital at 6.6x.
Considering BOMN is losing money and has only recently deployed much of its Invested Capital we think an appropriate (and perhaps generous) valuation would be to value the cash and Invested Capital at 1.5x, which would imply a stock price of $15.60 or 50% lower than the current stock price. We note that most Spacs and other cash rich companies trade at approximately cash. Furthermore (according to Bloomberg) BRK/A only trades at 1.6x book and that firm obviously has a long, established successful track record with meaningful competitive advantages.