Description

I believe that Boston Omaha (BOMN) is a short.

The stock was previously written up on 6/8/2017 by “Bluegrass” as a long at $14/sh (the expected public offering price at the time; the deal wound up pricing at $13).  Bluegrass’ write-up provides a good overview on the brief history of the company as well as the principals involved.  It has proven to be a good call so far, as the stock is up 50% since the IPO this summer.

BOMN is a shell company controlled by two hedge fund managers (one of whom is Warren Buffett’s grand-nephew).  The managers are good marketers of their stock, and write good letters (there are two that are available on their website: 2015 and 2016; they are worth a read).

BOMN is fairly simple to analyze.  It is a shell company that contains cash and a few small operating businesses (primarily in insurance and billboards).

Book value is $10.23/sh and TBV is $8.27.

Given that the operating businesses were purchased over the last couple of years, I am willing to give the company the benefit of the doubt that it paid reasonable prices, and thus think the goodwill and other intangibles have economic value.  Therefore I think book value is a more reasonable proxy for fair value than TBV.

Still, the company has $102mm, or $7/sh, of cash on the balance sheet.

In many ways, this is akin to a “search fund” or a SPAC.

At the current trading price, investors are paying $19.50 for $10.23 of book value (1.9x book), of which $7/sh is just cash.  Ex the cash, investors are paying $12.54/sh for $3.23/sh of book value (~3.8x book value).

(Can you think of any SPACs, regardless of the pedigree of their sponsors, that are trading at ~$19.50/sh against ~$10 of cash/value in trust?  While there are no founder’s warrants in this case; there is a manager-friendly hedge fund-style compensation scheme, more on which below.)

Outside of the cash, what does BOMN own?

-          Billboards purchased in 2015-2017 for $29mm

-          Insurance companies purchased for $14.2mm (with an additional $2.75mm of contributed capital)

-          Real estate management businesses purchased for $1mm

Based on the purchase prices, these businesses together are worth $47mm, or $3.27/sh (this foots with the book value ex cash).  While there are likely some synergies which could arguably make these businesses worth more than the purchase prices paid, there are also numerous dis-synergies in the form of corporate overhead/G&A.  At this point, I think it’s generous to value this at Book Value without capitalizing any of the corporate expense.

Pro forma for acquisitions, 2016 Revenue was $6.3mm, and Net Income was ($2.86mm).  G&A was running at roughly $1.2mm/yr.

In 2Q 2017, Revenue was $2mm and Net Income was ($1.37mm).  G&A was $400k (annualized: $1.6mm).

Right now, the company is sub-scale and money-losing.

In general, the market values publicly-traded, controlled holding companies at discounts to NAV.  Think about the Liberty complex, IEP, Pershing NV, Steel Partners LP, HRG, BH, and many NOL shell companies.  Vehicles such as this tend to trade at discounts.  BOMN is trading at a 90% premium.

The co-CEOs will each receive base salaries of $275k/yr (starting in 2018), and a bonus pool, “equal to up to 20% of the amount by which our stockholders’ equity for the applicable fiscal year (excluding increases or decreases in stockholders’ equity resulting from any issuances, purchases or redemptions of our securities) exceeds 106% of our stockholders’ equity for the preceding fiscal year.”  Note, there is no high water mark.

BOMN would have to increase Book Value by around 100% (gross of the bonus pool payments) in order for the Book Value to match the current stock price.

Would you invest in a hedge fund that charged ~50bps + “20 over 6” at a 90% premium to NAV?  (Would you even do it at NAV if they told you their strategy is to go buy billboards and small insurance companies at this point in the cycle – ie, with no obvious distress?)

I think Fair Value today is roughly Book Value, and I could see the stock trading at 70 – 110% of Book Value as a reasonable range (again, most controlled holding companies trade at discounts).  Therefore my price target range is $7-11/sh, for downside of 44-64%.  

Risks

-          The biggest risk to the short in my mind is that the company has access to better/proprietary deal flow at discounted prices.  Perhaps families looking to sell their businesses could see BOMN has the type of buyer they want to be associated with (long-term oriented, not one to slash employees, etc) and therefore sell their businesses at a discount.

-          Low liquidity (though a borrow is readily available and cheap).

-          The promoters have proven to be successful marketers of their stock/story thus far, which could continue or increase.

-          Interests are indeed well aligned between the principals and investors (insofar as they have large personal investments in the company; less so insofar as they get a 20% carry over 6% book value growth with no high water mark).

Legal Disclaimer

We had short exposure to BOMN at the time of submission.  We have no obligation to update the information contained herein and may buy, cover, or sell shares at any time for any reason. We make no representation or warranties as to the accuracy, completeness or timeliness of the information contained in this presentation. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained in this presentation.  This does not constitute an advertisement or an offer to sell or a solicitation of an offer to buy any securities.

Catalyst

- Market valuing this like typical controlled holding companies.
- Slow or no growth in book value which may make investors question the premium they are paying for the company.