Stock Analysis

Baby Berkshire: Insider Buying, Cash Pile And Strong Investments

Summary

  • Co-CEOs to Boston Omaha, Alex Rozek and Adam Peterson just went long with $80 million dollars.
  • Boston Omaha Corporation is a holding company owning subsidiaries engaged in diverse business activities, hailed by many as the next Berkshire Hathaway.
  • The company could be a good investment, and its future looks bright.
  • Alex Rozek happens to be the grandson of Warren Buffett’s sister. While Rozek says his company gets ‘no help’ from Buffett, it is a neat connection.

On March 1st, 2018, both CEOs of Boston Omaha Corporation collectively purchased over $80 Million worth of stock, the companies largest insider purchase to date. The pair is likely trying to capitalize on the companies rapid growth in both earnings and share value following a September 2016 IPO.

The Interesting Story Of BOMN

A lot of investors feel that Boston Omaha could be the next Berkshire Hathaway in its infancy.

BOMN was founded in 2015 and went public in late 2016. The company was founded with the sole purpose of growing intrinsic value per share at an attractive rate, while seeking to maintain a strong financial position.

Rozek and Peterson, the two Co-CEOs met as entrepreneurs and quickly banded together to buy the Houston real-estate company REO Plus Inc. They renamed it Boston Omaha after their home cities, and began investing. BOMN was originally listed OTC, but in as little as a year announced a $85 million public offering and NASDAQ listing. Since 2016 the company has preformed well, peaking at almost 100% return in a year. Since its peak a few months ago, BOMN has setteled to a 50% return in two years.

Even more interesting is that the company is directly connected to Buffett – but not in the way you’d think. Warren Buffett holds no position in Boston Omaha, doesn’t sit on the board, and has never stepped foot in its Boston headquarters. Instead, BOMN’s Co-Ceo, Alex Rozek, is actually connected by blood; Buffett’s great-nephew (Warren’s sister’s grandson).

“It’s not like there’s this private class that goes on for family members about business,” says Rozek regarding his connection to the Oracle. He gets ‘no help’, other then admiration from the most influential investor ever.

While Warren isn’t involved in the company, he admires his nephews work from a distance. “I think the world of Alex, but we don’t have anything to do with his decision-making or anything of the sort,” The Oracle said. “He’s got a good mind, a very good mind, and he certainly has good values.”

Comparing Boston Omaha to Berkshire

Comparisons between Boston Omaha and Berkshire (BRK.A) (BRK.B) don’t stop at the blood; the two companies are very similarly structured.

Berkshire Hathaway rose from an $8 stock in the 1960’s to more than $317,000 per share today following one simple principle: capital allocation.

Berkshire Hathaway was a textile company with roots in the 1800s. In the early ’60s, Buffett began investing in the company, believing it to be undervalued, and eventually outright bought the textile manufacturer. From then he used investments and the companies revenue to expand, becoming a conglomerate and expanding into the insurance industry. Profits and investments kept growing in a snowball-like-effect and Buffet and Berkshire continued acquiring and investing, eventually ended up where they are today – one of the most powerful companies to date, valued at over $400 billion.

They built this massive company in 60 years by following a proven capital allocation technique – putting money where it makes the most sense and in a way that is most beneficial to shareholders (strategic acquisitions and investments).

Boston Omaha follows this time tested method of smart capital allocation designed to consistently grow its intrinsic per-share value, and this has investors excited. If the two CEOs, Adam Peterson and Alex Rozek continue to make strategic investments and acquisitions, many think that Boston Omaha may be up there with Berkshire in the future.

Boston Omaha has the record to back up this claim. Started in 2009, the mini-conglomerate already controls 8 companies in the insurance, advertising, billboards, real estate, securities and investment industries.

Lets take a look.

Baby Berkshire’s Holdings

Boston Omaha has three main holdings; Link Media, General Indemnity Group and Logic Commercial Real Estate in three different industries; Billboards and Advertising (Link), Surety Insurance (GIG) and Real Estate (Logic). Under those companies it controls several others which allow it to be diversified into many other sectors.

This slide from the 2017 Shareholder Meeting shows BOMNs activity when it comes to acquisitions and investments. 2017 was an active year, but notice that all of the activity came from Link and GIG – not from the holding company. This allows for much quicker growth – Boston Omaha will make larger acquisitions and it’s holding will continue to expand independently.

Link and GIG, the two 100% owned companies by BOMN both have great future growth prospects with concrete catalysts.

That is some really aggressive and impressive expansion for only two years.

Link will continue this expansion and work on getting its billboard occupancy rates up. They hover at about 60% currently, compared to about 30% in January 2016. There’s 40% occupancy left to work towards short term expansion opportunities there. They also own less than 5% of their land sites today. In the long run, they can widen margins by purchasing up land. Link has some great opportunities for future growth (and a great record for past growth), and is a valuable asset to Boston Omaha.

GIG the second of the two 100% owned holdings also has seen and can work towards some great growth.

The company provides sultry insurance – basically insurance for insurance companies. Since 2016 they’ve seen some very rapid growth.

GIG held licences in 9 states in 2016. Notice that NY and Delaware are both states that GIG holds licences in – those two states hold the majority of insurgence company incorporations and residencies.

Now look at GIG 1 year later in 2017. Like Link, they aggressively and impressively expanded.

Wow. The company went from holding a licence in nine states to 41 states in only one year. Even better, they’ve filed for applications in the rest of the states and are waiting approval.

This is very similar to Berkshire’s relationship to its holdings. Both Boston Omaha and Berkshire look to buy into companies that have consistent earnings along with strong competitive positions in their respective markets. After acquisitions, they let them run independently and hold them forever.

It’s worth noting that Boston Omaha is tiny in the world of holding corporations (especially when compared to Berkshire), but it does have the techniques down and its existing investments are experiencing great growth.

This is what pushed Berkshire to the pinnacle of success (investment selection and capital allocation), and could be the same vehicle to the top for Boston Omaha.

(All graphics in this section were sourced from the 2017 shareholder presentation.)

A Look At Financials

Lets look at some numbers. Boston Omaha last published a quarterly earnings report in November of 2017, so investors should see new report in the next few days.

For the first nine months of 2017, Boston Omaha had total revenues of $6,249,791. Compare that to 2016, where they made $2,550,060 – they almost tripled revenue in one year! However, another thing you may be noticing is that these numbers are really small, especially when compared to other conglomerates. Berkshire made $242.1 billion last year, so that means that BOMNs revenue for 2017 (first 9 months) would make up 0.002% of revenue, if owned by Berkshire.

This really allows investors to visualize Boston Omaha, and compare it to Berkshire. They’re not in the same universe, let alone the same division when it comes to finance.

So, what made up Boston Omaha’s revenue of about $6 Million for the first 9 months of 2017?

Link with its billboard rentals accounted for about 58% of Boston Omaha’s revenue. Insurance premiums from GIG made up another 25% and commissions from the insurance business made up 14%. The remainder of the revenue came from investments and other income, about 3% or $101,015. This lets investors see that Boston Omaha isn’t all that diverse, and while its subsidiaries own businesses, the fact still is that 97% of its revenue in 2017 (for the first 9 months) came from only two holdings.

Another interesting factor allowing for future acquisitions is that BOMN is currently sitting on about $100,000,000 in cash. This can be used to make multiple new acquisitions, or one big one. But, while this looks good, profitability does not.

In the first 9 months of 2017, BOMN posted a net loss of $3,989,983, compared to 2016’s loss of $2,270,828. That amounts to a $-0.11 EPS. Because Link (advertising) amounts for over half of the companies income, let’s compare this EPS to the average EPS of the advertising industry. That would be an EPS of $6.73, meaning BOMN is seriously lacking when it comes to its peers.

Over the last twelve months, opex increased by 70.20% – pretty quickly. This is good and bad; BOMN is spending money on expanding (they went from 8 employees in 2016 to 36 currently) but it’s also burning through cash. Lets say that the average yearly cash burn for BOMN is $6 million for the next 10 years. That means that in five years, Boston Omaha will already be one third of the way through their $100 million dollar cash pile.

This isn’t cause for all out panic though, just slight concern. Realize that BOMN is currently in the startup phase of its business – and many companies in this range experience net loss. Even more soothing, the company is still sitting on $100 million dollars, a nice emergency cushion for the next 15 years.

In summary: BOMN is rapidly growing in revenue, but in no way shape or form even comes close to Berkshire, financially speaking. Subsidiaries of Boston Omaha have great growth prospects in the long and short term, as does BOMN – The company is also sitting on a cash pile of about $100 million. However, investors are worried because they are currently experiencing a growing net loss, but this shouldn’t be a major issue in the coming years.

Insiders Making Moves

My attention was brought to this company on March 6th, when I was reading an insider trading report. It said that insiders had bought around $80 million worth of shares – impressive considering that Boston Omaha’s market cap is only $350 million.

The two Co-CEOs bought into BOMN on March 1st, collectively dropping about $80 million. Adam Peterson bought 1,650,000 shares (note that shares were incorrectly reported, then amended) through his investment vehicle, Magnolia group. Alexander Rozek bought 1,650,000 shares, with both both CEO’s buying in at $23.00.

This shows great confidence in the company, and is a really good sign. It shows that the Management feels that $23 is a fair share price, and is willing to invest their own cash into the company. It also fuels speculations, but we’ll leave it to you to your predictions… (Cash Pile + Insider Buying = Future Acquisition?).

The Million Dollar Question: Is It Overvalued?

There are two aspects to take into account here: book value, and recent insider trading. The CEOs bought in at $23.00 in a major way, indicating that they felt it was a good price. As of today, BOMN is trading at $23.43 up about 10% from a $21 dip on Monday.

It’s important to look at ownership. About 70% of Boston Omaha is owned by (28) institutional investors. That means that funds (well, at least 28 of them) are bullish in some way, shape or form.

Boston Omaha’s current price is $23.43 and its book value per share for the quarter that ended in Sep. 2017 was $10.42. Therefore, today’s PB ratio of Boston Omaha Corp is 2.25. On paper, the company is overvalued – there’s no way around that.

During the past 2 years, the highest P/B Ratio of Boston Omaha was 3.11, the lowest 0.62, and the median was 1.66. While on paper, yes, the company is overvalued, it’s PB ratio is still under 3% – acceptable for most investors – and not at an all time high.

The reason for this overvaluation is that investors are excited. Just look at some recent headlines:

• “A Buffett-Run Firm Is on a Roll, but Warren Has Nothing to Do With It”

• “Buffets Nephews Company Soars In Value”

• “Boston Omaha: A Baby Berkshire Hathaway?”

There is a lot of hope in this company, and you can tell by just reading headlines.

Taking all of this into consideration (including the recent insider purchase price) a good price target for Boston Omaha is $24.50. The CEOs obviously have faith in the company, and future prospects look good. The target is fair considering the last ER, but with a new one just around the corner, paired with positive press coverage, the market may buy out of sheer apprehension, pushing share value higher than $24.50. Realize that when buying this company, you’re really betting on future growth.

Risks and Considerations

As previously stated, this company is overvalued and hope fueled. The company is definitely experiencing its ups and downs, peaking about a 3 months ago at a share value of $33 (up over 100% from IPO), then loosing 40% of that in three weeks. Shares recently experienced another dip of 20%, but have recovered about 10% of that. Buy in, and while you may see some nice returns, be prepared for a really bumpy ride.

A safe portfolio allocation for this stock would be under 3% of the total holdings due to volatility and valuation concerns.

Bottom Line

A baby Berkshire? In some ways.

Both companies follow the same model of investing in small undervalued companies and allowing them to run fairly independently. Both have the mission of making there shares more valuable. Both are run by Buffetts.

However, Berkshire makes millions upon millions of dollars a day, while Boston Omaha makes under $10 million a year. Berkshire holds many established companies, while Boston Omaha only has two main holdings.

But, Boston Omaha is seeing some rapid growth, and sits on a major mound of cash. They could very well be a huge conglomerate in years to come, and the growth that they’ve seen in the three years they’ve been public is pretty amazing.

If you have money that you can spare for a fairly risky investment, go for it. The company has good future catalysts, smart management who have large sums of their own money invested and good current investments. But, be wary of the volatility, and go in expecting to endure corrections in the future.

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