One company that has been in the news a lot recently is Boston Omaha Corp. (BOMN, Financial), a small-cap with a big name behind it. The company's CEO, Alex B. Rozek, is Warren Buffett (Trades, Portfolio)'s grandnephew.
Naturally, this has attracted attention. It seems investors believe he has inherited Buffett’s investment skill, but even if he has not, the fact he can pick up the phone and call his great-uncle for advice is more than enough to demand a Buffett premium.
But does such a premium really exist?
The next Buffett?
Rozek has told the Wall Street Journal his firm has nothing to do with the "Oracle of Omaha."
“It’s not like there’s this private class that goes on for family members about business,” he said. “If I wanted to learn, the best thing I could do is pick up an annual report and read the Berkshire annual report like anybody else.”
”‹”‹
Still, he does have money behind him. Co-CEOs Rozek and Adam Peterson have invested over $100 million of cash equity or two-thirds of the total paid-in capital of the business via funds they own and control, so there is plenty of skin in the game with these managers.
The company is involved in two lines of business. Through its Link Media subsidiary, Boston Omaha is rolling up subscale billboard operators in smaller markets where competition - to buy and to operate - is generally less intense. Then, through its GIG subsidiary, the company is looking to become a significant player in the commercial surety business. For the quarter ended in September, the group turned over $2.4 million. For the nine months ended Sept. 30, revenue was $6.3 million. With a market cap of $390 million at time of writing, around 2.6 times book, there is a lot of hope already baked into the valuation.
As well as the high valuation, there is another sticking point that immediately stands out about the business. As reported in the 2016 10K:
“Each of Alex B. Rozek and Adam K. Peterson are eligible to participate in the management incentive bonus plan pursuant to their respective employment agreements. The management incentive bonus plan provides for a bonus pool, determined on an annual basis by the Compensation Committee of the Board of Directors, 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 purchases or redemptions of our securities) exceeds 106% of our stockholders' equity for the preceding fiscal year.”
Put simply, the CEOs have the option to a 20% bonus if equity growth exceeds 6% per year. Currently, they are making minimum wage (less than $30,000 per annum), but this is set to possibly increase to $275,000 within the next several months.
The bottom line
This is only a short analysis of Boston Omaha without an in-depth look at what the company actually does. Before I go further, however, I want to compare the business to Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial). It seems almost all of Boston Omaha’s valuation is because it has an association with the Buffett name.
So how does the company compare to Buffett’s business?
First, Berkshire has a much longer history of impressive returns. Second, Berkshire is much cheaper -- it trades at a price-book value of 1.6. Third, Buffett, even though he is one of the wealthiest men in the world, is paid less than a third of what Boston’s CEOs will soon be paid, including a bonus of 20%.
”‹
Put simply, you can either buy an untested small-cap with no record of success, trading at a high valuation and a bloated compensation structure. Or you could buy one of the most successful businesses in the world, managed by the world’s best investor, for 40% less.
Mohnish Pabrai (Trades, Portfolio) has said the best investment theses are simple and this choice is just that. It might be best to avoid Boston Omaha despite its Buffett association.
Disclosure: The author owns no stocks mentioned.
