FRMO - FRMO Corp.

[oddballstocks]

When I looked at the Balance Sheet of this company I thought it would be easy to value.  However, I am really confused by it. 

 

The two biggest assets are cash (~20m) and investments (~40m).

 

Investments are the following:

 

Bond and equities - 27.6m  - I am assuming these are similar securities to what is held in their funds?

Horizon Multi Strategy LP - 5.2m - An investment in a hedge fund they run. 

Polestar Fund - 7.3m - What is this?

 

And then, they have a small investment in Horizon Kinetics LLC, which gives them a share of the fees generated by Horizon Kinetics?

 

 

I guess my biggest problem is identifying where the fees are coming from.  I want to make sure I apply an appropriate multiple to them and that I am not double counting them (i.e. counting the FV of Horizon Kinetics in the valuation when the fees received are the inputs to come up with the FV).  The investments and cash are straightforward and give you a floor value.  I am having trouble seeing what value should be placed on the fees, but know it should be more than 10x.  So it a minimum this is worth 80m to me.

 

Right, so break this down.  There is cash then the investment portfolio.  If you were on any of the calls or read the transcripts these are a lot of owner operators, a lot of companies discussed on the board here.

 

Then you have the two funds.  They own pieces of these funds just as a shareholder would.

 

Then there's the fee revenue as you mention.  I believe they exchanged most of the fund fee revenue for the Horizon Kinetics stakes.  So the ownership stake in HK is in place of most of the fee revenue.  I think they still have a revenue agreement for the wealth index.  Most of the fee agreements are winding down, that's why they swapped for the ownership stake.

 

The annual report has a good breakdown of what generates fees, just make sure to read the transcripts to see what's changed in the meantime.

 

 

[Sportgamma]

Anybody know what the heck is going on?

 

Did anybody listen to the conference call?

[Sportgamma]

This type of management style should help shareholders over time, Doyle argues, citing historical research that he believes still holds true today. Between 1968 and 2000, all ten companies with the highest cumulative returns per dollar invested between their initial public offerings and the year 2000 were run by owner-operators, according to Jeremy J. Siegel, now a professor at the University of Pennsylvania's Wharton School of Business.

Doyle is focused chiefly on U.S. companies because he finds them more attractive than owner-operated companies abroad. Fund holding Beijing Capital International Airport Co., for instance, has seen its shares fall 1.4 percent since the beginning of the year, in part because the government-run company isn't taking the same steps an owner-operator would to boost revenues, Doyle said.

 

http://finance.yahoo.com/news/beat-bull-market-focus-company-163026982.html;_ylt=Ag5oUDXo0xmVPSP3wTXE7.GiuYdG;_ylu=X3oDMTIxdmYzYjNrBG1pdANXaWRlIFF1b3RlcyBNb2R1bGUEcG9zAzMzBHNlYwNNZWRpYVJlY2VudFF1b3Rlc1BvcnRmb2xpb3NXaWRl;_ylg=X3oDMTFkcW51ZGliBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3BtaA--;_ylv=3

[Sportgamma]

Steve Bregman covering earnings on the 3Q earnings call:

 

In order to cover our earnings in the ordinary way, I’ll say most of it is in the earnings announcement. The highlights are that revenue from our consultancy and advisory fees was up, we have some earnings from investment partnerships that was up, we have earnings from our pure balance sheet interest and dividends, and that was up. So, the earnings per se were up, and that translates into some per share numbers.

 

...briliant

[giofranchi]

Please, find in attachment an interview with Mr. Murray Stahl on the Value Investor Insight May 2013: DreamWorks, Ascent Capital, Oaktree Capital, Dundee Corp., and Onex.

 

giofranchi

Value_Investor_May_2013.pdf

[giofranchi]

Please, find in attachment The Contrarian Research Report Compendium April 2013: Booz Allen Hamilton Holding Corp., Boardwalk Pipeline Partners LP, Biglari Holdings Inc., Spirit Aerosystems Holdings.

 

giofranchi

Contrarian_Compendium_April_2013.pdf

[augustabound]

Please, find in attachment an interview with Mr. Murray Stahl on the Value Investor Insight May 2013: DreamWorks, Ascent Capital, Oaktree Capital, Dundee Corp., and Onex.

 

giofranchi

 

Sweet, thanks Gio.

[Guest hellsten]

Please, find in attachment an interview with Mr. Murray Stahl on the Value Investor Insight May 2013: DreamWorks, Ascent Capital, Oaktree Capital, Dundee Corp., and Onex.

 

giofranchi

 

Thanks. Murray is one of the few who still believes Eddie Lampert can pull a rabbit out of his hat:

 

Are you actively looking for the next John Malone?

 

MS: We’re always looking, but I can’t say, “Here are five people you may not have heard of who fit the mold.” The youngest that comes to mind is probably Eddie Lampert of Sears [sHLD], who’s very controversial at the moment, but we’re not prepared to say the story there is over. Given that he assumed the role of CEO earlier this year and that he’s personally acquired nearly $200 million in Sears shares since the end of 2011, he apparently doesn’t believe so either.

[giofranchi]

Q2 2013 Commentary

 

giofranchi

Q2_2013_Commentary.pdf

[giofranchi]

Q2 2013 Commentary

 

Page 3 is very interesting!

Many people say: Shiller P/E for the S&P500 is no longer relevant, because higher margins are here to stay. Therefore, the S&P500 will return more to shareholders and deserves higher valuations…

In fact, on page 3 Mr. Stahl & Company argue and explain why the S&P500 will return less in the future…

It’s not your grandfather’s S&P500.

 

giofranchi

 

[bargainman]

this looks like a very interesting company. Anyone done the valuation on them? Looking at the quarterly report looks like they have about 60 million in shareholder equity.

http://www.frmocorp.com/_content/10q/FRMO_Corp_Q3_2013.pdf

 

Yahoo puts their market capitalization at 166 meaning

http://finance.yahoo.com/q?s=frmo&ql=1

 

meaning that price to book is about 2.7, which generally speaking is quite expensive, but not if they can maintain their current impressive bv growth.

 

Gio, have you bought this yet?

[giofranchi]

this looks like a very interesting company. Anyone done the valuation on them? Looking at the quarterly report looks like they have about 60 million in shareholder equity.

http://www.frmocorp.com/_content/10q/FRMO_Corp_Q3_2013.pdf

 

Yahoo puts their market capitalization at 166 meaning

http://finance.yahoo.com/q?s=frmo&ql=1

 

meaning that price to book is about 2.7, which generally speaking is quite expensive, but not if they can maintain their current impressive bv growth.

 

Gio, have you bought this yet?

 

No, not yet. Very difficult to value… Intellectual capital is highly scalable, but the fact they will go on growing BV at the same rate of the past few years is something I simply don’t know how to judge.

For now I am watching from the sidelines.

 

giofranchi

 

[Sportgamma]

this looks like a very interesting company. Anyone done the valuation on them? Looking at the quarterly report looks like they have about 60 million in shareholder equity.

http://www.frmocorp.com/_content/10q/FRMO_Corp_Q3_2013.pdf

 

Yahoo puts their market capitalization at 166 meaning

http://finance.yahoo.com/q?s=frmo&ql=1

 

meaning that price to book is about 2.7, which generally speaking is quite expensive, but not if they can maintain their current impressive bv growth.

 

Gio, have you bought this yet?

 

Out of pure self interest I hope that this company will not be discussed much on the board.

 

But to give you a hint: Compare the income statement with the balance sheet and try to pair various sources of income with the assets on the balance sheet. Then you will know why they are trading at a high p/b ratio.

[giofranchi]

Out of pure self interest I hope that this company will not be discussed much on the board.

 

But to give you a hint: Compare the income statement with the balance sheet and try to pair various sources of income with the assets on the balance sheet. Then you will know why they are trading at a high p/b ratio.

 

Come on Sportgamma! Won’t you be a little bit more generous? :)

Do you think BV is somehow artificially low? If so, how much do you think their capital really is today?

I must admit that, not being quoted on any exchange, I have some “technical” problems to invest in FRMO through my firm… So, I have never examined very deeply their numbers…

 

giofranchi

 

[ItsAValueTrap]

They have an asset management business that's able to generate high returns on capital.  That part of their business arguably deserves a premium to book value / should be valued on P/E or discounted cash flow.

[Sportgamma]

Out of pure self interest I hope that this company will not be discussed much on the board.

 

But to give you a hint: Compare the income statement with the balance sheet and try to pair various sources of income with the assets on the balance sheet. Then you will know why they are trading at a high p/b ratio.

 

Come on Sportgamma! Won’t you be a little bit more generous? :)

Do you think BV is somehow artificially low? If so, how much do you think their capital really is today?

I must admit that, not being quoted on any exchange, I have some “technical” problems to invest in FRMO through my firm… So, I have never examined very deeply their numbers…

 

giofranchi

 

Its pretty straight forward.

 

On February 28, 2013 FRMO had roughly $68m of assets on the balance sheet comprised mainly of cash and cash equivalents ($21m) and investments ($45m). $16.8m of the investments are in associated companies (HK and funds), meaning that roughly $29m are investments in equities and bonds. They had about $7.7m of liabilities, mainly deferred tax ($4.5m) and short sales ($2.3m).

 

Compare that to the revenues and you see that revenues are broken down into (1) consultancy and advisory fees, (2) dividends and interest, (3) realised gains and (4) income from investment partnerships. Number (2), (3) and (4) are linked with assets on the balance sheet, (1) is not.

 

Now, you can find the transcript to the 3Q conference call on the FRMO website and there you can find much more info.

 

From the CC:

Questioner 5

Hi, good afternoon. Thanks for taking my question. You’re going to be getting 4.2% of consolidated Horizon revenues. As a private company, I’m curious how big are Horizon’s revenues, and also what percentage that is of your total revenues?

 

Steven Bregman – President & Chief Financial Officer of FRMO Corp.

In terms of operating revenues, meaning other than income from investment partnerships we might be participating in, or dividends and interest income, that 4.2% of revenue interest will be, I believe, all of our revenues. The calculation was adjusted so that whatever our trailing revenues were for the four quarters—I think we used trailing revenues for all those programs—through February, we’ll get the same—on a snapshot basis going forward; we’ll start with the same dollar amount of revenue.

 

Theoretically speaking, FRMO could sell all the assets on their balance sheet, but they would still generate revenues from the revenue contracts.

 

One more quote and then I´m off...

 

Now, back to the revenue share. This is an important point, and it’s more a philosophical point than it is an income statement or balance sheet point. When you look at the revenue share number, it’s important to note we haven’t done a good job explaining what exactly it is. In most corporations, the payment to the shareholder, such as it is, whether it’s merely a share of the net profit that belongs to them or one in which that net profit is paid out in the form of a dividend, is taken after all the expenses for employees, management, et cetera.

What does that do in the corporate governance sense? That puts the shareholders in the position that the shareholders are paid after management is paid, and we happen to be the management. Speaking theoretically, we control the company; we can pay ourselves, justifiably, a lot of money. But we don’t want to do that. The purpose of the revenue stream is that the shareholders get paid, in some degree, not always from the bottom line, which is after we get paid, but from the top line, which is before we get paid. From an arithmetic standpoint, it’s as if we created a line item from which we, as employees and management, really can’t participate.

You would see it much more clearly if we simply took the revenue share and paid it out in the form of dividends; then it would be visible to you. At the moment, it isn’t visible, but it is delineated separately on the income statement. You can track it and see that it goes to shareholders’ equity.

 

 

[oddballstocks]

Sportgamma,

 

You are too generous, I would have just pointed them to the transcripts, Stahl does a pretty good job at layout out how they should be valued.

 

The company is deceptively simple, at first glance a pile of assets and some revenue streams.  Once one looks a little past the headline the complexity arises.  They don't just own a piece of HK, they are revenue sharing.  They untangled this a bit from what they had in the past, but the end result is the same.

 

In the past they had FRMO receive management fees from certain funds and products.  This is simpler to understand, but people puzzled over what FRMO gave HK to get this juicy deal.  The ownership is more straight forward, FRMO owns a portion of HK, it's clear now, whereas in the past it wasn't as out in the open.  FRMO is Stahl and Bregman, who are majority owners of HK, so it's anyone's guess at how much of HK FRMO will eventually own.  My guess based on the calls is that FRMO is going to end up exposing as much of HK as possible.  It's an unusual arrangement for sure.

 

Back to the management fees.  When an asset manager runs a fund they get the management fee plus an incentive fee.  These are paid right off of assets to the manager who does what they wish with them, usually pay for the office and other expenses.  FRMO is the recipient of these fees, they have almost no expenses, no salaries (hint look at the CF statement) except for taxes.  So FRMO is receiving almost the pure revenue minus taxes, and that falls straight to the bottom line.

 

FRMO is a pile of assets and a pure play on HK's asset business, almost literally a pure play.

 

Now the next question is "why does this exist?" that seems to be everyone's hangup with FRMO.  The reason is simple, as a private company if HK earns $1 the owners have $1, if as a public company they earn $1 they have some market multiple of that dollar.  Stahl and Bregman are the biggest owners of FRMO, and during one call they indicated that they don't plan on selling any stock, and that FRMO is how they intend to pass down their ownership of HK to their kids.

 

 

[giofranchi]

Sportgamma,

 

You are too generous, I would have just pointed them to the transcripts, Stahl does a pretty good job at layout out how they should be valued.

 

oddballstocks,

I really didn’t mean to bother you or Sportgamma… sorry if I did!

 

If there is a company my firm really resembles (except that my firm is a thousand times less successful… :( ), that company is FRMO. In fact, the revenues of both rely on the one hand on “consultancy services”, and on the other hand on investment returns. Also the idea of paying shareholders from the top line, instead of paying them from the bottom line, is exactly what I do with my firm! :)

What is happening with my firm is that, as investments grow, the part of revenues tied to “consultancy services” will become less and less relevant. So, that is my worry about FROM as well… though I understand that FRMO is in a far better position, being the revenues generated by “consultancy services” a percentage of AUM. Therefore, as investments grow, automatically the revenue generated by “consultancy services” should grow too.

 

Anyway, I was only asking… don’t see any harm in that!

 

giofranchi

 

[Sportgamma]

Sportgamma,

 

You are too generous, I would have just pointed them to the transcripts, Stahl does a pretty good job at layout out how they should be valued.

 

oddballstocks,

I really didn’t mean to bother you or Sportgamma… sorry if I did!

 

If there is a company my firm really resembles (except that my firm is a thousand times less successful… :( ), that company is FRMO. In fact, the revenues of both rely on the one hand on “consultancy services”, and on the other hand on investment returns. Also the idea of paying shareholders from the top line, instead of paying them from the bottom line, is exactly what I do with my firm! :)

What is happening with my firm is that, as investments grow, the part of revenues tied to “consultancy services” will become less and less relevant. So, that is my worry about FROM as well… though I understand that FROM is in a far better position, being the revenues generated by “consultancy services” a percentage of AUM. Therefore, as investments grow, automatically the revenue generated by “consultancy services” should grow too.

 

Anyway, I was only asking… don’t see any harm in that!

 

giofranchi

 

Hi Gio,

 

I think Nate is just messing with you. What he´s pointing out is that latelly Stahl and Bregman have made a considerable effort to explain the company to its shareholders and they have made most of that info available at arms lenght.

 

Stahl often focuses on "[iurl=https://fundamentalfinanceplaybook.com/mental-models/predictive-attributes-of-outperformance/]predictive characteristics of outperformance[/iurl]" in his research notes, such as (1) owner-opperated, (2) dormant assets, (3) long product cycles, (4) scalability, (5) tax efficiency on a company level. All five seem to apply to FRMO.

 

One more hint Gio: FRMO gets a fixed % of HK´s revenues but HK revenues are not a fixed % of HK´s AUM. The revenues come from various sources, with some sources generating higher fees as % of AUM. 

[giofranchi]

One more hint Gio: FRMO gets a fixed % of HK´s revenues but HK revenues are not a fixed % of HK´s AUM. The revenues come from various sources, with some sources generating higher fees as % of AUM.

 

Thank you, Sportgamma!

Very interesting! :)

 

giofranchi

[APG12]

Hey all, I've been lurking for a while but never post. So hello.  :)

 

Anyways, I think I've got the whole picture here but I don't really see any value. 43.26mm shares outstanding at $4.30/share is a market cap of $186mm. Subtracting out net investments of $60.7mm leaves $125.3 mm-- the implied market value of the company's revenue streams.

 

Q3 revenue, after subtracting out dividends and realized gains, was $1.4mm. Expenses were $.266. Assuming the expenses drop an arbitrary 10% as a result of the Horizon transactions, annualized op income is $4.9mm. At a 40% tax rate (they seem to be paying 53%!) let's just say net income is $3mm. It's trading at a 41.7X multiple to the revenue stream!

 

I mean, I think the gist here is that the company has some crazy operating leverage. My problem is that it's impossible to quantify. If this thing were trading at $2.50 you could conclude that a 10X multiple is simply too cheap for the quality of the revenue streams.

 

However, at the current price you HAVE to quantify the growth to figure out if you're paying too much. How are other people getting comfortable with this price? Maybe I missed something.

 

Edit: I also forgot about the 4.9% interest in Horizon but that shouldn't change anything and it is also difficult to quantify

[racemize]

Hey all, I've been lurking for a while but never post. So hello.  :)

 

Anyways, I think I've got the whole picture here but I don't really see any value. 43.26mm shares outstanding at $4.30/share is a market cap of $186mm. Subtracting out net investments of $60.7mm leaves $125.3 mm-- the implied market value of the company's revenue streams.

 

Q3 revenue, after subtracting out dividends and realized gains, was $1.4mm. Expenses were $.266. Assuming the expenses drop an arbitrary 10% as a result of the Horizon transactions, annualized op income is $4.9mm. At a 40% tax rate (they seem to be paying 53%!) let's just say net income is $3mm. It's trading at a 41.7X multiple to the revenue stream!

 

I mean, I think the gist here is that the company has some crazy operating leverage. My problem is that it's impossible to quantify. If this thing were trading at $2.50 you could conclude that a 10X multiple is simply too cheap for the quality of the revenue streams.

 

However, at the current price you HAVE to quantify the growth to figure out if you're paying too much. How are other people getting comfortable with this price? Maybe I missed something.

 

Edit: I also forgot about the 4.9% interest in Horizon but that shouldn't change anything and it is also difficult to quantify

 

I came to a similar conclusion, though I think some of the expenses you listed are phantom--in the transcripts, they indicated that they had to take compensation as an income expense even though it doesn't actually get paid out, i.e., that money still goes to the balance sheet and is listed in the cash flow statements.

[jay21]

Hey all, I've been lurking for a while but never post. So hello.  :)

 

Anyways, I think I've got the whole picture here but I don't really see any value. 43.26mm shares outstanding at $4.30/share is a market cap of $186mm. Subtracting out net investments of $60.7mm leaves $125.3 mm-- the implied market value of the company's revenue streams.

 

Q3 revenue, after subtracting out dividends and realized gains, was $1.4mm. Expenses were $.266. Assuming the expenses drop an arbitrary 10% as a result of the Horizon transactions, annualized op income is $4.9mm. At a 40% tax rate (they seem to be paying 53%!) let's just say net income is $3mm. It's trading at a 41.7X multiple to the revenue stream!

 

I mean, I think the gist here is that the company has some crazy operating leverage. My problem is that it's impossible to quantify. If this thing were trading at $2.50 you could conclude that a 10X multiple is simply too cheap for the quality of the revenue streams.

 

However, at the current price you HAVE to quantify the growth to figure out if you're paying too much. How are other people getting comfortable with this price? Maybe I missed something.

 

Edit: I also forgot about the 4.9% interest in Horizon but that shouldn't change anything and it is also difficult to quantify

 

Are you looking at quarterly numbers for revenue?

[matts]

In terms of the revenue, they mentioned on the last call that their largest hedge fund was just crossing the high water mark and would begin to earn performance fees. This should give a material boost to the value of the Horizon stake. I work in the hedge fund space I can tell you these guys are class acts. What most managers did when they dropped 50% in 2008 and knew it would be years until they would get above the high water mark, was to "shut down" their fund and just start a new one 6 months later. It was shady as hell. These guys lost like 60% but honored their agreement with investors and dug themselves out of a hole. I like to invest along side people with integrity. I think the market will be surprised by the next quarterly report.

 

 

[jay21]

In terms of the revenue, they mentioned on the last call that their largest hedge fund was just crossing the high water mark and would begin to earn performance fees. This should give a material boost to the value of the Horizon stake. I work in the hedge fund space I can tell you these guys are class acts. What most managers did when they dropped 50% in 2008 and knew it would be years until they would get above the high water mark, was to "shut down" their fund and just start a new one 6 months later. It was shady as hell. These guys lost like 60% but honored their agreement with investors and dug themselves out of a whole. I like to invest along side people with integrity. I think the market will be surprised by the next quarterly report.

 

That's interesting.

 

I was listening to a Guy Spier interview and he was discussing something similar.  He said that he thought people who charged no fees or gave substantially more value than they received were building a lot of optionality and a lot of literal goodwill.  The clients will be happy and trusting and you will probably make your capital a lot stickier and be able to raise more funds in the future.