FRMO - FRMO Corp.

[Kraven]

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.

 

In my experience all of these things are good at the margins, but most money invested in hedge funds is to some extent "hot money".  Sure, most people won't call it that and many investors will claim to be long term investors, but at the end of the day hedge funds have reaped what they sowed.  Fees are extreme and in some cases (perhaps) warranted, but with that comes a perceived obligation, if you will, to perform at all times like your Barry Bonds after a steroids injection that morning.  Money comes and money goes.  So as I said, at the margins perhaps there will be people who hang on with a hedge fund manager with "integrity" longer than someone else or it might even mean some new money, but at the end of the day performance is all that matters in this arena.  Home runs put the butts in the seat in baseball and outperformance in hedgie land is what keeps the money in the till.

[APG12]

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.

 

Quarterly expenses amount are ~$.266. They say that their salaries are de minimis and that you'd need a very detailed income statement to see them. That being said, I did reduce expenses by 10% in my assumptions and rounded up to $5mm from $4.9mm. I think annual pretax profits of $5mm is a pretty generous starting point.

 

Are you looking at quarterly numbers for revenue?

 

Since their revenues seem to be growing pretty fast, I used Q3 numbers and annualized them by multiplying times 4.

 

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.

 

 

 

As far as their hedge fund crossing a high water mark, how much of a difference is that going to make? If it produces an additional $50mm in revenue FRMO is looking at $2.1mm in additional revenue. I have no idea how much revenue the hedge fund will provide by my point is only that revenues need to increase by multiples to justify the current price. We've got a long list of reasons for revenue to increase (hedge fund high water mark, increase in AUM for the alternative investment programs, etc) and not a single number for any of them! Is there anyone who currently owns this that wants to explain why they're comfortable owning it at today's prices?  :o

[matts]

Also, the reason for all the transactions lately is to clean up the balance sheet so they can list on a stock exchange (before they had too many private assets that could not be audited before the strict exchange deadlines). I expect them to announce concrete plans to list this year. And you are right, once again you can't put a numerical value on this catalyst, but I think it's a positive catalyst nevertheless.

 

I don't think this opportunity is deep value, but I don't think Berkshire is either and many value investors own it. We will see.

 

 

[John Galt]

New letter and Annual report just came out. Looks like a nice bump in earnings and book value.

 

http://www.frmocorp.com/_content/letters/2013.pdf

 

http://www.frmocorp.com/_content/10k/FRMO_Annual_Report_2013.pdf

[tripleoptician]

Was anyone able to attend the annual shareholders meeting on the 27th? I was trying to build a position here and the price has shot up over the last 2 months, specifically the last few days. I'm trying to find any new info that might have come out at the recent meeting to send shares higher.

[matts]

Was anyone able to attend the annual shareholders meeting on the 27th? I was trying to build a position here and the price has shot up over the last 2 months, specifically the last few days. I'm trying to find any new info that might have come out at the recent meeting to send shares higher.

 

Looks like you were right. Shares are up 55% since the FY results on Aug 8th and the annual meeting. Transcript is still not up however so I'm not sure what was said.

 

This is my largest position so I'm happy and I'm not considering selling. This could be a very strong compounding vehicle for at least a couple decades.

 

 

[Hielko]

Anyone an idea what Closed-End Mortage Fund(s) they like? BlackRock Income Trust?

[APG12]

It looks like these guys really know what they're doing. But again, since this is a value board, I'm assuming you guys think this is fairly valued to undervalued. Unless there's something materially significant that comes out in these transcripts, I don't get it. Can someone explain in a couple sentences why they think this is cheap?

[matts]

Well like I said above, it is not cheap in the traditional value sense. But neither is Berkshire. Now yes, FRMO trades at a premium to BH, but it's also much smaller and the guys are a lot younger. This is about quality. So I don't think anyone here will convince you that they are cheap in the traditional sense. I just love their model, their investing philosophy, and their integrity, which is all evident throughout their communication.

[APG12]

Fair enough! I just wanted to make sure I wasn't missing something because this things been a rocket. Thanks!

[FreeOption]

Just to make sure I'm thinking about this correctly.  Book Value less HK Revenue Stream and HK ownership = $62.2 million or $1.44 per share.  I'd argue that you shouldn't pay any premium for that book value since you could largely recreate that asset mix.  Maybe a slight premium.

 

HK has $8.6 billion in AUM.  Using a generous multiple of 10% of AUM that values HK at $860 MM.  FRMO owns 4.95% so call that $42.6 MM in value or roughly 4x the current book value.  Adding that to the net cash and investments gets you to $104.8 million or roughly $2.67 per share.

 

They also own a 4.199% interest in gross revenues.  Assuming HK receives 2% management fees (generous, but also accounts for non-asset management revenue streams) on $8.6 billion in assets that amounts to $7.2 million annually in revenue sharing for FRMO.     

 

The market cap is $245 million.  If you back out the net cash and investments and HK equity then the market appears to be pricing the HK revenue stream at about $140 million or roughly 20x the (generous) run-rate earnings stream. 

 

That seems fairly valued to me at best.  Am I missing something? 

[giofranchi]

Liquidations September 2013 Commentary

 

 

giofranchi

Liquidations_September_2013_Commentary.pdf

[Guest hellsten]

Liquidations September 2013 Commentary

 

giofranchi

 

Thanks.

 

The stock is still illiquid and there's never any news about this company:

http://finance.yahoo.com/q/bc?s=FRMO&t=5y&l=on&z=l&q=l&c=

 

I wonder who's pushing up the price, perhaps it is you Gio :D My guess is that it's value investors who found FRMO through this board or one of the very few blog articles.

 

I count FRMO as one of my biggest mistakes because I didn't buy the stock when I started this thread at ~$1.58.

[giofranchi]

The stock is still illiquid and there's never any news about this company:

http://finance.yahoo.com/q/bc?s=FRMO&t=5y&l=on&z=l&q=l&c=

 

I wonder who's pushing up the price, perhaps it is you Gio :D My guess is that it's value investors who found FRMO through this board or one of the very few blog articles.

 

I count FRMO as one of my biggest mistakes because I didn't buy the stock when I started this thread at ~$1.58.

 

Hi hellsten,

No, unfortunately I couldn’t invest in FRMO… Being listed OTC, I couldn’t invest through my firm’s bank account… Therefore, you see, we are suffering from the very same “sucking our thumbs” syndrome… I know this doesn’t make you feel better, but you are not alone! ;)

 

Cheers!

 

giofranchi

 

[Sportgamma]

Finally...this is like waiting for Christmas, except you don´t know at which date Christmas arrives.

 

http://www.frmocorp.com/_content/letters/2013_FRMO_Transcript.pdf

[Guest hellsten]

Finally...this is like waiting for Christmas, except you don´t know at which date Christmas arrives.

 

http://www.frmocorp.com/_content/letters/2013_FRMO_Transcript.pdf

 

Thanks. How much they earn from Horizon Kinetics will soon be revealed:

 

Certainly in the structure as it exists

now it’s quite clear that the revenues and the earnings of FRMO Corp. are clearly a direct

function of those at Horizon Kinetics. And since Horizon Kinetics is an asset manager, all of that

derives from the assets under management. Last night, precedent to this meeting, we posted a

slide showing the assets under management at Horizon Kinetics and the distribution across

strategy type and client type. We’ll expect to update that slide periodically. So, there’s that.

 

Our posture is that we move in the opposite direction. If you see us with a big position in

something, and we are favored with a good investment result, and the world begins to recognize

what we purportedly saw as value, we’re going to move out of it. The few occasions in our

investment career when we didn’t do it, we had trouble. It happened a couple of times in our

careers that the world moved to us. Normally speaking, when the world moves to us, we move

away from the world.

 

And to

reiterate an answer to a question from a shareholder at our last earnings conference call, “Can we

reveal what the earnings and revenues of Horizon Kinetics are? Why don’t we just tell people

and make it public?” Well, with the next quarterly earnings report, it will be, because you’ll see

on our income statement and balance sheet an earnings number, which can be related to our

4.95% equity interest, and a revenue number, which can be related to the 4.199% revenue

interest. And you do a little bit of division, and you’ll actually know the number.

 

We also get 3 stock tips, including Dreamworks:

So, depending on the price and the month, you could see sometimes that the company was

trading at the value of the earnings derived from its films. But you got the library for free. So,

that’s why we own it.

 

But, in the last year, especially in the last eight months or so, the company has been very active.

It engaged in a sequence of transactions that suggest even more value. One of the first was that,

late last year, I believe, it bought another library.

…

They also, late last year, engaged in two transactions with Chinese partners. One was for a joint

venture with an entity that I believe is ultimately owned by the Chinese government to make

some movies there.

 

Interesting story about the Texas Land Trust and how Murray found it:

We get offers to sell the whole stake to

someone at a price of X, and we don’t want to do it. We look at our investment performance,

which we’re, I think, proud of, and we say, “Well, if we took that deal, we’d have higher

investment performance. But is that really the best use?” We could make our performance higher

if we really wanted to, but it tells us something about the meaning of investment performance.

It’s a market value. It’s a guide to what investors think it’s worth, but what investors think it’s

worth is not always the best guide. I think it’s also a validation of the idea of long-term investing.

…

What

the company has done over the years is use roughly 40% of the cash flow to buy back the stock.

…

Number one, it’s from them that I got the idea for the FRMO revenue share, because I saw what they were doing.

 

TPL is definitely a cannibal.

 

Onex:

Getting back to Onex, this company also has, in its own bizarre way, a similarity to FRMO. It’s

an investment company. But you might say it’s oriented around private equity. They raise private

equity funds, and they invest their own money alongside those investors.

…

So, the question is: what would we pay if we had a business with $13.5 billion of assets under

management that was locked up for 10 years and had the opportunity to get a 1 and 20 fee

structure? Would we value that at $500-plus million? And I don’t think we would.

 

Secondarily, when I said $47.50 Canadian is the value of their investments, that values a lot of

the private investments. Some of them have come public, but the private investments are valued

essentially at cost.

[giofranchi]

Finally...this is like waiting for Christmas, except you don´t know at which date Christmas arrives.

 

http://www.frmocorp.com/_content/letters/2013_FRMO_Transcript.pdf

 

Thanks.

 

Yes! Thank you, Sportgamma! Very useful! :)

 

giofranchi

[Sportgamma]

Finally...this is like waiting for Christmas, except you don´t know at which date Christmas arrives.

 

http://www.frmocorp.com/_content/letters/2013_FRMO_Transcript.pdf

 

Thanks.

 

Yes! Thank you, Sportgamma! Very useful! :)

 

giofranchi

 

Wow, thats a very high exclamation-marks-to-words ratio.

 

Here´s a riddle that I have been thinking about:

 

We know the following:

Equity ownership in HK: 4.95%

Share of gross revenue interest in HK: 4.199%

HK AUM: ~$8.6B

Book value of Equity in HK: $10.97M

Book value of Rev. stream: $10.2M

 

We don´t know the following:

Revenue/AUM at HK: My guess is somewhere between 0.8-1.5% (the expense ratio of the Paradigm fund is 1.78%)

Operating income of HK: Compared to Legg Mason and others, I´d say 10-14% would be an appropriate estimate, perhaps lower for HK because of the revenue interest. 

 

Now, lets assume that the equity and revenue stream offer cash flows of the same quality (they don´t). You have three leavers, (1) the gross revenue/AUM ratio, (2) NOPAT% on the income statement and (3) the discount rates for the sources of cash flows (equity and revenue stream). In what kind of scenarios do you get both NPVs to match the book values at the same time?

[matts]

I'm disappointed no one asked about their plans to uplist to an exchange. I though some of the transactions over the past year were partly meant get them eligible from an accounting standpoint to return to an exchange.

 

[giofranchi]

I'm disappointed no one asked about their plans to uplist to an exchange. I though some of the transactions over the past year were partly meant get them eligible from an accounting standpoint to return to an exchange.

 

+1

 

giofranchi

[giofranchi]

Finally...this is like waiting for Christmas, except you don´t know at which date Christmas arrives.

 

http://www.frmocorp.com/_content/letters/2013_FRMO_Transcript.pdf

 

Thanks.

 

Yes! Thank you, Sportgamma! Very useful! :)

 

giofranchi

 

Wow, thats a very high exclamation-marks-to-words ratio.

 

Here´s a riddle that I have been thinking about:

 

We know the following:

Equity ownership in HK: 4.95%

Share of gross revenue interest in HK: 4.199%

HK AUM: ~$8.6B

Book value of Equity in HK: $10.97M

Book value of Rev. stream: $10.2M

 

We don´t know the following:

Revenue/AUM at HK: My guess is somewhere between 0.8-1.5% (the expense ratio of the Paradigm fund is 1.78%)

Operating income of HK: Compared to Legg Mason and others, I´d say 10-14% would be an appropriate estimate, perhaps lower for HK because of the revenue interest. 

 

Now, lets assume that the equity and revenue stream offer cash flows of the same quality (they don´t). You have three leavers, (1) the gross revenue/AUM ratio, (2) NOPAT% on the income statement and (3) the discount rates for the sources of cash flows (equity and revenue stream). In what kind of scenarios do you get both NPVs to match the book values at the same time?

 

Sportgamma,

are you talking to me? If so, I admit immediately, without hesitation nor excuse, that, though I tried to read and did my best to understand your riddle, I am completely lost!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I have put all those exclamation marks, so that the exclamation-marks-to-words ratio is even higher than before! ;D ;D ;D

 

Cheers!

 

giofranchi

 

[Sportgamma]

Finally...this is like waiting for Christmas, except you don´t know at which date Christmas arrives.

 

http://www.frmocorp.com/_content/letters/2013_FRMO_Transcript.pdf

 

Thanks.

 

Yes! Thank you, Sportgamma! Very useful! :)

 

giofranchi

 

Wow, thats a very high exclamation-marks-to-words ratio.

 

Here´s a riddle that I have been thinking about:

 

We know the following:

Equity ownership in HK: 4.95%

Share of gross revenue interest in HK: 4.199%

HK AUM: ~$8.6B

Book value of Equity in HK: $10.97M

Book value of Rev. stream: $10.2M

 

We don´t know the following:

Revenue/AUM at HK: My guess is somewhere between 0.8-1.5% (the expense ratio of the Paradigm fund is 1.78%)

Operating income of HK: Compared to Legg Mason and others, I´d say 10-14% would be an appropriate estimate, perhaps lower for HK because of the revenue interest. 

 

Now, lets assume that the equity and revenue stream offer cash flows of the same quality (they don´t). You have three leavers, (1) the gross revenue/AUM ratio, (2) NOPAT% on the income statement and (3) the discount rates for the sources of cash flows (equity and revenue stream). In what kind of scenarios do you get both NPVs to match the book values at the same time?

 

Sportgamma,

are you talking to me? If so, I admit immediately, without hesitation nor excuse, that, though I tried to read and did my best to understand your riddle, I am completely lost!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I have put all those exclamation marks, so that the exclamation-marks-to-words ratio is even higher than before! ;D ;D ;D

 

Cheers!

 

giofranchi

 

 

Well, it was not directed at anyone in particular. The point is that in order for those two assets to be properly valued on the balance sheet of FRMO, the revenue stream would have to have a much higher discount rate than the equity interest (in reality, I would argue, it should be the other way around) or the operating income of HK would have to be something like 90% of rev less the revenue stream (which most definitely is not realistic).

 

We will know more with the next filing but in my feeling is that the revenue stream asset is worth multiples more than it is recorder for on the balance sheet.

 

However, I must add, that the current price does seem awfully high...

[racemize]

Ok, dumb question everyone.  I was trying to figure out how much of FRMO Stahl and Bregman own (e.g., as a % of the company).  Is there a fast way of finding this out (e.g., generally, for any company)? 

[matjone]

I have wondered this too.

 

For companies that file with the SEC it is on form 5, correct?

[racemize]

Ok, dumb question everyone.  I was trying to figure out how much of FRMO Stahl and Bregman own (e.g., as a % of the company).  Is there a fast way of finding this out (e.g., generally, for any company)?

 

Incidentally, here is the answer (2012 Annual Transcript).  I knew it was in there somewhere.  I still don't know the easy way of finding this for companies generically though.

 

 

QUESTIONER 1: I’m a shareholder, and I have several questions. The first is, since the proxy

doesn’t contain this information, can you share with us how much the two of you and other

insiders own in FRMO Corp.?

MURRAY STAHL: I own roughly 7.2 million shares. The exact numbers can be found on

Bloomberg and www.sec.gov.

STEVEN BREGMAN: I own somewhere around 6.7 million.