Motley Fool Hidden Gems Investing - Tesla's Optimism Springs Eternal

Episode Date: October 20, 2022

Despite mixed 3rd-quarter results Elon Musk is ever-optimistic about Tesla's future. (0:21) Bill Mann discusses: - Economic takeaways from England's sudden need for a new Prime Minister - Questions about Tesla's accounting - Why he believes that, despite falling in 2022, Tesla's stock is still pretty expensive. (10:11)  Buck Hartzell talks with Boston Omaha co-CEOs Adam Peterson and Alex Rozek about the nuts and bolts of their business, and how they're handling short-term pain. If you're a member of any Motley Fool service you can access the full Boston Omaha interview here: https://www.fool.com/premium/live/video/4056/coverage/2022/10/19/interview-alex-rozek-adam-peterson-boston-omaha/ Companies discussed: TSLA, BOC Host: Chris Hill Guest: Bill Mann, Buck Hartzell, Adam Peterson, Alex Rozek Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Volvo is leaving the chaos of rush hour outside. Start by settling into your saddle-stitched Nappa leather seats. Notice the open space around you. Uncluttered, elegant, intentional, warm ambient light, and natural wood details to ground you. This is Volvo's Scandinavian sanctuary for every journey. Learn more at volvocars.ca. Optional features mentioned. Chris Hill. We've got the latest from Tesla and some breaking news from the U.K. Motley Fool Money starts now.

I'm Chris Hill. Joining me in studio is Motley Fool Senior Analyst Bill Mann. Good to see you. Too bad there's nothing to talk about today. When the news fairy shows up. We'll get to Tesla in a second. But yes, for the second time in 45 days, our friends on the other side of the pond are in need of a prime minister. Liz Truss was in office for one Brian Kloff, or what was it, 3.1 Scaramucci? 4.1 scaramucci. 44 days for Liz Truss, setting, I believe, a new record for briefest tenure as British Prime Minister. Yeah. She is the first Prime Minister since Winston Churchill to serve under two monarchs, though.

Well, I look forward to reading that in her upcoming biography. Yes. Soon to be found in the history section of your local bookseller. Does this, I mean, much of this seems to be motivated by economic forces, negative ones, obviously. As a U.S. investor, do you look at this and think anything specific one way or the other? Because it seems like, well, this is interesting to watch, but I don't know that this is necessarily having an impact on any of the companies in my portfolio. Yeah, maybe, maybe not. Obviously, some of the biggest issues that are facing the U.K. right now are supply-driven. There's very little that you can do when you have

supply issues to create incentives on the demand side. That doesn't really help that much. YouGov came out with a poll that was asking about whether or not people thought it was right for Liz Truss to resign. And it was one of the most profoundly one-way polls I've ever seen. 79% of the U.K. citizens who took this poll said it was right for her to resign. I think that probably the big moment for her government was when they came in and decided that one of the things that they ought to do is cut taxes at a time in which, again, with supply issues out there and with debt issues out there, put the entire pension system of the United Kingdom at risk. I believe that you need to give anyone who is new to running

any organization, and I guess you could call a country an organization, a little bit of a burn-in time. But this was such an unforced error that anyone who had any amount of knowledge about how the financial system worked could have said, this might not be the best idea. Let's move on to Tesla, then. Third quarter, adjusted profits were higher than expected, but Tesla's revenue was light. Shares are down a little bit today, 3%, 4%, that sort of thing. Not surprisingly, Elon Musk projecting all the optimism in the world on the call in terms of the demand that he says they are seeing for Q4. On a price-to-optimism basis, this company is super cheap.

It is super cheap. There are a couple of things I want to get to, but just in terms of the results and the comments from Musk, what stood out to you? It's still a pretty expensive stock. I think people put too much emphasis on what a quarter represents. Tesla is a company that is trading. It's a $675 billion company with about $80 billion in run rate sales. That puts them at a price to sales of about $8 billion, which is an awful lot for, and I know that this is not quite fair, but what is essentially a car company. So, I would not put too much emphasis on what the stock is doing today after this quarter. It was a pretty good quarter. I still have endless questions about the accounting

at Tesla. They produced 50% more cars, essentially, with barely any more operating expenses. That is hard to understand. There's no such thing as immaculate auto production. I do have questions about that. At its core, it was a good quarter. But when you have an expensive stock and Tesla may be the one remaining expensive stock, a good quarter isn't what gets you to maintain the stock at those levels. And it's not what gets your market cap to go higher. Speaking of market cap, Musk just volunteered, again, with his optimism, his belief that the company has the potential not just to be bigger than Apple, but to be bigger than Apple and Saudi Aramco combined. That's pretty big.

Leading a lot of people to ask the perfectly fair question, well, if you have that level of belief, and he couched it with the word potential and that sort of thing, but if you believe that, then why are you almost certainly going to be selling some of your stakes so that you can buy Twitter? Which I don't think anyone is suggesting will be larger than Apple or Saudi Aramco, much less the two combined." Well, the Twitter thing is interesting simply because I think that Galaxy brain Elon Musk stepped in front of logician Elon Musk and made an offer that he probably ought not have. I don't know that it's particularly fair now to say, well, he's got to sell Tesla shares,

because he has a deal that he agreed to in April, which feels like another era at this point that he's got to make good on. So, yes, he will be selling shares. Of course, he did get an incentive of $23 billion in April also. I think he's OK there, and he's still very heavily levered towards Tesla. If Tesla were to collapse, Elon Musk would be OK, but he'd be much less OK than he is now. I wouldn't really put too much on that. You're not talking about something that, at this point, is a choice that he's making. That choice was made six months ago. If you're a Tesla shareholder, one thought I had when I was just going through the quarter and looking through some of the comments on the call, and I'm not a Tesla

shareholder, but I thought to myself, boy, I bet the shareholders are happy that he's just talking about Tesla. He's back, he's talking about the company. I would be a little bitter if I was a Tesla shareholder, I would be a little bitter about how the last six months has played out in terms of, why are you spending so much? Come back and focus on this. By the way, as you said, it was a good quarter. Forget the questions around how big can this company get. There are legitimate questions about the service side of Tesla's business. Absolutely. For people who own the vehicles, and as vehicles are wanted to do from time to time, they need some service.

Yeah. Mine needs servicing now, if someone could get in touch. Yeah, I think that that's very true. When I interviewed Elon Musk, and this was in 2011, one of the things that he talked about was that he did not believe that he would be a success if all he did was run a luxury car company. This is someone who has always been very, very clear about the fact that he's going after big picture problems. When you talk about big picture problems, no one should be surprised when Elon Musk moves out of his lane just a little bit. But the last six months have not been a great six months for the brand of Elon Musk. And the brand of Elon Musk, whatever else you

want to say about it, is as deeply enmeshed with the brand of Tesla as any combination that I can think of. So, yes, I'm sure they were happy that he was talking about the car company and not anything else. Bill Mann, always good being in the studio with you. Thanks for being here. Yeah, great to be here, Chris. Thanks. Tesla, like many public companies, has a conference call with analysts every quarter. But one company that does not do quarterly calls is Boston, Omaha. Co-CEOs Adam Peterson and Alex Rozek joined my colleague Buck Hartzell to give a background on their company and share how they handle short-term pain as long-term investor operators. Buck Hartzell

Before we get in here, Adam and Alex, when we write up stock pitches and things for people, We usually tell them what kind of stock they're getting into. So we give it just a small cap or a large cap, or what can you kind of expect in this company as you're building out your own portfolio. But since we have both of you here today, I figured we'd give you a chance to describe for folks out there that are retail investors

that are considering purchasing Boston Omaha, if they buy shares in this company, what kind of company are they getting? It's a great question. I honestly don't know what cap we would be. So I just got to plead ignorance on that one. You tell me what cap we're about. but the kind of company, yeah, probably small. Uh, the, the, uh, the kind of company you're

buying in Boston, Omaha, the way I think about what I own in Boston, Omaha is a collection of companies that have good returns on invested capital that are durable, uh, that are understandable have barriers to entry. And we're, you know, in many cases, the low cost provider and whatever field we're in and that, and a number of other factors you kind of layer on together and you get Boston Omaha. And it's, it's really Adam and myself working with some tremendous managers and a few different businesses, billboards, uh, broadband, uh, surety bonds and Boston Omaha asset management. Those are kind of our four verticals, uh, trying to just create more value every day than we had yesterday. Right. And that's great. Cause, uh, one thing that's unique,

I think I first met you all at the second, uh, second annual meeting that you ever had up in Boston. And this is kind of a unique company in the small cap realm. Sometimes a lot of those companies have one product or they're really kind of narrowly focused, but you guys are very diversified for what a small cap company is. And, um, you know, it's unique when you see a company that kind of started from nothing. And I think based on last quarter's results, you're almost at the run rate of a hundred million dollars a year. And can you just tell me a little bit about the journey from, I guess it is 2015 to 2022 and where you started and where you're at kind of now to give people a quick update on what's happened over the last seven years. And I know it's been

a lot, you don't have to hit everything. Yeah. Yeah. I would love to. Um, yeah. So it's just over seven years ago, uh, we bought control of a small publicly traded company for, uh, that had one piece of real estate in it. And back then we then entered capital and the first business we bought was a billboard business in Alabama. And from there, we both raised capital, but also retained all our cash flows and, uh, built the business we have today, which Alex had just described. But I would say how we ended up here is not billboards was purposeful from there. Really diversification was a consequence of decisions we made over a long period of time. it was not, or over the seven years, uh, it was not the necessarily the outright plan at the

outset. It was like, hopefully we find other things to do. Uh, and I just think it's a great advantage. If you truly understand say four or five industries, or maybe more, if you're, if you're lucky enough, you have the optionality to move capital to that many options. Cause there's not always opportunity in a single industry on a constant basis to continue to retain capital. So to have options is important. So we're always comparing and contrasting where to put our excess capital or the cashflow coming in. But that's kind of how we ended up where we are, just happenstance. Businesses we knew and studied and opportunities came along and we executed to the best we could. A quote that we love, and this comes from Tom Russo,

and he said he loves kind of management teams that demonstrate an ability and a capacity to to suffer. He talked about Nestle and some other companies that are famous Tom Russo investments. I just say, you guys, having been for a short time operators of a public company, you've seen a global pandemic where pretty much the world has shut down. We've seen the attack on Ukraine happen. We've recently seen a stock market turn down 20% of the S&P, but some sectors getting hit a lot worse than that. I mean, you guys have been through a lot in seven years of public company. So can you kind of give me some examples of things that you guys are doing, um, to kind of, uh, exchange some short-term pain for what you think will be long-term gain

two, three, five years into the future. It doesn't matter whoever wants to take it. Yeah. I'll, I'll take billboards quick and then broadband if you want to Alice, um, in billboards, you know, we've always done that. We've always over invested and we still do on like an overhead level, uh, in our real estate team. Uh, we, we probably have a large real estate team relative to, uh, competitors. And the reason why is because the ground lease on the billboard business is probably the most important variable of all, uh, differentiates. And so we want to own more and more of our ground and we want to negotiate leases that don't grow as fast in cost as our revenue. Right. And so we over invest in there. And so that's an expense

item. And we do that. I mean, we do that and we've done that hugely in insurance too. Um, we do not, yeah, we're not a company on a quarterly reports that cares what the, uh, expenses we're thinking everything is an investment, uh, what this might pay off like three, five years out. So that's a billboard example. That's a great example. And I think in the billboards, right. The, uh, cost of, uh, 25% of the expenses usually is the land fee. And, and you guys have driven that down over time. I think maybe the last time I saw it was 21 or 22%. So you've kind of, I think on a cash basis, it's down to 18 or 19%. You got to remember if that scales to some extent, some of the leases, and then now we own more and more of the land as the revenue grows. Even if we don't negotiate

another deal, you would think that would slowly go down over time because of the fixed piece. So it pays off forever, which is why it's so important to invest in upfront, even though it might make your overhead look high. Yeah, that's great. Alex, broadband. Yeah. On the broadband side, let's just take the cable industry, for example, again, which we've studied for a long time.

There's a narrative in the cable industry that the upgrade cycle, and I get a little technical here, but like DOCSIS 3.0 to 3.1, which was the technology and the hardware that allowed them to push higher speeds to the customers and be more competitive with other ways of getting internet and respond to desires for higher speed internet, that that was maybe only $10 per home passed as a cost. And that's about true. And a lot of them went through that upgrade.

There's still more to do in some cases, but now this is 3.1 to 4.0, which is a few years out, but it's a 10X more expensive per home passed per home passed on average. Now you're exactly right. you mentioned something earlier, Buck, about how they build cities out first, what everybody seems to forget in that, in that, uh, sort of math is that why they've done that is because the cities are more dense. So you get a lot more homes past per mile. That's why rural is always built out

last. And you still have, you know, copper phone lines providing DSL in areas like where I lived before they came in late fiber. It wasn't, it was very simple math for a lot of the cable companies. their system was optimized for video down and very little data up and that's how coax cables designed to deliver the idea of a symmetrical speed like what i'm talking to you over right now where i'm uploading video and voice and downloading video and voice at real time with no latency that's the kind of thing that works really over fiber and not very well over coax and you need to spend a lot of money to be able to be competitive with fiber now why aren't cable companies doing that? Very simple, because it's really, really expensive. It's a lot of CapEx

right now. It would hammer, hammer near-term estimates for profitability and cash flow. And why don't CEOs want to make those kinds of investments in their business? I'm not just talking about the big ones, but some of the smaller ones too. Well, because they're not motivated to think long-term. We at Boston Omaha, we have no earnings calls. We give no projections. we don't sort of play that game where now we have forecasts that we need to meet and shareholders. And we also, it's not just that telcos, why telcos are paying out huge dividends when they're in massively capital intensive business never really understood why that is the case that, you know,

there might be a case at some point where they have to decide, you know, are we going to get downgraded on our debt or, or cut our dividend? Why are you paying a dividend? You should be investing. It'd be an interesting analysis to Alex's point. and if you took and it's not even the ceo i mean the investor investment pressure from investors to buy back stock massive amounts of it by some of these cable companies with both cash flow and while increasing debt and instead what if you would have taken all that money and built out the fiber instead and you'd probably be more competitive for a longer period of time it would

have been short term everybody would have been upset with you and your stock would have gone down but in the long term probably would have been a different story and i'm not saying they're all debt or something. They have a lot of my, some really great assets. I'm just saying you're going to get shipped away in areas pretty badly because of that decision, you know, three, four, five, six years ago that investors all applied. If you're a member of any Motley Fool service and you're interested in hearing the full interview with the leaders of Boston, Omaha, just click the link in the show notes. As always, people on the program may have interest in the stocks they talk about, and The Motley

Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.