Tesla: "On a Price-to-Optimism Basis, This Company Is Supercheap."

In this podcast, Motley Fool senior analyst 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.

Plus, Motley Fool analyst 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. We've got part of that interview here.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 20, 2022.

Chris Hill: We've got the latest from Tesla and some breaking news from the UK. Motley Fool Money starts now. I'm Chris Hill, joining me in studio, it's Motley Fool senior analyst Bill Mann. Good to see you.

Bill Mann: Too bad there's nothing to talk about today. 

Chris Hill: When the news fairy shows up, 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.

Bill Mann: Liz Truss was the in office for one Brian Clough, or was it 3.1 Scaramuccis?

Chris Hill: 4.1 Scaramucci, 44 days for Liz Truss, setting, I believe a new record for a briefest tenure as British prime minister.

Bill Mann: She is the first prime minister since Winston Churchill to serve under two monarchs, though.

Chris Hill: I look forward to reading that in her upcoming biography.

Bill Mann: Yes. Soon to be found in the history section of your local bookseller.

Chris Hill: 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 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.

Bill Mann: Maybe, maybe not. Obviously, some of the biggest issues that are facing the U.K. right now are supply-driven, and so 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 that 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 a supply issues out there and with debt and with issues out there, put the entire pension system of the United Kingdom at risk, and it was something, I believe that you need to give anyone who is new to running any organization. I guess you could call a country an organization. Sure. 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.

Chris Hill: Let's move on to Tesla then. Third-quarter adjusted profits were higher than expected, but Tesla's revenue was light and shares are down a little bit today, 3%-4%, that sort of a 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.

Bill Mann: On a price-to-optimism basis, this company is supercheap.

Chris Hill: It is supercheap. 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?

Bill Mann: It's still a pretty expensive stock. I think that is the basis that you need to -- 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 [ratio] of about 8. Which is an awful lot for and I know that this is not quite fair, but what is essentially a car company. I would not put too much emphasis on what the stock is doing today after this quarter. It was a pretty good quarter. I mean, I still have endless questions about the accounting at Tesla. I mean 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.

Chris Hill: 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.

Bill Mann: That's pretty big.

Chris Hill: Leading a lot of people to ask to 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 stake so that you can buy Twitter?

Bill Mann: Which I don't think anyone is suggesting will be larger than Apple or Saudi Aramco, much less the two combined. 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, he's got to sell Tesla shares because he has a deal that he agreed to in April, which was I don't know, it feels like another era at this point that he's got to make good on. 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 toward Tesla. I mean, 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.

Chris Hill: If you're a Tesla shareholder, one thought I had when I was just going through the quarter and looking through the some of the comments on the call. 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. Since like he's back, he's talking about the company because that's I would be a little bit or if I was a Tesla shareholder, I would be a little bitter about how the last six months has played out in terms of like, why are you spending so much, like come back and focus on because 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.

Bill Mann: Absolutely.

Chris Hill: For people who own the vehicles, and as vehicles are wont to do from time to time, they need some service.

Bill Mann: Mine needs servicing now, if someone could get in touch. 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 own 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 it has 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 in meshed with the brand of Tesla as any combination that I can think of. Yes, I'm sure they were happy that he was talking about the car company and not anything else.

Chris Hill: Bill Mann, always good to be in the studio with you. Thanks for being here.

Bill Mann: Great to be here, Chris, thanks.

Chris Hill: 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 stock they're getting into, so we give is this is a small cap or a large cap and what can you expect with 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 company are they getting?

Alex Rozek: 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? But yeah, probably small. The company you are 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, that are understandable, have barriers to entry, in many cases, the low-cost provider and whatever field we're in. That and a number of other factors you layer on together and you get Boston Omaha. It's really Adam and myself working with some tremendous managers and a few different businesses, billboards, broadband, surety bonds, and Boston Omaha asset management, those are our four verticals, trying to just create more value every day than we had yesterday.

Buck Hartzell: That's great because one thing that's unique, I think I first met you all at a second annual meeting that you ever had up in Boston, and this is a unique company. In the small-cap realm, sometimes a lot of those companies have one product or they're really narrowly focused, but you guys are very diversified for what a small-cap company is. It's unique when you see a company that started from nothing, and based on last quarter's results you're almost at the run rate of $100 million a year. Can you just tell me a little bit about the journey from, I guess, it is 2015 to 2022, and where are you started and where you're at now to give people a quick update on what's happened over the last seven years. I know it's been a lot. You don't have to hit every day.

Adam Peterson: I would love to. It's just over seven years ago, we bought control of a small publicly traded company that had one piece of real estate in it. Back then we then inserted capital and the first business we bought was a billboard business in Alabama. From there we both raised capital, but also retained all our cash flows and built the business we have today, which Alex had just described. But I would say how we ended up here billboards was purposeful, from there, really diversification was a consequence of decisions we made over a long period of time. It was not over the seven years. It was not necessarily the outright plan at the outset.

It was hopefully we find other things to do, and I just think it's a great advantage if you truly understand, say four or five industries or maybe more if you're lucky enough, you have the optionality to move capital to that many options because there's not always opportunity in a single industry on a constant basis to continue to retain capital. To have options is important, so we're always comparing and contrasting where to put our excess capital or the cash flow coming in but that's 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.

Buck Hartzell: A quote that we love, and this comes from Tom Russo, and he said he loves management teams that demonstrate an ability and a capacity to suffer. He talked about Nestle and some other companies that are famous, Tom Russo investments. But I just say, you guys having been there for a short time, operators of a public company, you've seen a global pandemic where pretty much the world was shut down. We've seen the attack on Ukraine happen. We've recently seen a stock market turned down 20%, the S&P, but some sectors getting hit a lot worse than that. You guys have been through a lot in seven years of public company, so can you give me some examples of things that you guys are doing to exchange some short-term pain for what you think will be long-term gain, 2, 3, 5 years into the future? It doesn't matter, whoever wants to take it.

Adam Peterson: I'll take billboards quick and then broadband if you want Alex. In billboards, we've always done that. We've always overinvested and we still do on like an overhead level in our real estate team. We probably have a large real estate team relative to competitors. The reason why is because the ground lease on the billboard business is probably the most important variable of all the differentiates. We want to own more and more of our ground and we want to negotiate leases that don't grow as fast and cost us our revenue. We've overinvested there and so that's an expense item and we've done that hugely in insurance, too. We're not a company on quarterly reports that cares what the expense is. We're thinking everything is an investment, what this might pay off 3-5 years out. That's a billboard example.

Buck Hartzell: That's a great example. In billboards the cost of 25% of the expenses usually is the land fee and you guys have driven that down over time. I think maybe the last time I saw was 21% or 22%.

Adam Peterson: 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 the other fixed piece, so it pays off forever. That's why it's so important to invest in up front even though it might make your overhead look high.

Buck Hartzell: Yeah, that's great. Alex, broadband.

Alex Rozek: 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 DOCSIS 3.0-3.1, 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. But 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 there's this 3.1-4.0, which is a few years out but it's a 10x more expensive per home passed on average.

Now you're exactly right. You mentioned something earlier back about how they build cities out first, what everybody seems to forget in that math is that why they've done that is because the cities are more dense, so you get a lot more homes passed per mile. That's why rural is always built out last and you still have copper phone lines providing DSL in areas like where I live before they came and laid fiber. 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 in real time with no latency, that's the thing that works really well 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 the cable companies doing that? Very simple.

Because it's really, really expensive. It's a lot of capex right now. It would hammer near-term estimates for profitability and cash flow. Why don't CEOs want to make those 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 play that game where now we have forecasts that we need to meet and shareholders. It's not just that telcos. Why telcos are paying out huge dividends when they're a massively capital-intensive business never really understood why that is the case. That there might be a case at some point where they have to decide we're going to get downgraded on our debt or cut our dividend. Why are you paying a dividend? You should be investing.

Adam Peterson: It would be an interesting analysis to Alex's point if you took, and it's not even the CEO. The 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. Instead, what if you would have taken all that money and built out the fiber. Instead, you'd probably be more competitive for a longer period of time. In the been short-term, everybody would have been upset with you and your stock would've gone down. But in the long term, probably would've been a different story. I'm not saying they're all dead or something; a lot of them have some really great assets. I'm just saying you're going to get chipped away in areas pretty badly because of that decision, 3, 4, 5, 6 years ago, but investors all apply.

Chris Hill: If you're a member of any Motley Fool service and you're interested in hearing the Fool 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.