Description

BKF Capital Group is a cheap valuation play in a good and growing business. BKF is primarily an institutional and high net worth money manager with over $10 billion under management. This company was owned by Baker Fentress, a closed end fund, and was distributed to Baker Fentress shareholders when that fund liquidated at the beginning of 2000 (its primary business is John A. Levin & Co.).

Levin calls itself a value manager and as far as I can tell from the portfolios they hold, they pretty much index with a value tilt. Using 3% of assets as a lowball going rate for its business, BKF Capital is worth approximately $300 million. With 6.5 million shares outstanding, that would work out to a value per share of about $46, add about $2 in excess cash on the balance sheet and we get to $48 for this currently $23 stock.

There are a few warts here. The company does not approach the 50% margins of comparable money managers because management doesn't own that much stock apart from the 10% or so owned by John Levin. Consequently, I believe there has not been much incentive to "share the wealth" with shareholders. However, in November, a plan was disclosed to incentivize senior management with a 10% stake in the company.

Let's assume that in any acquisition, management must be provided for, and knock my previously valuation down by 25% (.75*$46) or $36.50 per share plus the $2, for a total of $38.50. One of my other concerns is that management may try to make a lowball bid for the company. However, consider the nature of the shareholder base, a veritible who's who of value investors, including 5% plus holders such as Royce & Associates, Wanger Asset Management, Gabelli & Co., and of course Warren E. Buffett.

If you start with the $38.50 valuation and the firms portfolios grow at a 10% annual clip through market appreciation and perhaps adding 5% each year of new client fund acquisition, then in 5 years time the value of that $38.50 will be closer to $77.50 using the same valuation metrics. Add in the earnings for that period and we're over $80 for our $23 stock. That's close to a 30% per year compound return from here. Could happen. In any event, not a ton of risk at these prices.

Catalyst

I think with continued consolidation in the money management business, this company will be sold in the next few years. If not, I think values will continue to grow and investors are paying a substantial discount to that growing value.