Checking In on the Quiet Compounder
Taking a Look at Boston Omaha (BOC).
It's been a decent week in the markets so far; I'm eager to see how it wraps up. This week, I'm focusing on a business that has been fluctuating in and out of the top five holdings in my portfolio: Boston Omaha (BOC). The more I dig into this company, the more impressed I am with what I find. While I briefly discussed this business in the context of their last earnings results, today I'd like to approach it from a different perspective. So, let's dive in!
Building an Empire
Despite appearances, BOC didn't have a bad year at all. In fact, this company, often likened to a mini-Berkshire Hathaway, has been steadily expanding its reach in 2023. The current market valuation of the stock, in my view, significantly underestimates its true worth.
Let's start with the leadership of Boston Omaha, co-CEOs Alex Rozek and Adam Peterson. Since taking charge in 2015, they've invested over $500M, surpassing the company's present market capitalization of $488M. This discrepancy suggests that the market undervalues the combined worth of the company's businesses and assets (Interesting…). BOC's operations span four primary segments: Link Media Outdoor, with roughly 4,000 billboards across 16 states; Boston Omaha Broadband (BOB), serving over 40,000 fiber internet customers; General Indemnity Group (GIG, which I talked about in-depth last article), offering surety bonds nationwide; and Boston Omaha Asset Management (BOAM), which holds minority stakes in various companies.
Valuing BOC is indeed complex. The traditional metric of book value per share, typically a staple in assessing the worth of financial holdings, has become less indicative of the company's true value. This shift, recognized by the management in mid-2021, reflects a growing disparity between the company's book value and its real-world valuation. This divergence is largely attributed to a range of accounting peculiarities, such as fluctuations in unrealized gains and losses, the shifting values of investments, and the varying depreciation rates, particularly noticeable in the billboard sector of the business. Despite these valuation complexities, BOC's financial performance in the first three quarters of 2023 has been noteworthy. The company has seen appreciable growth in key areas such as revenue, liquid assets, total assets, and shareholder equity. That said, these positive trends have been somewhat offset by increased depreciation and amortization costs, culminating in an unexpected net loss for the period.
Further illustrating the complexity of BOC's valuation is its 22.9% stake in Sky Harbour Group (SKYH), now valued at close to $150M. This significant holding is subject to market fluctuations and will not realize its gains or losses until a sale occurs. Management has hinted at a target sale price of around $18 per share, adding a layer of speculation to the investment's future. Additionally, BOC's portfolio includes several other strategic investments that contribute to its valuation complexity. Notably, the acquisition of a controlling interest in 24th Street Asset Management, as well as investments in Boston Omaha Build for Rent and a regional bank, have further diversified the company's asset base. These varied investments necessitate a nuanced understanding of BOC's overall worth, often requiring detailed insights from management's annual letters to gain a clearer picture.
As we look forward to the announcement of the company's full-year 2023 results, the anticipation among investors and market analysts is palpable. The company's intrinsic value has evidently grown, particularly through its minority investments, challenging the rationale behind its current trading position near a four-year low. The upcoming financial disclosures are expected to provide a more comprehensive view of the company's performance and could potentially reshape market perceptions, potentially rectifying what many see as an undervaluation of BOC's stock.