Boston Omaha (NYSE:BOC) is down over 44% year-to-date in spite of a year-over-year climb in both revenues and earnings.
This unusual drop introduces the possibility that BOC could be on sale, particularly for value seekers. But is this apparent deal just a value trap in disguise?
For those of you new to this “mini-Berkshire”, Boston Omaha earned the title because it, too, is a holding company.
Like Berkshire Hathaway, Boston engages in insurance and investment activities. Arguably, it is best known though for its ownership of a large number of billboards in the American Southeast along with a growing presence in broadband internet provision.
The ownership of several distinct and disparate businesses has earned Boston Omaha favorable comparisons to Omaha’s own Berkshire Hathaway, the much more famous holding company headed by Warren Buffett.
Top Line Growth Has Been On Fire
While Boston Omaha has not yet reported Q3 earnings, its Q2 earnings report provides a decent look at the company’s recent performance. For that quarter, total revenues rose 15.9% year-over-year to $24.2 million.
Billboard rental revenues increased 10%, while broadband internet revenues rose 7.6%. Insurance premiums proved the most impressive non-investment growth driver, rising by over 40%.
2023 has also seen Boston Omaha achieve consecutive quarters of profitability for the first time since 2021.
In Q2, the company generated $0.05 in earnings per share. Earnings for the first six months of the year totaled $0.16 per share. Assuming the company can remain in the black, Boston Omaha shares should start to move in lock-step with them.
The company has delivered exceptionally strong revenue growth in recent years. At the end of 2018, its trailing 12-month revenues totaled just $20 million. In the last 12 months, Boston Omaha has soared to $95 million. This rapid revenue growth is one of the most attractive aspects of the company, especially given its recent shift back toward profitability.
Boston Omaha also continues to grow its network of holdings. Earlier in November, for example, one of the company’s subsidiaries acquired Nevada’s SunRiver Fiber Network. This acquisition expanded Boston Omaha’s presence in the high-speed internet space and could set the stage for similar acquisitions going forward.
Analyst Ratings For Boston Omaha Are Bullish
At the moment, just two analysts have standing price forecasts for Boston Omaha shares. One projects shares to reach $23, while the other anticipates a price of $35. Compared to the most recent price of $14.88, these targets would imply returns of 55% and 135%, respectively.
Investors should, however, be cautious about including such high rates of return in their investment assumptions, particularly with only two analyst forecasts as guideposts.
With Boston Omaha’s short track record and intermittent profitability, the company is quite difficult to value using traditional metrics such as the price-to-earnings or price-to-earnings-growth ratios.
Other metrics, however, do suggest that the company could be on sale. To begin with, Boston Omaha trades at just 0.8 times book value. The price-to-cash-flow ratio of 15.8 may also supports an argument that it’s a bargain, provided cash flows rise steadily.
A final value consideration is the fact that the company carries very little long-term debt and holds a very large cash reserve. At the moment, Boston Omaha’s debt-to-equity ratio is a negligible 0.04 while the reserves of cash and cash equivalents combine to $103.8 million as of the end of Q2.
Is Diversification Bullish or Bearish for BOC?
While conglomerates like Berkshire Hathaway have succeeded in tying together disparate businesses, the same balancing act can be somewhat difficult to maintain at a scale as small as Boston Omaha’s.
The company’s combination of insurance, telecommunications and investment businesses also makes it somewhat difficult for investors to accurately value the enterprise.
Another challenge for Boston Omaha shareholders is the company’s ongoing habit of issuing new shares despite having ample cash on hand. In Q2, the company raised about $9.4 million in new equity.
With a large reserve of cash and equivalents already at Boston Omaha’s disposal for new investments, this activity dilutes existing shareholder ownership which in turn hurts confidence among the investor base.
Finally, investors must consider the possibility that Boston Omaha could be a value trap. With shares having lost nearly half of their value so far this year, existing shareholders have already been saddled with steep losses. This concern, though, may be limited in scope. During the time that the stock has been on the decline, the company has actually performed quite well while not taking on additional debt.
Is Boston Omaha Undervalued?
Even though the company is still quite small, its combination of renewed profitability, strong revenue growth and careful financial management all suggest that it could be oversold.
According to analysts, Boston Omaha stock is 96.5% undervalued with a consensus price target of $29 per share.
At the end of 2022, the company’s assets totaled $687.7 million, while that that number had risen to $773.2 million by the end of Q2 this year. Much of this gain was the result of the increasing value of Boston Omaha’s investments.
Another positive of Boston Omaha is its high rate of insider ownership, a figure currently sitting above 25%, and signaling a strong link between shareholder interests and those of management.
Of course, much of Boston Omaha’s future will depend on management’s ability to identify and acquire profitable new investments. If the company can continue to put its cash to use efficiently, shareholders can look forward to good returns over time. For now, Boston Omaha’s reserves earn a respectable return in treasuries due to higher prevailing interest rates.
While Boston Omaha does carry investment risks, the company appears to be undervalued at today’s prices. Trading at a discount to book value with virtually no long-term debt, a large cash stockpile and a decent history of revenue increases, it has emerged as a strong candidate for risk-tolerant value investors.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.