Allow me, please, to preface today's column with a disclaimer: I come bearing no ill will toward the good citizens of Boston, Massachusetts -- or Omaha, Nebraska, either.
That being said, famed value investor Peter Lynch did advise us, once upon a time, to seek out investments in "boring" companies with unexciting names, opining, "A company that does boring things is almost as good as a company that has a boring name, and both together is terrific."
Which brings us to the topic we're here to discuss today: Is Boston Omaha (BOC -0.30%) the kind of stock you should invest in?
A boring name for a boring line of business
Right off the bat, I'm going to guess that when most people think about exciting places to visit, Omaha is not the first place that comes to mind. Yes, it may have great steaks. Yes, it may be the site of Warren Buffett's annual meeting of Berkshire Hathaway shareholders. But exciting? Um... no.
And that may be our first clue that "Boston Omaha" is a company worth looking into -- simply because other investors may avert their eyes.
Our second clue, of course, is the business that Boston Omaha is in. In today's era of streaming media, smartphones, and tablet computers, Boston Omaha's sale of advertising space on outdoor billboards sounds not merely boring. It's positively old-fashioned! I mean, paper-plastered physical billboards? Do those even exist anymore?
A boring business with potential?
Turns out they do exist. In fact, across the country, Boston Omaha operates no fewer than 2,900 individual outdoor billboards -- although, in a nod to the 21st Century, 61 of these "billboards" are actually digital displays. From these assets, the company extracts $39 million in annual revenue, for which investors have decided to reward Boston Omaha with a $490 million market capitalization -- 12.5 times sales.
If that sounds like a heady valuation, though (and it does), consider this: Working off an admittedly small base, in the five years since Boston Omaha began doing business in 2013, this company has grown its revenues 129,500%. (That's not a typo.)
Granted, growth has slowed down a bit as Boston Omaha's business got bigger. But even so, Boston Omaha's growth rates are more than respectable: 432% in 2016, 135% in 2017, 122% in 2018, and -- while final results for the year aren't yet in -- reaccelerating 168% growth in the first nine months of 2019, compared with the first nine months of 2018.
That kind of consistent, repeated, triple-digit growth could well justify a sizable price-to-earnings ratio in Boston Omaha stock.
The problem with Boston Omaha stock
There's just one problem: Despite massive increases in sales, Boston Omaha doesn't actually have a price-to-earnings ratio -- or for that matter, earnings, period. Indeed, since its foundation in 2009, Boston Omaha has never earned a penny of profit. It wasn't profitable last year, and is not expected to be profitable next year, either, according to estimates tallied by S&P Global Market Intelligence.
This lack of profitability may be one reason why, over the past 52 weeks, Boston Omaha stock has sunk 17%, versus a 25% gain for the S&P 500. It may be the reason investors have been avoiding the stock of late.
But it could also be a mistake.
The promise of Boston Omaha stock
You see, while it's true that Boston Omaha is not currently profitable, as generally accepted accounting principles (GAAP) measure such things, the company is generating positive free cash flow (FCF). The last 12 months, in fact, saw Boston Omaha generate $4.16 million worth of such cash profits. That may not sound like a lot, but rival outdoor advertising giant Clear Channel Outdoor Holdings has $2.7 billion in annual sales (69 times bigger than Boston Omaha), yet earns no free cash flow from them. Viewed in that context, one might even say Boston Omaha is doing pretty well.
Moreover, when valued on the basis of its free cash flow, and valued too on its debt-adjusted market capitalization (i.e., its enterprise value), Boston Omaha's stock turns out to have an enterprise value-to-free cash flow ratio of almost precisely 100 -- versus infinity-times-FCF for Clear Channel.
Granted, 100 times FCF still does not sound like a particularly cheap valuation. But if Boston Omaha should prove able to continue growing its sales -- and growing its free cash flow, too -- at the 100%-plus rates it's achieved over the last five years, then it could in fact be cheap, even at 100-times FCF.
Long story short, I don't know that Boston Omaha stock is a "millionaire-maker stock" necessarily. But thanks largely to the growth rate, the valuation on this one looks intriguing enough that I'm curious to see how it plays out.