Boston Omaha (BOC 0.07%), both in its business model as well as the tone of its annual letters, appears to aspire to be the next coming of Omaha's most famous company: Warren Buffett's Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.93%). That shouldn't be a huge surprise, considering one of the company's two CEOs, Alex Rozek, is Buffett's great-nephew.

Though first incorporated as another business in 2009, Boston Omaha took its name and began its current business model in 2015. That's the year Rozek linked up with co-CEO Adam Peterson and bought its first business: a company that owned a building inhabited by a sushi restaurant. Since then, Boston Omaha has raised $480 million and deployed $280 million in over 50 transactions. Those include three wholly owned businesses (billboards, insurance, broadband), one SPAC, and a slew of other minority investments, both public and private. 

One of those wholly owned companies is surety insurance company General Indemnity Group. That big investment in insurance definitely invites a comparison to Berkshire, and is also why Boston Omaha's founders tended to use book value as a proxy for Boston Omaha's intrinsic value in its annual disclosures.

But no more. Here's why.

A blank  billboard on the side of a desert highway.

Image source: Getty Images.

Book value is now a "nearly worthless" metric, both for Boston Omaha and Berkshire

Because of a spring capital raise, Boston Omaha's 2020 annual letter was delayed, but it just came out this weekend, and with it, its last highlighting of annual book value growth, which declined 4.6% in 2020. Not bad, considering billboard advertising and insurance were heavily affected by the pandemic. Since 2015, Boston Omaha's book value has compounded at a 12% annual rate, nearly doubling in that time.

But that's not to say Boston Omaha's intrinsic value has compounded at the same rate. Why? Well, book value was already a highly imperfect proxy for business value heading into 2020, and accounting conventions are making it worse.

In fact, Boston Omaha "mentor" Berkshire Hathaway ditched citing book value in 2018. That was for a few reasons; in his 2018 letter to shareholders, Warren Buffett cited a greater proportion of Berkshire's earnings coming from operating businesses rather than public securities. While public securities are marked-to-market on the balance sheet, operating businesses, which had become more asset-light over time anyway, are not.

In addition, Berkshire had begun repurchasing shares at a premium to book value, though below management's assessment of intrinsic value, with Buffett noting, "The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality."

Boston Omaha now has even more reasons to ditch the book value metric. As Berkshire was repurchasing shares at a premium of its book value, Boston Omaha just raised capital, selling shares in April at $25 per share -- also at a premium to book value. Buying or selling shares at a premium to book value will distort the metric.

Additionally, Boston Omaha also launched its first SPAC called Yellowstone Acquisition Company (YSAC), back in November, and it currently owns about 3.4 million shares and 7.7 million warrants. The stock ownership is about a quarter of shares outstanding, yet Boston Omaha has to record almost the entire $140 million in Yellowstone's cash, most of which it doesn't own, on its balance sheet. Additionally, thanks to a recent change in SEC guidelines for warrants at the SPAC level, its warrants have to be recorded not as equity but as a liability, which, strangely lowers book value.

The complications around selling shares and SEC rule changes on SPAC warrants are compounded by high depreciation costs at both Boston Omaha's billboard business and its new fiber broadband business, which management believes are higher than the ongoing maintenance cash needs of the business. That has the effect of lowering book value.

Rozek and Peterson sum it up:

If you are confused, then you are paying attention... It seems like every year some additional quirk in accounting further separates the intersection of book value and intrinsic value so that they now, in our opinion, are far enough apart so as to be nearly worthless to shareholders.

How to value Boston Omaha, then?

Fortunately/unfortunately for investors, there is no easy way to value Boston Omaha. The best way may be to  look at each individual segment, value them separately, then add them together. The company does break down each of its owned businesses' operating performance across insurance, billboards, and broadband in its financial statements. Then there is Boston Omaha's marketable securities, which consist of short and long-term treasuries, unconsolidated affiliates, and publicly traded equities. Notably, these public equity investments now include the company's minority stake in Dream Finders Homes (DFH 2.06%), which went public in the first quarter of this year, with Boston Omaha's stake valued at $115 million as of March 31. Last quarter, these securities were found in Note 8 in the footnotes of Boston Omaha's quarterly report.

But there's a silver lining to all this work

Obviously, this growing conglomerate is difficult to value and will require substantial work by investors. However, that can also be an opportunity, as the more complicated a company is, the more likely it is to be mispriced. So despite its loose affiliation with Berkshire Hathaway, this small-cap stock, at just an $877 million market cap, still flies under the radar of many investors. Therefore, those with a solid grasp of valuation methods and financial statements, as well as faith in Boston Omaha's Berkshire-esque management, should definitely keep Boston Omaha on your radar.