Markets have not been kind to investors so far in 2022. This is especially true for technology and small-cap stocks, which have both underperformed the top indices so far in 2022. One small-cap stock that has been taken to the woodshed is Boston Omaha (BOC -0.26%), a small-cap conglomerate started in 2015. The stock is down 25.8% year to date, even though the company continues to grow its operational businesses and make smart investments. In fact, with this drawdown, Boston Omaha stock is only up 42% since the 2015 takeover, severely underperforming the S&P 500's 79% total return over that same time period.
Boston Omaha is being left for dead by many investors right now. Are they right? Or does that mean now is the time to pick up some shares?
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What is Boston Omaha?
Capitalized by current co-CEOs Adam Peterson and Alex Rozek in June of 2015, Boston Omaha is a company with a broad mandate to increase intrinsic value per share while maintaining an "uncompromising financial position," according to its initial shareholder letter. This gives the two executives a broad mandate to allocate the cash they have into various different industries and minority investments. Its actions and business plan have led some to refer to it as a "Baby Berkshire," a reference to the conglomerate Berkshire Hathaway and how it does business.
So far, the company has focused on a few main areas. First, it has invested over $100 million into billboard assets, whose advertising faces generate steady cash flow for shareholders. In the 2021 shareholder letter, Peterson and Rozek said the assets now generate over $1 million a month in cash flow, or $12 million a year. These are not high-growth assets, but they can generate durable profits that management can then reinvest into other areas of interest.
Second, Boston Omaha has invested around $20 million into various surety insurance operations it now calls General Indemnity Group. In 2021, the unit wrote $9.3 million in premiums, but is still in its early stages and not that profitable. However, it should provide a steady stream of capital -- otherwise called "float" -- for Boston Omaha to invest in other assets like treasuries, bonds, and securities as it grows.
Third, Boston Omaha has a fast-growing broadband/fiber business, which we'll get into in the next section.
Currently pushing hard into broadband
Over the last few years, Boston Omaha has seen lots of value in rural broadband/fiber internet providers. In 2020 it spent $41 million acquiring Airebeam, which operates in Arizona, and Utah Broadband, which (you guessed it) operates in Utah. These acquisitions have helped Boston Omaha easily scale into the industry, and it now has 18,200 subscribers that brought in $15.2 million in revenue and $4.6 million in EBITDA last year. On top of these acquisitions, it started a new business called Fiber Fast Homes to partner with homebuilders to install internet services in new developments.
On April 1, Boston Omaha announced yet another acquisition in broadband, this time of a company called InfoWest for $49.4 million. The deal is sizable for a company of Boston Omaha's size but will add around 20,000 new internet subscribers to its operations. Hopefully, the combined broadband entity will start generating lots of cash flow for Rozek and Peterson to reinvest.
Still tons of dry powder left
At the end of the first quarter, Boston Omaha had liquid investments and cash/equivalents valued at $172 million. Almost $50 million of that is going to the InfoWest acquisition, but the company will still have over $120 million in dry powder to make more investments. This is a significant portion of Boston Omaha's $625 million market cap.
And don't forget about the cash flow coming in from the broadband, billboard, and (potentially soon) insurance operations. Relative to its equity value, there is a mountain of cash to potentially deploy, with valuations coming down across the board because of the bear market. This could be a lucrative environment for Rozek and Peterson to acquire/invest in some assets on the cheap and could be a crucial period for creating future shareholder value.
So is the stock a buy?
There are a lot of moving parts to Boston Omaha. We didn't even get to discuss in detail the company's asset management business, which has stakes in Dream Finders Homes and Sky Harbour Group valued at over $50 million each. It is also building out a real estate investment fund for investors to participate in. This section of the business, called Boston Omaha Asset Management (BOAM), had minority stakes valued at $141.5 million at the end of 2021.
If you're thinking of investing in Boston Omaha, you need to decide whether you like Rozek and Peterson's investment style and whether all these allocation decisions have created and will create shareholder value over the long haul. With the stock trailing the S&P 500 materially over the past seven years, now could be a time to buy some shares at a discount, setting yourself up for fantastic returns over the next decade and beyond.
