Shares of Boston Omaha (BOC -1.30%) fell 40% in 2023, even as the S&P 500 Index (^GSPC 1.02%) climbed 23%. You might be tempted to think that Boston Omaha's underlying businesses had a terrible year -- except you'd be wrong.
On the contrary, the financial holding company and so-called mini-Berkshire Hathaway continued to quietly build its empire in 2023. And I think the market is drastically undervaluing the stock right now.
For one, consider that Boston Omaha's co-chief executive officers, Alex Rozek and Adam Peterson -- who are, in my opinion, two of the world's most talented capital allocators -- have deployed well over $500 million in capital since they took the helm in 2015. That's more than Boston Omaha's current entire market cap, which stands at only $488 million as of this writing. So the market seems to be assuming that the company's consolidated businesses and assets are worth less than Rozek and Peterson have effectively paid.
Boston Omaha has four distinct business segments. These include its Link Media Outdoor billboards business, which as of the latest quarter operated about 4,000 billboards with 7,600 advertising faces in 16 states; its Boston Omaha Broadband (BOB) fiber internet business, which currently serves more than 40,000 customers and growing; its General Indemnity Group (GiG) insurance business, which sells surety bonds in all 50 states; and Boston Omaha Asset Management (BOAM), through which the company owns a variety of investments, including minority stakes in several diversified businesses.
Why Boston Omaha is so hard to value
That raises an obvious concern: Boston Omaha is an exceedingly difficult stock to value.
Book value per share, for instance, is typically considered a reliable measure of a financial holding company's intrinsic value. But after reporting this quarterly metric for several years, management publicly moved away from using book value in mid-2021 after it became increasingly disconnected from the company's actual intrinsic value.
The culprit: A variety of accounting quirks were increasingly distorting reported values in any given quarter, including unrealized gains and losses, values of investments, and depreciation and amortization schedules for its physical assets (particularly in the billboard business).
Indeed, revenue through the first three quarters of 2023 increased 22% to $71.6 million. Unrestricted cash grew by over $20 million to $88.5 million, total assets rose 11% to $764 million, and stockholders' equity increased almost 7% to $541 million. But a more than 30% increase in depreciation and amortization expenses (to $14.3 million) during the same period helped drive Boston Omaha to a net loss of $3.4 million through the nine months ended in September.
Meanwhile, take Boston Omaha's 22.9% stake in Sky Harbour Group (SKYH) as another example. That position in Sky Harbour was a byproduct of a merger in 2021 for which Boston Omaha served as sponsor of a special purpose acquisition company, or SPAC. As of this writing, the stake is worth nearly $150 million.
Sky Harbour stock has more than doubled to more than $10 per share since mid-October. That same stake was worth a little over $108 million at year-end 2022, and fluctuated wildly throughout the year as Sky Harbour's share price changed. Until Boston Omaha actually opts to sell that stake, however -- and management told shareholders it would only opt to do so at around $18 per share -- the company won't actually realize any losses or gains.
That's not to mention Boston Omaha's May 2023 move to acquire the 52% stake it didn't already own in 24th Street Asset Management. 24th Street is a small firm with more than $122 million in assets under management at the end of 2022, and Boston Omaha's 48% stake was valued at just under $7 million at the end of 2022.
Or consider its investments in Boston Omaha Build for Rent, valued at nearly $22 million at year-end 2022, and a regional bank stake valued at just over $19 million. It's difficult for the average investor to keep a running tally for the values of these businesses until management provides us with an official update in the annual letters (typically released in May).
What's next for Boston Omaha shareholders?
It should be quite interesting, then, to see how the market reevaluates Boston Omaha's share price once its full-year 2023 results hit the wires in the coming months.
In the end, even if we exclude the obvious calculable increases in intrinsic value from its minority stakes mentioned above, it seems a big stretch to assume Boston Omaha deserves to be trading near a four-year low.
