Viorika
I have written several times about Boston Omaha (NYSE:BOC), one of my favorite small-cap stocks. I think the company has a lot of potential for long-term investors and shares many characteristics with the famous Berkshire Hathaway (BRK.A) (BRK.B). I recently wrote an update on Buffett’s conglomerate, and I figured it was time for an update on Boston Omaha after its recent Q3 earnings report. The company is much smaller than Berkshire, but the potential upside is much higher in my opinion due to the small size of the company with its $854M market cap.
Investment Thesis
Boston Omaha is a small-cap conglomerate with operating segments in billboards, broadband, and insurance, along with other various investments. The company recently reported Q3 results, showing strong revenue growth but posted a net loss of $1.4M. I’m not too worried about the profitability of the company because I expect the margins to improve for each segment as they continue to grow to scale. I will be keeping an eye on the balance sheet, which isn’t as strong as it was at the end of 2021, but I still think the long-term future is bright for Boston Omaha.
Q3 Results
I skimmed the most recent 10-Q and there are a couple of things I wanted to mention before jumping into the segment breakdown. Boston Omaha has been pretty consistent in making acquisitions in the last couple of years, but they didn’t make any in Q3. In the past, they have issued equity at a decent clip, but there were no equity issuances in Q3. All else being equal, I would prefer the company avoids diluting us as shareholders, but I can’t complain too much if the money is put to good use, and they don’t overdo it on issuing new shares. Now we can jump into billboard segment, which is the largest operating segment of the company.
Billboards
The billboard segment of the company posted the best operating results of the company’s operating segments in my opinion. Revenues increased over 20% compared to Q3 2021, which was partially driven by an acquisition. Margins also improved, with gross margins bumping up a couple of ticks to 65% and net margins coming in just over 12%, a 3% increase from 2021. While billboards might not be the sexiest line of business, I think Boston Omaha has the potential to post continued double-digit revenue growth (aided by potential future acquisitions) at the same time as improving margins as the scale of the segment grows.
Broadband
As predicted in my first article on Boston Omaha, the broadband segment has grown quickly to the point where the billboard segment has dropped below 50% of overall revenues. Again, this is driven by acquisitions made in the last year, but revenue more than doubled in Q3 when compared to 2021. Unfortunately, the net loss expanded in Q3 ($565k), but it wasn’t a massive loss. I wouldn’t be surprised to see broadband revenues surpass billboard revenues in the future, and I’m expecting to see the bottom line turn positive for the segment as they increase the scale of their operations.
Insurance
The insurance segment also posted impressive revenue growth for Q3, coming in at just over 25% for Q3. This was driven primarily by a 40% increase in premiums earned and a slight bump in investment and other income. Commissions declined slightly in Q3. Like the broadband segment, the insurance segment posted a loss in Q3. The operating loss was $592k and just under $1.5M after factoring in investment losses. Like the broadband segment, I’m expecting the same thing long term for the insurance segment. Revenue should continue to grow at a solid clip, and I think margins will improve as the segment increases in size.
Financials
For a company like Boston Omaha, I like looking at the individual operating segments to see if there are any red flags with the core businesses. For any company I own, I also look at the financials to see if there are any obvious red flags there. The income statement, while showing a small loss for Q3, showed impressive revenue growth that is set to continue in my mind. The balance sheet still has more cash than debt, but there were a couple of things worth noting that could become a problem if they continue.
When compared to the Q2 balance sheet, several key items on the asset side of the balance sheet showed small declines. Cash and equivalents ($40M to $38.5M), US Treasury trading securities ($40.6M to $37.9M), equity securities ($21.3M to $13.3M), and short-term investments ($8.6M to $7.9M) all declined in the last quarter. It’s not something to worry about yet, but I will be keeping an eye on it to see if things stabilize in future quarters.
Conclusion
Like I have said in past articles on the company, small caps are notoriously volatile, and Boston Omaha is no exception. For investors looking to start a new position (or add to an existing one), I would look for a drop near $25. If shares drop below $20, like they did in June, I plan to add to my position. All three segments showed impressive double-digit revenue growth, but the billboard segment was the best out of the three, in my opinion, due to the improving margins.
The broadband and insurance segment posted losses, which isn’t ideal, but I think they should turn profitable in the future as they grow to scale. I’m curious to see if they pursue any further acquisitions like they have in previous years. The balance sheet, while still having plenty of cash, isn’t nearly as strong as it was at the end of 2021. I still think the long-term future is bright, but I will be watching future quarterly reports to see how the company’s financials develop over the next couple of years. Until then, I will be holding onto my shares and might look to add opportunistically on share price dips.
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