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While I own many large companies that should provide attractive returns, I get most excited about the potential return for many of the small cap companies I own. If you can buy companies with good margins, consistent growth, and a small market cap, long term investors can see massive returns that could be potentially life changing. One of my favorites is a small cap conglomerate called Boston Omaha (NYSE:BOC).
Investment Thesis
Boston Omaha is a small cap conglomerate with a market cap of $844M. For those unfamiliar with the company, it owns three main subsidiaries (Billboards, Broadband, and Insurance), along with a portfolio of public and private investments. They have made many acquisitions over the last couple years (including a SPAC deal), so you must understand the business and be comfortable with management to take a position, but I like the long-term plan and outlook for the company. They recently reported Q2 earnings, which shows that the various business segments continue to grow. I’m still long and I think investors looking at small caps might find Boston Omaha to be an interesting pick.
Putting Cash To Work
A quick peek at the balance sheet shows that the company’s cash balance declined from $72.5M at year end to $40M at the end of Q2. Their equity portfolio and Treasury balance has also declined, but I’m not too worried about the health of the company. Boston Omaha has been a serial acquirer, and that continued in Q2. In April, they acquired InfoWest and GoFiber for $48.6M. While that is the biggest piece of Q2 for Boston Omaha as far as news, I liked what I saw from the recent Q2 earnings.
Q2 Earnings
I will break earnings down by segment because it will make things easier for readers to understand. All the segments continue to hum along, increasing revenues and digesting acquisitions.
Billboards
The billboard segment showed an increase in revenue for Q2, from just under $8M last year to $9.8M this year. They also had improved margins for the segment. I’m curious to see how aggressive the company will be in pursuing outside acquisitions for the billboard segment because they made a couple in previous years but haven’t made any additions in 2022. The billboard operations should continue to throw off cash, especially without the added expenses related to acquisitions.
Broadband
The broadband segment has grown revenues even faster over the last year, but it is primarily due to acquisitions. Revenue has more than doubled, going from $3.8M in 2021 to $8.1M this year. While margins were solid last year, the broadband segment actually lost money in Q2 due to additional expenses from the acquisition. The broadband segment is quickly catching up to the billboard segment as far as revenue. I think we will see the segment become the largest segment in the next year or two, especially if they continue to acquire new companies to add to the broadband segment on a regular basis.
Insurance
Like the other segments, the insurance segment posted a solid increase in revenue when compared to last year. It went from $2.5M last year to $3M this year. They did post a small operating income for Q2 but had a large loss due to other investment income. While this was primarily due to unrealized losses on investments, the actual insurance segment looks healthy to me based on the numbers. The investment side of things will make the insurance results fluctuate, but I’m expecting continued growth in the coming years for this segment as well.
Conclusion
While I’m still bullish below $30, I’m not blind to the fact that shares have run up almost 40% since my last article in May on Boston Omaha. Small caps are typically volatile, and Boston Omaha is no exception. If markets selloff, Boston Omaha will likely sell off more. I’m not a short-term trader and I’m bullish on the long-term future of the company, but a little price discipline never hurt anyone when it comes to investing. I would be patient and look for a better entry point at or around $25.
All the segments continue to grow revenues which is what I’m expecting for years to come. While acquisitions could lead to short-term margin pressure (like it did this quarter for the broadband segment), all three segments have the potential to be cash cows at larger scale. I will be keeping an eye on the balance sheet to see if the cash and investment balance continues to dwindle, but the liabilities side of the balance sheet shouldn’t create any problems in the foreseeable future. It’s nice to get a short-term bump in shares like we have had over the last couple months, but I have no intention of selling my position in Boston Omaha. The long-term future is bright and I think the company has the potential to grow from a small cap into a much large company.
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