Why This “Baby Berkshire” Is Saying Goodbye To Book Value

Boston Omaha (NASDAQ: BOMN), both in its business model and in the tone of its annual letters, seems to aspire to be the next arrival of Omaha’s most famous company: Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). This shouldn’t come as a huge surprise, given that one of the company’s two CEOs, Alex Rozek, is Buffett’s great-nephew.

Although first incorporated as a separate company in 2009, Boston Omaha took its name and began its current business model in 2015. This was the year Rozek partnered with co-CEO Adam Peterson and bought his 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 more than 50 deals. These include three wholly owned companies (billboards, insurance, broadband), a PSPC and a host of other minority investments, both public and private.

One of these wholly owned companies is General Indemnity Group surety insurance company. This large investment in insurance definitely invites comparison with Berkshire, and this is also why the founders of Boston Omaha tended to use book value as a proxy for Boston Omaha intrinsic value in their annual disclosures.

But not more. Here’s why.

Image source: Getty Images.

Book value is now a “nearly worthless” measure for both Boston Omaha and Berkshire

Due to a capital raise in the spring, Boston Omaha’s 2020 Annual Letter was delayed, but it just came out this weekend, and with it, its latest culmination of annual book value growth, which decreased 4.6% in 2020. Not bad, considering billboards and Insurance has been heavily affected by the pandemic. Since 2015, Boston Omaha’s book value has grown at an annual rate of 12%, almost doubling during that time.

But that’s not to say that Boston Omaha’s intrinsic value has increased at the same rate. Why? Well, book value was already a very imperfect approximation of business value by 2020, and accounting conventions make it worse.

In fact, Boston’s “mentor” Omaha Berkshire Hathaway dropped book value in 2018. This was for several reasons; In his 2018 letter to shareholders, Warren Buffett cited a greater proportion of Berkshire’s earnings from operating companies rather than government securities. While government securities are marked-to-market on the balance sheet, operating companies, which had gotten lighter over time anyway, are not.

Additionally, Berkshire had begun repurchasing shares at a premium to book value, albeit below management’s assessment of intrinsic value, with Buffett noting: “The math for such purchases is simple: every transaction increases the intrinsic value per share, while the book value of the share decreases. This combination causes the book value dashboard to become increasingly disconnected from economic reality. ”

Boston Omaha now has even more reason to abandon the book value metric. As Berkshire bought back shares at a premium to 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 for more than the book value will skew the measurement.

Additionally, Boston Omaha also launched its first SPAC called Yellowstone Acquisition Company (NASDAQ: YSAC), in November, and he currently holds approximately 3.4 million shares and 7.7 million warrants. Shareholding represents about a quarter of shares outstanding, but Boston Omaha must record nearly all of Yellowstone’s $ 140 million in cash, most of which is not held, on its balance sheet. In addition, thanks to a recent change in the SEC guidelines for warrants at the PSPC level, its warrants must be recorded not as equity but as a liability, which strangely reduces the book value.

Complications from selling stocks and changing SEC rules on PSPC warrants are compounded by high depreciation costs for both Boston Omaha’s billboard business and its new fiber broadband activity, which management believes exceeds the company’s ongoing maintenance cash requirements. This has the effect of reducing the book value.

Rozek and Peterson summarize:

If you are confused then you pay attention … It seems like every year there is an additional oddity in accounting that further separates the intersection of book value and intrinsic value so that they are now, in our opinion, enough. remote to be almost worthless to shareholders.

How to promote Boston Omaha, then?

Fortunately / unfortunately for investors, there is no easy way to rate Boston Omaha. The best way may be to look at each segment individually, evaluate them separately, and then add them up. The company breaks down the operational performance of each of its businesses in terms of insurance, billboards and broadband in its financial statements. Then there are Boston Omaha marketable securities, which consist of short- and long-term treasury bills, unconsolidated affiliates, and publicly traded stocks. In particular, these public capital investments now include the company’s minority stake in Dream Seeker Homes (NASDAQ: DFH), which went public in the first quarter of this year, with Boston Omaha’s stake valued at $ 115 million as of March 31. In the last quarter, these titles were found in footnote 8 of the Boston Omaha Quarterly Report.

But there is a silver lining in all of this work

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

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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