USA MOBILITY INC USMO
August 01, 2011 - 7:34am EST by
cuyler1903
2011 2012
Price: 16.51 EPS $0.00 $0.00
Shares Out. (in M): 22 P/E 0.0x 0.0x
Market Cap (in $M): 365 P/FCF 0.0x 0.0x
Net Debt (in $M): 8 EBIT 80 89
TEV ($): 373 TEV/EBIT 4.7x 4.2x

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

USA Mobility, Inc. (Nasdaq: USMO) is a special situation value equity with a misunderstood, transforming business model and virtually all of the characteristics that value investors seek, which should lead to a large valuation increase as investors take notice of the story and hidden value is realized: 

  1. Very low valuation (3.9x run-rate EBITDA, 4.2x run-rate EBITDA-Capex) and high FCF yield;
  2. A large hidden asset in $494mm of usable NOLs, $372mm of which are not subject to IRC 382 limitation create Adjusted EV valuation to a tax-paying strategic buyer <3.0x run-rate EBITDA-Capex using the below PV estimates;
  3. Zero sell-side analyst coverage;
  4. Brilliant management, led by Royce Yudkoff as Chairman (http://abry.com/home/ourteam/royceyudkoff.aspx), who is the co-founder of highly successful telecom buyout fund ABRY Partners despite ABRY not being a current owner of USMO; and
  5. Strong insider buying on the open market by eight different officers and directors since March 2011 - 69,314 shares for total price of $875,000.  CEO Vincent Kelly and Amcom President Chris Heim were both large buyers.  

 

Valuation and NOLs 

Enterprise Value

   

Price

   

16.51

Shares Outstanding

 

22.10

Market Cap

   

364.87

       

Cash

   

(29.50)

Debt @ 5.25%

 

37.80

Net Debt

   

8.30

       

 TEV

   

373.17

 

NOL Carryforwards per 2010 10-K

         
     

12/31/2010

Rate

Value

PV @ 5%

Assumption

Federal - subject to IRC 382

122.00

35.00%

42.70

16.90

Used over 19 yrs

Federal - not subject to IRC 382

372.00

35.00%

130.20

102.02

Used over 5 yrs

Federal - not usable/will expire

410.00

0.00%

-  

-  

 

Total

   

904.00

 

172.90

118.91

 

 

Target Value

 

Low

Mid

High

Run-Rate Cons. EBITDA-Capex

 

88.80

88.80

88.80

Multiple

   

5.50

6.50

7.50

TEV

   

488.40

577.20

666.00

           

+ PV of NOLs (50%/75%/100%)

59.46

89.18

118.91

+ Cash

   

29.50

29.50

29.50

- Debt

 

(37.80)

(37.80)

(37.80)

Equity Value

 

539.56

658.08

776.61

Shares Outstanding

 

22.10

22.10

22.10

Target Price

   

24.41

29.78

35.14

 

 

 

 

 

 

 


Detail 

  • Market views USMO as a dying pager business, yet key customer segments of Healthcare and Government still value the cost/benefit proposition of paging solutions and will continue to use paging as part of their mission critical communications systems for years to come. In Q2, unit erosion improved to 2.7% from 3.5% in Q2 2010, and revenue erosion improved to 0.8% vs. 3.9% in Q1 2011 and 5.8% in Q2 2010.
  • USMO announced in March the acquisition of Amcom Software (www.amcomsoftware.com) for $163 million, a fast-growing (revs +19%, EBITDA +54% 2010/2009), 24% operating margin company and recognized leader in software solutions which enable seamless, critical communications. Importantly, Amcom sells into the same channels as wireless, allowing USMO tremendous sales synergy to those customers seeking to upgrade their communications.
    • While paging business is declining, these declines are slowing due to the stickiness of healthcare and gov't business (i.e. hospitals that can't afford to go the smartphone route and doctors that prefer pagers).
    • The Amcom website and conference call transcript below are must reads.
  • Management raised guidance significantly this past week:

 

($MM)

 

2011 Guidance

Q2 2011

Q2 2011 Annualized

Consolidated

     

Revenue

 

248.00

65.20

260.80

Opex

 

162.00

41.10

164.40

EBITDA

 

86.00

24.10

96.40

Capex

 

6.50

1.90

7.60

EBITDA-Capex

79.50

22.20

88.80

         

Wireless

       

Revenue

 

200.00

52.10

208.40

Opex

 

127.00

31.70

126.80

EBITDA

 

73.00

20.40

81.60

Capex

 

6.00

   

EBITDA-Capex

67.00

   
         

Software

       

Revenue

 

48.00

13.10

52.40

Opex

 

35.00

9.40

37.60

EBITDA

 

13.00

3.70

14.80

Capex

 

0.50

   

EBITDA-Capex

12.50

 
 
 
  • Prior to this quarter's marked stabilization, paging revenue has been declining 19% annually, so despite the marked slowing in declines, it makes sense to conservatively expect $53mm of paging EBITDA in 2011 to decline at similar rate over next few years as management looks to manage costs on that side of the business. 
  • USMO translates operating income to cash flow effectively as it has not been a cash taxpayer in recent years.
  • NOLs
    • Large hidden asset: buried in the 10-K, you'll find that USMO has $904mm of NOLs that expire in varying amounts through 2029, of which $372mm are not subject to an IRC Section 382 limitation. Approx. $532 million of these NOLs are subject to an annual $6.1 million Section 382 limitation (IRC Section 382 limits a company's ability to utilize net operating losses).
    • NOLs allowed the Amcom acquisition to be completed in a very tax efficient manner.
    • To a tax-paying strategic buyer, the NOLs have tremendous value.
  • Dividend is presently $1.00/share, representing a 6.1% yield while you wait for value to be realized.
  • Excess cash flow to be aggressively applied to retiring the $51.9mm of debt taken on for Amcom deal, of which only $37.8mm is now remaining. Through prepayments, USMO retired $14.1mm of debt in Q2, implying that USMO will be debt free during Q1 2012.
  • Management's shareholder friendly stance indicates that after retiring debt, it will continue to return cash to shareholders through means which may include large share buyback, future special dividends or higher dividends. There is precedent for special dividends, as the company paid a $1.00/share special dividend in October 2010, $0.97 of which was a return of capital and $0.03 was a dividend.

 

Key Documents to Read:

Q2 Press Release with Earnings Guidance:  http://phx.corporate-ir.net/phoenix.zhtml?c=112049&p=irol-newsArticle&ID=1589829&highlight=

Press Release regarding Amcom Acquisition:  http://phx.corporate-ir.net/phoenix.zhtml?c=112049&p=irol-newsArticle_print&ID=1535684&highlight=

Conference Call regarding Amcom Acquisition:  http://edgar.sec.gov/Archives/edgar/data/1289945/000129993311000743/exhibit1.htm

Amcom Software website:  www.amcomsoftware.com 

 

Disclaimer: The author of this idea has a position in this security and may trade in and out of this position without informing the readers of this opinion.

Catalyst

Potential Catalysts: 

  • Buyside understanding the story, begin valuing USMO as a going concern rather than a cash runoff story
  • Market ascribing value to the fully usable NOLs
  • Aggressive retirement of bank debt, expected to be fully retired by Q1 2012
  • Special dividend, share repurchase or increasing of the recurring dividend beginning 2012
  • Sale of company to a tax-paying strategic buyer, realizing value from the NOLs
    sort by    
      Back to top