As a single-source provider, the company’s strategy is to focus on the business-to-business marketplace and to offer wireless connectivity solutions. The company operates nationwide networks for both one-way paging and advanced two-way messaging services. In addition, the company offers mobile voice and data services through third party providers, including BlackBerry® devices and global positioning system (GPS) location applications.
The company’s product offerings include customized wireless connectivity systems for healthcare, government and other campus environments. USA Mobility also offers M2M (“machine to machine”) telemetry solutions for numerous applications that include asset tracking, utility meter reading and other remote device monitoring applications on a national scale.
Financial information presented in this report for USA Mobility, Inc., is based on the company’s most recent SEC Form 10-K filing for year ending Dec. 31, 2010, as filed with the Securities and Exchange Commission on Feb. 24, 2011.
The stock closed recently at $15.45, with first Resistance at $15.90, a 3% increase from the recent close, second Resistance at $19.21, a 24% increase from the recent close, first Support at $14.64, a 5% decline from the recent close and second Support at $12.10, a 22% decline from the recent close.
Even though the stock price is trending upward, there does not appear to be any near-term price breakout on the horizon, making a short-term investment impractical at this time.
Long-Term (Five-Year Hold) Investment
In review of the company’s latest annual financial information we note that the current ratio is at 4.48, the quick ratio is at 4.28, and the cash ratio is at 3.74, were all what we consider investment quality.
In addition, Debt to EBITDA at 0.01 and a cash conversion cycle of 13 days, were well within our investment quality parameters. Additional bright spots were ROIC at 131% and free cash flow at $3.25. Although year over year free cash flow declined from $3.97, or about 18%, at this time we do not see the decline as the beginning of trend.
We also note that the company ended FY10 with debt of $0.03 per share, and paid an annual dividend of $1.96 per share.
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.
However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.
In the case of USA Mobility, the company had year over year earnings growth of (7%), ending FY11 with earnings of $4.52 per share. With a current PE of 3, the spread between earnings growth and the PE is about 2, meaning that for a value investor considering earnings growth, a fair value for the stock is about $6.50.
Based on our review of the company’s latest annual financial information we think a reasonable value estimate for the company is in the $48-$50 range.
Assuming all due diligence was performed prior, we would set a buy target in the $29-$30 range, a first sell target in the $56-$57 range, and a close target in the $60-$62 range.
Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a buy target in the $22 to $23 range.
Considering a recent close of $15.45, an estimated merger and acquisition payback of 2.6 years (assuming EBITDA remains the same), and free cash flow of $3.25, we think the stock is currently under valued, and a candidate for additional research for the Wax Ink Portfolio.
We have no position in USA Mobility Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector or theme.