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Value Thoughts - USA Mobility Inc.

May 02, 2011 | About:
wax

wax

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USA Mobility Inc. (USMO) is a provider of wireless communications solutions to the healthcare, government, large enterprise and emergency response markets.

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.

Basis

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.

Short-Term Investment

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.

Earnings Growth

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.

Valuations

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.

Wax

Disclaimer

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.

About the author:

wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

Visit wax's Website


Rating: 3.5/5 (6 votes)

Comments

red777
Red777 - 2 years ago
Wax, I really think you need to do a little more homework. The company's historical core business is in consistent secular decline (the classic buggy whip) with compounded annual revenue decline for past 3, 5 and 1 year at 19%-20% per annum. It is a "melting ice cube" (which is fine so long as you value it as a liquidating asset).

In your ratios on debt, you failed to read USMO's most recent disclosure or notice that the company spent $163MM in early march to buy the AMCOM business (actually decent business but they way overpaid IMO at 13x trailing EBITDA) which is 1/5 the size of the company's core paging revenues which will mitigate (but not stem entirely) the USMO's continued revenue and EBITDA shrinkage. The company spent all its cash and went into $53MM of debt which it expects to pay off within the next couple of years (while shareholders hold their breath).

All your analysis don't seem to reflect the AMCOM acquisition or the fact the company's core business is melting ice cube. Management are excellent operators but it's recent M&A initiative caused a lot of angst among its shareholders (rather then its prior strategy of returning cash to shareholders so that its shareholders can make their own investment decisions) -- yours truly included. I ditched once I realized that mgmt and board seemed to value their own longetivity more then it valued serving its shareholders' interests -- just IMO. good luck and you probably should reprogram your computer bot.
wax
Wax - 2 years ago
Red;

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.

So the AMCOM purchase was a quarterly event but the valuation and associated ratios are for FY10.

As to being a melting ice cube, that could be true. But what happens when they are the last ice cube?

Wax

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