In one value investing group, I’ve come across the idea of USA Mobility (USMO) as an investment opportunity for value investors. At the first glance in its valuation, it seemed to be extremely attractive. The P/E is only 2.8x, P/B is 1.3x and only 3.8x cash flow multiples. Since 2007, it kept paying constant dividend at the very high rate, and now at the price of $13.75 per share, the total dividend was $1 in 2011, making the dividend yield of nearly 7.3%.
USMO is the leading provider of reliable and affordable wireless communications solutions to healthcare, government, large enterprise and emergency response sectors. It mainly focuses on business to business marketplaces for wireless connectivity solutions. The business was mainly generated via direct sales channel to customers from small to medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses and Federal, state, local government.
Around 90% of units generated via this direct channel, and the majority revenue was from the large account size, more than 50% from account larger than 1000 units, and around 25% from account from 101 to 1000 units. In this field, there is the term named average revenue per unit (ARPU), considered to be the key revenue measurement as it showed whether charges for similar services and distribution channels were increasing or decreasing. Consolidated for both direct and indirect channel, it was good to see that ARPU was increasing over time for USMO, from $8.64 in 2008 to $8.84 in 2010.
For financial health, USMO is quite conservatively financed. The D/A is nearly 30% only, whereas the total debt is only 8.4% of the total assets. On the asset side, the biggest item is the level of goodwill, taking nearly 40%. The $131 million goodwill was generated largely via the acquisition of Amcom Software in the first quarter of 2011.
Dated back further, actually USMO was recognized from the merger between Arch and Metrocall companies and begin to have financial reporting effect since 2004. It is worrisome to look at the trend for the operating performance over the past 06 years. The top line has kept decreasing at breathtaking place. In 2004, it got nearly $500 million in revenue, and in fiscal 2010, the total revenue was only a little more than $230 million. The top line has been cut nearly in half in 06 years time.
However, the operating income and the net income have begun to increase over time, leading to the growth in the operating margin and the net margin. Currently, the operating margin in 2010 was 57% whereas the net margin for that fiscal year was 33.4%. Overtime, USMO has kept reducing the costs of operating to cope with the decline in the revenue. The negative operating income and net income was mainly due to the goodwill write-down of around $188 million off the balance sheet.
USMO has been the consistent cash flow generator. However, the level of operating cash flow and free cash flow are in the downside as well.
Even at only 2.8x P/E but it was the same valuation of 2009, and for the average Cash flow multiples, it was traded around 4x-5x since 2006, so compare to historical valuation, it was not the screamingly cheap. In addition, there are two issues: the first one is the declining trend in the operating performance that I mentioned above, in both revenue and the level of cash generated. Second is the new level of goodwill booking in 2011, and it might easily be written totally off the book like in 2008. Personally, I would not consider the stock to purchase at this moment, at this price.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.