As one of the most important factors to consider in investing, cash flow is the life blood of every firm. A couple of weeks ago I did a piece on United Online’s impressive cash flow, but that it might not translate into a profitable investment. Today I will be reviewing a company with similar characteristics – shrinking business with tremendous free cash generation. The company describes itself as a wireless communications company, but there basic service comes from the paging business. The good news is that they are very strong on this niche. The bad news is that this niche has slowly been going away. It’s pretty clear that the market understands this fact as the stock is off significantly over the past five years. Given the huge cash generation, the company has been able to support an oversized dividend – for the time being. Beyond the positive cash flow, the balance sheet is very strong.
USA Mobility, Inc. (USA Mobility) is a provider of wireless communications solutions to the healthcare, government, enterprise and emergency response sectors. The Company operates nationwide networks for both one-way paging and two-way messaging services. In addition, USA Mobility offers mobile voice and data services through Sprint Nextel Corporation, 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 machine to machine (M2M) telemetry solutions for numerous applications that include asset tracking, utility meter reading and other remote device monitoring applications on a national scale.
Their revenue is derived primarily from the service contracts to subscribers, with only a small fraction coming from product sales. Here is a brief exert from USMO’s latest 10K:
During 2010 USA Mobility will continue to focus on serving the wireless communications needs of the
Company’s customers with a variety of communications solutions and new product offerings, while operating an efficient, profitable and free cash flow-based business strategy. USA Mobility’s principal operating objectives and priorities for 2010 include the following:
• Drive free cash flow through a low-cost operating platform;
• Preserve average revenue per unit;
• Reduce paging subscriber erosion;
• Maximize revenue opportunities around the Company’s core subscriber and revenue segments, particularly healthcare; and
• Seek revenue stability by potential business diversification.
Here is the past ten years of revenue:
It doesn’t take a rocket scientist to spot the trend here. I am always intrigued with a business model such as this. Management must surely understand the business is dying? However, management seems pleased if they can simply slow the rate of decline.
- Highly competitive market with intense pricing pressure.
- Industry obsolescence.
- Inability to diversify revenue stream.
In my opinion, USMO is nothing more than a value trap. If I am wrong and management can profitably diversify, one still has plenty of time to take a position.