"If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the "cigar butt" approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the "bargain purchase" will make that puff all profit."
- Warren Buffet
USMO is in an industry that many believe is on its way to obsolescence, but is it? Contributing to this view is a massive shift in the mass market from pagers to handphones and other mobile communication devices. I hold a contrary view, I believe that the industry is transitioning from one with mass appeal to one with a more limited audience. It will continue to be used by thousands of medical, security and emergency workers as a back up mode of telecommunication. The robustness and cost effectiveness of the paging option will ensure that this technology survive even though it will pass from popular usage.
And this is when it gets interesting. The market is probably big enough for only one player and USMO is the biggest and making sure that it is the most cost effective. Over time as other players leave the scene or gets consolidated, it will emerged as a natural monopoly in a smaller but stable market.
To ensure that USMO gets there, it has to continually cut cost and ensure that they remain the low cost provider. Over the next few years they will have to wrench out cost to stay as the low cost producer. During the last earnings webcast, it was heartening to hear management lay out plans to cut annual network costs by another $87 million over the next 5 years. This figure is significant in the context of expected revenues of only $575 million and EBITDA of $115 million. This $87 figure is not pie in the sky figure either, most of this savings will come from expiry of redundant leases just waiting to expire.
I see several catalysts that can take the stock back up. Its audited results has been held up as their new auditors had proposed accounting changes in their reported financial reports. Whilst this may result in the company restating some prior years earnings, none of the changes has any bearing on revenues or cash flow. The uncertainty pertaining to this should be lifted over the couple of weeks. Cash continues to build up as capex requirements are minimal; any decision to return money to shareholders will be welcome by the market. However, the biggest catalyst to this stock will have to come from stabilization of its subscribers base, paving the way for the market to value it as a ongoing entity rather than a stock with an expiry date.
The management is embarking on several initiatives that could materially impact future earnings. One of them is to allow utility companies to transmit meter reading from homes & buildings automatically using paging technology. Another involves putting paging functionality into cell phones. Buyers of USMO gets free options on these new business plans, but for buyers of the stock at this level, investment success is not predicated on the success of these new ventures. If any of these take off in a big way, it's pure icing on the cake.
I think many value investors are passing over USMO thinking it is just a cigar butt. USMO is no cigar butt but a miniature cigar.
Not A Lemming
(Disclosure: My family and I has a position in the stock)
