Monday, October 24, 2011

Aastra Dials Up Cash Flows

Considering its financial position, Aastra Technologies (AAH) is an extremely volatile stock. The stock traded above $40 in 2007, below $8 in 2008, above $36 in 2010, and has now come all the way back down to $13 in 2011. One might expect this kind of stock price volatility for a heavily-levered company with a highly-oscillating profit profile. But Aastra is neither of these; it carries negligible debt along with a ton of cash, and has remained profitable throughout the recession of recent years. As such, these excessive price swings in the shares of Aastra are offering investors an excellent opportunity to buy into a good business at a great price.

Aastra markets a range of telephony solutions for large businesses. The company sells its products all over the world, but 80% of revenue comes from Europe. This exposure to Europe, where austerity rules the day, is likely responsible for the stock's large decline. But this decline is overdone.

Aastra has a cash balance of almost $120 million and has generated operating income of $102 million in just the last three years. Despite this, the entire company trades for just $200 million. Furthermore, the company is entering its strongest quarter of the year, and on its latest conference call management hinted that inventory levels are high by about $10 million. Both of these factors should serve to enhance the company's cash position even further over the next three months.

Often, when a company has this much cash and doesn't return it to shareholders, investors rightly become concerned that the money will be blown on an empire-building transaction. But in this case, these fears are likely unfounded. When asked about potential acquisitions on the latest conference call, the company's co-CEO noted they are "focusing on organic growth" and that there is "enough on our plate".

Furthermore, Aastra has been a model corporate citizen when it comes to share buybacks. The company has a history of buying back shares at the most opportune times. For example, in 2008 the company quickly charged through its repurchase authorization and then proceeded to initiate a Dutch auction to buy back even more shares at the depressed prices. (By the way, the company trades at a similar discount to book value today as it did when the company announced the Dutch auction in 2008.) At the same time, the company pays a dividend which yields almost 6% to the current price!

Investing in a good company trading at a great price that has a value-oriented management is a recipe for success. Aastra Technologies appears to be offering investors just such an opportunity.

Disclosure: Author has a long position in shares of AAH

9 comments:

Paul said...

Saj,

What's the insider ownership look like?

Saj Karsan said...

Hi Paul,

The co-CEOs own a combined $20 million+ or so, and get paid a combined $3 million annually.

Chris of Stumptown said...

Thanks for mentioning this one. However, I am not sure that I can play it easily as a US investor.

I'm wondering whether the markets ought to be moving the share price up. One possible resolution for Europe would be for the north and south to split. In which case their big market, Germany, would see their currency appreciate and Aastra's product declining in price.

valueguy123 said...

Saj, great post! Aastra seems to well positioned amongst the category of declining businesses. The company has little to no debt, great management, significant mgmt. ownership, decent capital allocation, strong free cash flows and limited capex requirements.

Your article was timely and the 1st quarter was very strong. The company is now initiating a dutch auction between $21-23. Post the dutch auction, I'm interested to hear your thoughts on whether this is a company worth holding? In particular, I'm curious to know how you value the business. What is a fair multiple to pay (after netting out the excess cash) for a business in decline? What is your view on the decline rate (will it pick up in the future given that they sell a legacy product that businesses might no longer replace in the future)? What is the floor on the stock given the company's cash position and potential takeout from one of their competitors (many of Aastra's competitors are owned by P/E firms and there could be synergies in a merger/sale). At what point do you think the business will no longer be FCF positive assuming the videophone business never takes off?

I would love to hear your thoughts on how you analyze a company like Aastra that clearly has many attractive attributes but is facing a potentially serious decline in their business going forward.

Regards,

Andrew

Saj Karsan said...

Thanks, valueguy. I'm not sure I can add a lot of value by answering your questions. They would just simply be opinions. While at one time it was clear that this company appeared undervalued, like you said it has come up quite a bit and so now it's not so clear. I'm actually quite surprised the company didn't buy back stock about 40% ago, but is willing to do so now...missed opportunity in my opinion.

Anonymous said...

Saj,

Would you consider this stock now a 'value in action' and have you begun unwinding your position?

Cheers,

TTS

Saj Karsan said...

Hi TTS,

I have been unwinding on the way up, yes. Indeed you may see a "value in action" article about it soon if it pushes up a little more!

Anonymous said...

Any thoughts on their quarterly earnings? It seems odd that the stock is down this morning when they announced good earnings and a dividend...

Saj Karsan said...

I thought the results were fine too. The market does seem to get spooked by lower revenue, however, so that might explain it.

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