Wednesday, July 18, 2012

USMO Purchases, MO' Problems

US Mobility (USMO) is a cash cow. While paging use is in definite decline thanks to mobile phones, there are certain niche segments (e.g. in healthcare) where customers count on its reliability and low costs. As such, USMO generates free cash flow of over $70 million per year, against a market cap of just over $300 million. The company is also debt free, with a net cash position of almost $35 million.

One of the reasons Mr. Market hates this company undoubtedly has to do with the declining use of this old technology. Revenue has fallen by over 15% per year for the last three years. But give management credit here, as costs have fallen faster than revenues:

This has allowed the company to generate substantial free cash flows of over $310 million (which is currently the company's market cap) in just the last four years. If management was just returning all this cash in the form of buybacks and/or dividends, this might be a no-brainer. But it's not.

Combined, insiders own less than 1% of the company, meaning management is probably more interested in its employment situation than it is in delivering shareholder value. A manager's greatest fear might just be allowing his company to shrink into oblivion, even if that might be what's best for shareholders. Management's actions in this case support this theory.

A year ago, the company dropped $140+ million on a software company to help stem the company's decline. Goodwill and intangibles of this transaction comprised a whopping $173 million (bigger than the purchase price!). This newly acquired company managed to deliver negative segment earnings for 2011, and so far has lost half a million dollars through one quarter in 2012. In addition, this is the case even though it appears the company recently shifted some revenue from its cash cow segment into this new segment, perhaps to make it look better. More recently, some management reshuffling has taken place at the newly acquired company, suggesting things aren't going well.

Unfortunately, this is a scary situation for shareholders. While the company continues to generate cash flow, who's to know what this cash flow will be used for? Management appears intent on throwing good money after bad, as sadly, their incentives are totally out of whack with what they should be.

Disclosure: No position

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