IDT Offers A Cheap Valuation And 50% Upside Potential

Feb.13.13 | About: IDT Corporation (IDT)

When investors think of telecommunication companies, they usually think of behemoths like AT&T (NYSE:T) and Verizon (NYSE:VZ). However, there are reasonable values and income opportunities in smaller telecom companies. One company to consider is small cap telecom IDT Corporation (NYSE:IDT) which offers a cheap valuation and potential for a 50% increase in its stock price.

IDT Corporation, through its IDT Telecom subsidiary, is a facilities-based, multinational carrier that provides a broad range of telecommunications services to retail and wholesale customers worldwide. IDT Telecom, by means of its own national telecommunications backbone and fiber optic network infrastructure, provides its customers with integrated and competitively priced international and domestic long distance and domestic all-distance telephony and prepaid calling cards.

Even though the stock price is up 19% in the past year, IDT Corp has an extremely cheap valuation compared to the telecom industry average. IDT trades at a trailing price earning (P/E) ratio of 4.9 compared to 35 for the diversified telecommunications industry average. For comparative purposes, AT&T has a P/E of 29 while Verizon has a P/E of 142.

Additionally, IDT has a price-to-sales ratio of 0.15 compared to 1.32 for the telecom industry. IDT Corp has a market cap of $237 million and is trading just above $10.00 per share.

On December 11, IDT Corporation announced earnings results for the first quarter ended October 31, 2012. For the quarter, the company reported revenue increased 6.3% to $400.6 million, the 11th consecutive quarter of year-over-year revenue growth. Adjusted EBITDA increased 88.1% to $8.7 million.

Income from operations was $5.2 million compared to a loss from operations of $11.1 million one year earlier. Net income attributable to the company increased to $3.6 million compared to a net loss attributable to IDT of $4.3 million.

Non-GAAP net income increased to $9.9 million from $8.3 million. Diluted non-GAAP EPS of $0.45 compared to $0.37. Net cash provided by operating activities was $25.7 million (including $12.8 million generated by Fabrix) compared to cash used in operating activities of $13.4 million.

The Telecom Platform Services ((TPS)), which accounted for 98% of IDT's revenue in 1Q13, markets and distributes multiple communications and payment services across four business verticals: Retail Communications, Wholesale Termination Services, Payment Services and Hosted Platform Solutions. TPS' gross profit in 1Q13 was $59.0 million, an increase of 12.1% year-over-year and 3.9% sequentially.

IDT will see future growth from two developing products: (1) Fabrix, a software development company specializing in highly efficient cloud-based video processing, storage and delivery and (2) Zedge, a platform including a popular Android app that allows users to share and obtain content to personalize mobile phones and tablets.

Fabrix's revenue was $2.4 million in 1Q13 compared to $0.6 million in both 1Q12 and 4Q12. During the quarter, Fabrix collected $12.8 million in cash primarily from a system integrator partner pursuant to an expanded statement of work signed during 4Q12.

Zedge's Android app is rapidly approaching 50 million downloads, putting it in a very select class of most downloaded android apps. In Google Play, Zedge currently ranks among the top 10 most popular free apps. Users are now downloading in excess of 3 million games a month through Zedge's game channel. Because of the high value of its users, Zedge has developed direct relationships with a stable of premium publishers who are helping to propel revenue growth. Zedge generated revenue of $1.2 million in 1Q13 compared to $0.9 million in 1Q12 and $1.0 million in 4Q12.

IDT's Board of Directors declared a special cash dividend of $0.60 per share which was paid on November 13, 2012, and suspended payment of the Company's regular $0.15 per share quarterly dividend for fiscal 2013. Future dividends will be at a level commensurate with the Company's financial results, strategic goals and available resources.

For fiscal year 2013, analysts estimate that IDT will earn $1.31. For the 1st quarter of fiscal year 2013, IDT announced earnings per share of $0.16, representing 12% of the total annual estimate. For fiscal year 2014, analysts estimate that IDT's earnings per share will grow by 13% to $1.48.

IDT Corp has a market cap of $237 million and is trading just above $10.00 per share. IDT has an equity summary score of 8.8 out of 10 for a Bullish outlook. Wall Street analysts have a consensus buy recommendation on IDT with a 12-month target price of $16, a 50% upside from the current stock price. The $16 price target is based on a P/E of 12 and 2013 EPS of $1.31. IDT has an equity summary score of 8.8 out of 10 for a Bullish outlook.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.