A Glance at XO Holdings, Aehr Test Systems, Asta Funding

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Includes: AEHR, ASFI, XOHO
by: Jae Jun

A reader and I briefly discussed an idea over Twitter, one which looked promising by the numbers, but reading the 10-K brought up many questions. It ended up in the pass pile even though the valuation shows that it is trading at 61% to its liquidation price. That company is XO Holdings (OTC:XOHO).

With net nets, and any other long holding, I prefer an easy to understand business, a business that can make money and produce free cash flow. I feel these two points are important if the company is to ever come out of net net territory. Catalysts are definitely welcome, but no catalyst is 100% certain and if it fails, then what? You’re only left with the business.

XO Holdings

XOHO is a telecommunications services provider that delivers an array of telecommunications services to the telecommunications provider, business and government markets. XOHO operates their business in two reportable segments - through XO Communications, LLC, a wireline business, and Nextlink, the wireless business.

First of all, telecom is a difficult business to understand. Unless you are directly related to the telecommunications industry with plenty of experience, it will leave most people scratching their heads. I graduated in Telecommunications Engineering and work in the industry but admit that I definitely don’t fully understand the different techniques, standards and technology that are being used today. So in terms of easy to understand, XOHO is definitely a no.

Below are some points I came up with quickly regarding XOHO:

Good

  • FCC licenses currently prevent overcrowding of a single market. (Also limit growth if the market is saturated.)
  • Fiber optic network attracts new customers.

Bad

  • Heavy capital expenditure. Constantly need to maintain and upgrade networks. High fixed costs + extra for growth.
  • Need to pay leases on wireline (including fiber) and wireless networks
  • Extremely competitive industry
  • In the past 10 years, it has only had one positive FCF year.
  • Substantial amount of preferred stock needs to be redeemed in the next year. Redemption has recently been delayed to next year.

Click images to enlarge

xoho-netnet

The snapshot of the company at the time it filed its 10-K report looks pretty good, but if the value of a business is the sum of its future cash flows, I don’t see much value in the future.

Trident Microsystems (TRID)

I’ve been meaning to write up on TRID for a while, but ValueHuntr has done a good job at valuing the business. You can check and compare the numbers yourself with the free net net investing spreadsheet available.

Aehr Test Systems (NASDAQ:AEHR)

I haven’t been able to analyze or valuate the business yet, but it looks cheap on paper. Currently trading at 55% to its liquidation price.

aehr-netnet

Asta Funding (NASDAQ:ASFI)

ASFI is an interesting business. It buys receivables from companies such as Visa (NYSE:V) and Mastercard (NYSE:MA) at 20c to 50c on the dollar and then goes about collecting payment. It has gone up around 40+% from when I first noticed it and it still looks cheap.

ASFI liquidation value consists mainly of receivables which are valued at $407.3 million, but the important point is that the receivables were bought at less than 50c to the dollar and have been written down considerably. With the numbers that I have, if ASFI manages to collect more than 58% of it receivables, the current stock price is very cheap. Anything less than 58% and we have a problem.

The risk with the company is that it has to collect money from consumers who are currently struggling with their payments. The economy isn’t helping and if it gets worse, ASFI will find it harder to collect payment.

If the company can receive 75% of receivables, its net net or liquidation price jumps to $7.66 while a 60% of receivables yields $3.38.

In the meantime, I’ll be trying to learn more about the business as an ongoing concern.

asfi-netnet

Disclosure: I hold no shares of any stocks mentioned at the time of writing.