Usually, I wouldn't be writing on a legacy telecom company as a decent long investment. Everywhere, wireline and voice are under tremendous pressure from technology and competition. However, as it stands there might be one place where for a variety of reasons, that isn't really happening.
That place is Alaska, and the company I'll be writing about is General Communication (GNCMA). General Communication is a telecom company in Alaska and it provides the full spectrum of services, including wireline voice and data, wireless voice and data, ISP services, etc.
General Communication started out providing long distance telecom services, but it then expanded strongly in the cable TV segment. This has led to it holding a significant share in cable TV (70%) which in turn leads to it avoiding most of the telecom grief.
As of the last quarter, 31% of revenues come from the wireless segment, and 69% come from the wireline segment, which includes cable TV. In the wireless segment, General Communication has entered into a joint venture with Alaska Communications Systems Group (ALSK), merging both companies' wireless assets. General Communication holds 2/3rds of the resulting entity, and this merger has led the combined entity to hold the largest spectrum pool in Alaska (Source: Company presentation)
This merger is also the reason why General Communications is reporting strong EBITDA growth, since part of this EBITDA growth comes from accounting for 100% of the combined entity, though part of the earnings are then to be lost to minority interests.
The whole of the company was on a $266 million EBITDA run-rate as of Q3 2013, as per the company. The past performance of the company, both in terms of revenues and EBITDA, shows extremely stable growth.
This performance is now helped by the fact that the largest wireline segment by far is data (both consumer and commercial), accounting for 58.3% of wireline revenues in the latest quarter. Furthermore, this segment ((data)) is also the fastest-growing segment. Having the largest segment growing the fastest easily supports the entire growth edifice (Source: 10-Q, red highlight is mine).
General Communication has a market capitalization of $394.5 million. It also carries net debt including capital leases of $1.019 billion. Furthermore, one needs to consider the $305.8 million in minority interests present on the balance sheet, as most of these came from the merger of the wireless assets, which is a valuable subsidiary producing large amounts of EBITDA.
Taking into account these, we come to an enterprise value of $1.719 billion. EBITDA is at a run-rate of $266 million, so General Communication trades at an EV/EBITDA of 6.5 times. This seems rather cheap for a company showing sustainable growth as is the case with General Communication.
General Communication is also repurchasing shares in the open market.
Low exposure to wireline voice
In the last 9 months to September 2013, voice revenues over wireline amounted to just 9.9% of total revenues. This is important as this is the one telecom segment that's under tremendous pressure both technologically (from VoIP) and due to massive competition from wireless, voice over cable, etc.
High exposure to data
Data is the largest segment in wireline, accounting for 58.3% of wireline revenues. This is also the segment growing the fastest, so General Communications has its largest segment growing the fastest - this is supportive of overall growth.
Alaska demographics are favorable
The Alaskan population is growing faster than overall U.S. population and is also younger (Source: U.S. Census):
This trend has been in place for a long time, too. The U.S. population roughly doubled since 1950, whereas the Alaskan population has increased by 5.4 times since then.
General Communication is levered
While it trades at a rather low valuation and shows stable growth, General Communication also presents a levered situation. This means the share price can increase markedly without the valuation changing much, as market capitalization represents just 22.9% of the enterprise value.
For instance, if the share price doubled, EV/EBITDA would increase from 6.5 times to "just" 7.9 times, still reasonable in today's market.
Option value in its ISP
It seems likely that last-mile ISPs are going to see their economics improved by paid peering. General Communication will be in a position to be favored by such a trend, given its large market share in Alaska.
There is not much in the way of risks at this point. Perhaps just execution at the recently-merged wireless subsidiary. We also have the overall risks of increased competition facing most telecom companies nowadays, but seemingly mitigated by Alaska's unattractiveness (a small and distant market).
General Communication presents a chance to invest in a cheap and levered equity showing consistent growth, with a limited exposure to the worst of wireline telecom.