When I first wrote about SureWest (SURW) on September 28th, the stock closed at $6.75 a share. On Tuesday, SURW closed at $8.85, giving anyone who had bought the stock after my article was published a 31% gain so far.
Even after this recent run-up, I believe that SureWest is still extremely undervalued in relation to its potential value to a private owner. Why do I say this? When I first wrote about SURW, it was trading at 1.5X price to cash flow from operations. Today, it is trading for just below 2X price to cash flow from operations. EV / EBITDA is approximately 4.40X.
Although SURW does have debt on its balance sheet, it possesses very stable cash flows and revenue as a combination Broadband / Traditional Telecom play backed by a fiber optic network. Revenue in the latest quarter reported grew ever so slightly as broadband growth offset the decline in traditional Telecom.
I have heard from more than one banker in the past few weeks that it is very difficult to find high quality borrowers who want to take on more debt in the current economic environment. Most high quality potential borrowers are paying down debt. Contrary to popular belief, bankers have told me that loan growth is stagnant because loan demand from high quality potential borrowers is stagnant.
What is the big picture? Currently, Telcos with growing broadband segments are the most stable business around next to utilities. Any banker worth his salt would salivate at the opportunity to lend money to a business of SureWest's caliber. My thesis is that not only is it extremely easy for SureWest to refinance its debt in this environment, but also that it would be quite possible for a private equity firm or other potential acquirers to further leverage SureWest's balance sheet in a takeover, due to SureWest's revenue and cash flow stability.
While there are very few companies as cheap as SureWest, they do exist. However, in the current environment, cheap is no longer good enough. Cheap, stable, and high quality cash flows are the bull's eye. Measured by that standard, SureWest is potentially the cheapest publicly traded company in the United States, when factoring cheapness in relation to business stability.
As many tycoons have discovered, cable companies can make formidable investment vehicles. A fiber-based company could be a very valuable cash flow machine to an acquirer. Since current management has cut SureWest's dividend, my instincts tell me that many stockholders might jump at the chance to sell to the right acquirer.
I am not sure that at the current juncture SURW is the right play for an individual investor. However, for institutions with the wherewithal, scale, staying power, and determination to push for a sale of the company, SURW might be a very shrewd play.
Disclosure: Author is long SURW