Cash-heavy IDT Undervalued At Current Levels? (IDT)

We’re not typically interested in companies with negative net income, but we will take a look under special circumstances, such as when the company is mostly cash. That’s the case with IDT Corp. (IDT), a diversified provider of telecommunications services and one of the world’s largest suppliers of prepaid phone cards.

According to Yahoo, IDT has a market cap of $1.17 billion and cash of $863.41 million, meaning that the company is close to 74% cash. Even if you subtract its $217.55 million in debt from the cash balance, you have a company that’s 55% cash.

The P/E ratio is not helpful since there are no earnings, but the price to book ratio is 1.2, price to sales is 0.48, and enterprise value to revenue is 0.22.

Despite losing money in the last 4 fiscal years, the company has managed to grow sales nicely over the past 5 fiscal years. For the years ending 7/01 through 7/05, revenue was recorded at (millions): $1231, $1532, $1835, $2217, and $2469.

There’s no dividend but there is insider ownership at 24% to keep management motivated. Looking at insider transactions since the beginning of the year, no clear statement is made. There has been some buying and selling, sometimes in transactions that reach 6 figures in value, but we’re not clear on the trend, if any.

A company with growing sales, high insider ownership, and 55%/74% cash is interesting, but it would be even more interesting if there was a catalyst of some sort to shake things up. This is a developing story. Herbert Denton of activist fund Providence Recovery Partners was a quote in Reuters saying, “The company appears to be deeply undervalued due to corporate governance issues.�? He put the intrinsic value of the shares at $18 to $24. The last trade at this writing was $11.53. [Note: the Reuters story on Denton ran on Sep 27, 2005 and we have not followed it since, so more research is needed here.]

Denton also said that IDT would be vulnerable to pressure from its independent directors—who care a lot about image—to improve governance. Some of these directors include a former UN ambassador, former senator, former governor, and former congressman.

Smart investors betting on IDT include Fairholme Capital Management (Bruce Berkowitz) and legendary Irving Kahn, who mentioned the stock to Barron’s recently (you can read the Kahn interview here).

We need to spend some more time on IDT to understand its business, but we certainly find its balance sheet attractive. If you do decide to research the company, be aware of its tender for Net2Phone and recently postponed IPO of unit IDT Spectrum.

IDT 1-yr chart:

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