USA Mobility: The Long Case

| About: Spok Holdings, (SPOK)

I purchased stock in USA Mobility (USMO/NASDAQ) yesterday. The shares closed at $26.34.

USA Mobility is a paging company formed in the merger of Arch Wireless and Metrocall in 2004. The stock hit a high of $39.75 last March, but sank as low as 24.02 in May. It has a market cap of $726 million and there are less than 30 million shares outstanding. It trades at 1.24 times book and at 1.16 times sales.

The company is not popular on Wall Street because the use of pagers has plunged due to the increasing use of cell phones. Still, there is a market for pagers because they are superior to cell phones in an important way -- they penetrate deep into buildings. They're also cheaper. The main users of pagers today are medical professionals, fire departments, the military and U.S. government agencies.

In Barron's midyear roundtable, Meryl Witmer of Eagle Capital pointed out a growth potential for the underused paging network. For example, a pager-type device could be installed on electric meters and send monthly messages to a utility company, eliminating the need for highly-paid union workers going from house to house in neighborhoods to read meters. She notes the use of such devices is just beginning.

USA Mobility's management is committed to returning cash to shareholders. The company paid off the remaining portion of its $140 million bank debt on Monday -- only 9 months after being created by the merger. In early August, the company announced it will pay a special one-time dividend near the end of the year. That's all it has said officially, but I am betting the company will pay out all (or nearly all) of its free cash for the next several years.

What could go wrong with this pick? Basically, that pager use declines faster than anticipated and revenue declines are so massive the balance sheet gets trashed. I don't think that will happen. When the company announced results for the second quarter of 2005, it reported significant improvement in subscriber losses and revenue declines. It had an impressive $5.15 in free cash flow per share as of 6/30/05.

But that's just one quarter. I could still always be wrong over the course of time. So, as always, do your own due diligence before buying.

PLEASE NOTE: Remember that USA Mobility has less than 30 million shares outstanding. So be sure to use a price limit if you place an order.

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