LICT Corp. Is Far Too Cheap

Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

The fixed-line telephony business is one that should experience negative growth in the coming years, as competition from wireless carriers renders many land lines useless. As such, the market accords companies in this space low multiples, and perhaps deservingly so. But some great opportunities arise when the market paints all companies within an industry with the same brush, without regard to what may be occurring within each business.

LICT Corp. (OTCPK:LICT) is a cash-cow that Mr. Market appears to have left for dead. But within LICT Corp. is a growing telecom business that is now driving total company revenue higher, which should result in excellent risk-adjusted gains for long-term investors.

Business

Through some fifteen geographically diversified subsidiaries, LICT Corp. provides broadband and voice services. The business can be divided into two segments:

1) Regulated

LICT offers land lines, DSL, long-distance and other fixed-line services to customers primarily in rural areas where LICT Corp. is the only provider. This is the business that is in decline (these revenues are down 6.5% through the first nine months of 2013), as customers switch to wireless services.

2) Non-Regulated

LICT offers the same services as described above but in competitive (and therefore non-regulated) markets, and also offers broadband and cable television services to both its captive (e.g. rural) customers as well as to those in competitive markets.

While the company derives most of its revenues and earnings from the regulated segment, which is in decline, the company's revenues are actually growing overall because of the strength of its non-regulated business. Non-regulated revenue is up almost 11% through the first nine months of 2013, and is the reason why the company's 2012 sales were higher than its 2011 sales, and why it expects its 2013 sales to be higher than its 2012 sales.

The non-regulated business is now 41% of the business, up from 30% just three years ago. Amazingly, the margin profile of the two business units isn't that much different, with EBITDA margins of the regulated business coming in at 42% in 2012 vs. 39% for the non-regulated business. It's also worth noting that many initiatives within the non-regulated business have seen expenses due to start-up costs but no revenues as of yet, suggesting that recent margins understate the profitability of this business.

More granular details on each of these business units are available on the company's website.

Capital Allocation

Cash cows can often trade at low multiples because investors fear (and rightly so, in many cases) that managers will waste capital on empire-building acquisitions. For LICT Corp., this fear is unwarranted. The company's chairman and chief executive officer is value investor Mario Gabelli, who has made a career out of allocating capital efficiently. He is also a major shareholder of LICT, so his interests are aligned with those of other shareholders.

As such, LICT Corp.'s record is as one might expect. The company has grown its per-share book value at a compounded rate of more than 13% per year over the last twelve years, and this doesn't include a couple of spin-offs over this period that added another 25% or so to an investor's total return over this period.

Today, this wealth compounder's book value sits at $88 million, while the company's market cap languishes at $55 million. No wonder the company stated in its most recent annual report that "[u]nder...current bank covenants, we are limited to $1.0 million in annual share repurchases and we are planning to fully utilize, and would like to expand that amount."

Valuation

LICT Corp. is slated to generate earnings of $9 million in the recently-ended 2013 on *growing* revenues, giving the company a paltry P/E of just 6 and change. Meanwhile, the company's enterprise value of $120 million divided by the EBIT implied by those earnings gives the company an EV/EBIT of just 9.

The amount of debt carried appears benign, as the company's EBIT covers interest by more than 3 times. Furthermore, the company's EBITDA covers interest by 7 times. Considering the monopolistic nature of the fixed-line business (i.e. rural customers who want a land line are stuck with their local carriers), it is appropriate for LICT to carry some debt as a low-cost source of financing which helps boost shareholder returns.

Considering the incentivized management with a strong historical track record, along with the relatively safe debt profile and growing revenues, I submit that LICT Corp.'s P/E multiple should be at least 12, rather than the paltry 6 being currently accorded by Mr. Market. This would result in shareholder returns of 100%.

Risks

Because of the monopolistic nature of fixed-line telephony (i.e. it only makes economic sense to have one set of lines connecting to a customer in many cases), a large part of LICT Corp.'s business operates within a heavily regulated environment at both the state and federal levels. Such rules can change quickly and can impact the profitability of carriers.

As a holding company for some fifteen companies, however, LICT is somewhat diversified from the actions of individual states. Furthermore, traditionally the federal government has encouraged communications services to rural areas, and as such it seems unlikely that it would seek to significantly reduce the profitability of firms that are otherwise increasing services to this underserved group.

It's also worth mentioning that unlike most of the companies discussed on Seeking Alpha, LICT Corp. is not listed on an exchange. While the company nevertheless provides quarterly and annual reports on its website, it is free to cease doing so at any time. Considering the shareholder-friendly bias of Gabelli, however, I view this as unlikely, but it is still a risk.

Finally, just like Berkshire Hathaway the company doesn't appear to believe in share-splits. As such, each share trades for about $2500, and there are only 22,500 shares outstanding. Liquidity is therefore very low, though it doesn't take many shares to rack up a sizeable position!

Conclusion

LICT Corp. is a well-run business with a cash cow segment that is helping fund future growth. While the company has earned more than its cost of capital, Mr. Market treats this company like it will soon go under. In this author's opinion, the risk-reward profile of this company at this price strongly favors investors who go long.

Disclosure: I am long LICT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.