Alaska Communications: Implementing An Activist Playbook, Still Cheap

Daniel Shvartsman profile picture
Daniel Shvartsman
1.47K Followers

Summary

  • Alaska Communications is successfully threading the needle of growing their broadband business as fast/faster than their legacy revenues decline.
  • They are following an activist investor's playbook, turning over management and refreshing their board, and returning capital to shareholders.
  • The stock remains cheap and while there's no immediate catalyst, the randomness in the share price may offer an intriguing entry point.

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Alaska Communications (NASDAQ:ALSK) is a sleepy telecommunications company. It sells broadband, voice, IT services, and similar to individuals and businesses in Alaska, as well as collecting revenue from various regulatory programs. Its revenue has stayed flat since 2015; its operating income in that time has gradually increased, and its free cash flow has more than doubled. It has been an under the radar in 2020 – up 33% total return for the year, and that after coming down 20%+ from 52-week highs – and it paid its first dividend since suspending the regular payments in 2012.

This is not, in other words, an exciting growth story. I can’t dress this up as a software as a service pick or present you with a huge and growing total addressable market. Instead, this is a telecom based in Alaska – it’s not a mystery, it’s just forgotten about.

Since the company has fallen off the grid – no articles on Seeking Alpha in the past 3+ years, no comments on the Value Investor’s Club post on ALSK in ages, and only a handful of comments on anything ALSK related on Seeking Alpha in the last year - the story has evolved, growing like a tiny snowball trundling down a bunny slope. Most notably, the company has changed management and followed an activist investor’s playbook to a tee. While that perhaps explains the out-performance so far this year, the share price has corrected over the past month and is again approaching an interesting entry point.

Setting Up The Pieces

The business is straightforward. Quoting from the 10-K (page 5):

We are a fiber broadband and managed IT services provider, offering technology and service enabled customer solutions to business and wholesale customers in and out of Alaska. We also provide telecommunication services to consumers in the most populated communities throughout the state.

Further, the company explains their three business segments (page 6):

We operate our business under a single reportable segment. We manage our revenues based on the sale of services and products to the three customer categories listed below.

  • Business and Wholesale (broadband, voice and managed IT services)
  • Consumer (broadband and voice services)
  • Regulatory (access services, high cost support and carrier termination)

The company reports their numbers in these three categories, but then also by trying to highlight growth categories (hello, broadband) vs. other categories (goodbye, voice). For example, from their Q1 earnings presentation:

So it’s a fairly classic 2010s-20s telecom set-up – they are losing legacy revenue, and trying to grow growth revenue faster. There’s a bit of running to stand still, but standing still is not the worst result for shareholders.

The biggest nuance here is regulatory revenues. The company earns $19.7M from the CAF II fund, which is meant to bring broadband access to more distant locales (one can imagine Alaska has a need for that) and “we currently expect our high cost support revenue to be relatively unchanged for the next six years” (page 16 of the 10-K). Beyond that are the legacy regulatory revenues, which mostly consist of access charges and pass through surcharges. These are declining at a steady pace – 9% annually for the access charges, 33% decline for the pass-through surcharges (see pages 30 and 35 of the 2019 and 2018 10-k respectively – good degree of disclosure). So CAF II funds aside, the other revenues are definitely in the legacy bucket.

Springing Out Of The Value Trap

The bear case to rebut throughout this piece, as I understand it, is that this is a value trap. From a pure revenue perspective, the fact that they’ve held onto their revenue for the past five years and posted year over year growth in the past quarter give me reason to believe that they can continue to hold their ground. The company has one primary competitor – GCI Liberty (GLIBA) – and states:

We operate in a largely two-player terrestrial wireline market and we estimate our market share to be less than 25% statewide. However, our revenue performance relative to our largest competitor suggests that we are gaining market share in the markets we are serving. A third-party market study indicates that we have market share of close to 40% for “near net” opportunities, that is, within one mile of our fiber network. (Page 5 of the 2019 10-K)

I couldn’t independently verify this, and GLIBA’s revenue grew 8.3% in Q1 2020, though given it is part of the Liberty compound, it takes a lot of work to understand the details of the business. From the ALSK perspective, I think it’s reasonable to say they’ll hold ground.

Another risk area for Alaska is its balance sheet, and the company has made significant strides in that department. They sold their wireless business to GCI in 2015, allowing them to more than halve their debt load. They’ve refinanced a couple times since then, less successfully in 2017 and more so in 2019, and now pay an interest rate of 6.01% per their latest 10-Q - it’s a LIBOR plus 4.5% rate, with interest rate swaps to fix it to an extent. Net debt is now under $140M, a notable achievement - the company was at $415M when they announced the wireless sale.

A last area for risk is Alaska’s exposure to oil, and I refer to both the state and ALSK in that phrase. I can’t speak to Alaska’s economy in detail, but the five years of flat revenue growth for ALSK came amid a weak oil market. An investor asked management about this on their Q4 2019 call in March, right after the OPEC production increase news and oil’s big sell-off, and CEO Bill Bishop said:

I will tell you our guidance we set for 2020 includes this risk in it and we still see a path to meeting and exceeding guidance for 2020 even with the oil prices where they were earlier in the week.

The company did not change guidance after Q1, meaning that so far, the weight of the oil price sell-off and the broader economic downturn hasn’t hit them. The nature of the COVID-19 recession places a lot of weight on good telecommunications, though I can’t say how that plays out in Alaska specifically.

Alaska Communications’ valuation is and long has been very low. I pulled a list of peer regional/local telecom companies, as well as at least six buyouts in the last five years in the sector (GLIBA is in there twice, once for its value when Liberty bought it out, and once as a current entity). The latest buyout was announced this week, of Otelco (OTEL) - the metrics were low, but OTEL has been losing revenue for some time, and Alaska is still cheaper. Alaska has the lowest EV/EBITDA and lowest EV/FCF metrics, trades at a 28% discount to tangible book value. It is growing revenue in the middle of the pack, has an average debt load, and middle of the pack ROIC and ROC metrics. I can’t find an obvious explanation for why Alaska would trade at the lowest multiples in this group.

Updated as of July 30th close ROE ROC ROIC Rev Growth EV/EBITDA EV/FCF P/TB Price
ALSK 4.2% 5.8% 5.9% 2.4% 4.38 11.97 0.74 2.32
SHEN 91.1% 16.0% 8.9% 1.6% 11.34 22.87 32.00 49.63
OTEL (most recent buyout) NA 25.1% 14.9% -2.1% 4.48 31.73 NA 11.75
ATNI 1.6% 3.9% 2.4% 4.3% 8.01 22.54 1.50 59.68
CNSL NA 7.4% 4.5% -3.2% 5.45 17.41 NA 7.41
USM 3.4% 3.4% 1.3% -0.3% 4.66 NA 0.59 29.48
CCOI NA 28.3% 26.7% 5.1% 25.98 46.59 NA 88.74
OTCPK:LICT 31.4% 32.1% 15.0% 6.4% 6.24 13.99 3.04 17800
GLIBA 15.6% NA NA 8.3% 96.27 NA 2.01 76.69
HCOM (at buyout) NA NA NA -5.6% 7.47 201.76 2.04 30.75
CBB (at buyout) NA 2.6% 4.4% 0.1% 7.87 204.31 NA 15
LMOS (at buyout) NA 5.0% 4.3% 7.7% 9.96 46.56 NA 18
NTEL (at buyout) (rev growth year before) NA 5.0% 5.3% 0.7% 8.19 NA NA 9.25
GLIBA (at buyout) (year before) NA 6.5% 5.4% -4.6% 9.32 438.53 NA 32.5

Note: For OTEL, I am using the announced buyout price of 11.75. SHEN, ATNI, and CNSL reported earnings in the last week - I updated their figures, with revenue growth being for the H1 2020, year over year; other revenue growth figures are just Q1 2020, which is not perfect but should illustrate accurately enough (this is not the most seasonal industry).

ROE = Net income/Tangible book value; ROC = EBIT/net working capital + fixed assets; ROIC = Net Operating Profit After Tax / Net Debt + Equity

NA = tangible book value or free cash flow or whatever the profitability metric is negative.

There Must Be A Way Out: The Activist Playbook

Which leaves the last element of a value trap – the fact that the stock doesn’t move. I’ve owned shares for nearly seven years in one account or another, though increasing especially in 2018-2019 and trimming in the first half of this year. From a pure price action perspective, the stock seems to get a rocket booster every once in a while, and I suspect it falls into daytraders’ screens. This makes the stock attractive to trade around, and over the years I’ve had chances to add at 1.7 or below and then trim at 2.1-2.3, rinse and repeat.

But that’s a trading perspective. From the investing perspective, the most interesting counter to this element is the presence of a longtime activist investor, Karen Singer of TAR Holdings. She first filed a 13D in December 2017, and as of her most recent filing, has increased her position to 8.4% of the company, adding shares through mid March.

The company has, perhaps after some struggle, implemented about every one of her suggestions. They replaced former CEO Anand Vadapilli with current CEO Bill Bishop; they’ve nominated board members that she had proposed, including Wayne Barr, CEO of CCUR Holdings (OTCPK:CCUR) and interim CEO of HC2 Holdings (HCHC); they swapped out a share repurchase program from last year for a one-time $.09 dividend this year; and most recently, they did not nominate two of their longer-tenured board members, something Ms. Singer advocated for.

Where does this all point to? I don’t know, and it’s worth sharing some caution. First, not everybody is happy with the one-time dividend approach, as Barry Sine pointed out on the Q4 call. Even if it becomes an annual ‘excess cash’ sort of thing, does that change anybody’s mind? I’d note that even on Seeking Alpha, the dividend doesn’t show up in the dividend tab. Second, Ms. Singer has been involved with a number of other companies and, to the best of my understanding, the track record is mixed. She owns nearly 17% of Seachange (SEAC), which had a strong run until the beginning of this year, when the stock fell off (pre-COVID). The other stocks she’s been in are micro-caps with, again, a mixed bag of success. So while her requests have been heeded here, and I think they’ve been reasonable suggestions for ALSK management, there’s no clear past example of her specific playbook working out for shareholders. I would argue that the first half of this year is at least a partial win.

(One quick note: another major holder for a long time has been Scott Barbee of Aegis Financial, who runs a deep value investment fund (AVALX). He sold quite a bit in Q1-Q2; the initial sales suggested he was just rotating to another position, while the last sales suggest he was cashing in after holding shares beginning in Q3 2015).

The last point of caution or opportunity is the acquisition route. The industry has seen a lot of consolidation; I included six buyouts I remembered, but there have certainly been more. They happened at an average EV/EBITDA multiple of 8.5; a 6x multiple would net a $4.14/share price for ALSK holders, nearly a double. So theoretically, consolidation could continue and either one of the big players or an infrastructure fund (hmmm…) could make a buy. But in practice, that’s been a potential exit for at least the last five years, and nobody has ventured up to Alaska to buy ALSK out. Does following Singer’s playbook finally set them up to be sold? Barry Sine asked on the Q4 call, for example, but it’s not an obvious market for firms to go shopping in either, especially when ALSK’s position is stable. The recent Otelco news provides an encouraging datapoint, but it's still hard to bet on.

Back Where We Started, But Better

So this thesis is lacking a hard and firm catalyst. Which may indeed leave ALSK as a value trap. That said, I think there are reasons to consider the stock:

  • ALSK is profitable and with a decent balance sheet
  • The company appears likely to maintain its market position
  • It has started returning capital to shareholders, and is likely to continue doing so
  • It trades well below book value, and at low EBITDA and free cash flow multiples
  • Management has shown itself to be responsive to shareholders, at least the ones who haven’t forgotten about the company.

I have trimmed my overall position this year, selling about 1/3 of it amidst the bumpy market and based on the pattern of ups and downs the stock has had over the year. I’m looking at re-adding if the stock hits $2/share again. And while I don’t have that killer catalyst, between the company’s solid, its implementation of an activist investor playbook, and the stock’s propensity to swing around quite a bit, I am content to hold onto shares and think the position will play out well. Even if it puts me to sleep in the meanwhile.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

This article was written by

Daniel Shvartsman profile picture
1.47K Followers
I am a long-term stock investor who has been investing for the past decade. I manage my own accounts as well as those of a few family members and friends, mostly U.S. based (I manage one Europe-focused account). I am currently VP of Content at Investing.com. I worked for Seeking Alpha from 2012-2020 in a variety of roles, most recently Director of the Seeking Alpha Marketplace and host of the Marketplace Roundtable, as well as Podcast coordinator and co-host of the Razor's Edge. I previously worked as managing editor of Seeking Alpha PRO and director of Content Strategy. You can find my previous SA account here - http://seekingalpha.com/author/sa-editor-daniel-shvartsman - in case you want to see any of my work.I founded a podcast studio - Shortman Studios - in 2020, where I co-host the investing podcast The Razor's Edge as well the music podcast A Positive Jam. I continue to co-host The Razor’s Edge with SA author Akram's Razor. The show is an investing podcast that combines a prop trader’s viewpoint and deep-dive fundamental research to provide a unique take on the markets. We start with a theme or idea from Akram’s investing, then break it down to understand what goes into the idea, what could go wrong, and what else investors and traders need to know. We also interview industry leaders, executives, and other investors to get a wider perspective. The show has thousands of listeners around the world. You can subscribe to the show on Spotify, Apple, Stitcher, and wherever else you get podcasts. I currently live in Valencia, Spain, with my wife and two felines, though we go back to the Lake Michigan coast in Michigan when we're in the states (the felines stay in Spain - they don't fly well). I'm the son of Russian Jewish immigrants and grew up in Massachusetts, and have lived abroad more or less consecutively since 2008. I love languages, visiting other places, writing, reading, music, and meeting new people, along with investing.
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Disclosure: I am/we are long ALSK. 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.

Additional disclosure: I plan to add to my position if the price drops below $2/share.

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