Opinions
Robert McWhirter
Tucows Inc.
TC-T
DON'T BUY
Oct 27, 2005
Stock price when the opinion was issued
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Only 2 analysts cover this. A Toronto-based telecom company that operates entirely outside of Canada. They are a mobile virtual network operator (MVNO). They cut deals with Verizon (VZ-N) or T Mobile to buy rates from them, brand it under their own name, resell it, and have their own customer service. They really focus on customer service. Their value proposition is about half of what the incumbents charge in the US. Because they are using someone else’s infrastructure, it is a capital efficient business with about a 29% ROE. Management has been buying back a lot of shares.
(A Top Pick April 26/16. Up 165%.) Internet domain names was viewed as a very flat, dull business. He felt this was under the radar screen and not a lot of attention being paid to it. It is now trading 19X this year’s EBITDA, so it has gotten a little ahead of itself, and may be a little expensive.
(A Top Pick Sep 23/19, Up 37%) A great CEO who has driven shareholder value, like getting rid of their mobile business which was stagnating in terms of growth. They sold their subscriber base to Dish, and generated revenue by selling back-end services to Dish, which was smart.
TC has struggled now for a couple of years.
Sales growth has slowed, and it saw a loss in 2021 and an even bigger loss in 2022.
Net debt of $226M is very high vs annualized cash flow. It misses earnings estimate about half the time.
Insiders own 9% and four entities own a combined 50% more. It is buying back stock.
Sales fell in the recent quarter, so it is not even keeping pace with inflation right now.
Stock momentum is also not particularly great.
We think buyers can wait here.
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TC is down 28% YTD, bringing market cap to $282M. There are no analysts on the company so no estimates. In Q1 sales rose 8.7% and gross profit rose 30.3%. Most divisions showed growth. Cash is $79M but debt is $456M. Strong growth and cost containment at Wavelo helped results. But cash flow was negative in 2023. Considering weak momentum and lots of balance sheet risk, we have a hard time getting excited here about 9% growth and negative cash flow. We are not interested.
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Sold because its ROIC returns started to get a bit wonky. In fact in last 3 years, ROIC has been negative. Satellite internet access has eaten the lunch of fibre. Hard to form a moat around its domain business. Wait for ROIC to be in excess of 20% for at least 3 years in a row.
An excellent example of deciding to move on from a position when the returns start to falter or go negative. And if there's no identifiable moat, it's a reason to exit.