At $17,000 or so per share, LICT Corporation is already one of the market’s highest-priced stocks. I believe shares should and will trade far higher. In LICT, I find the rare combination of a strong and growing business, pristine balance sheet, and well-incentivized, capable management.
I talk about LICT a lot, but mostly on Twitter and in my quarterly letters. For anyone who is not familiar, LICT is a collection of rural telecom companies. Mario Gabelli and a few of his associates control the company, which has rewarded shareholders richly since going public in 1985. At present, LICT owns a collection of 11 telecom providers in several states. I’ll be borrowing liberally from the company’s annual meeting slides as I describe the company.
Rural telecom has never been what most would consider an “exciting” industry. Many rural telcos were established in the 20th century by neighbors collaborating to build systems in places so remote or thinly-populated that Ma Bell had no interest. Eventually, states and the federal government recognized the strategic and economic importance of ensuring rural Americans had access to modern communications and began subsidizing these rural telecoms. The major service of rural telcos was, for most of their existence, the landline. Naturally, the rise of cellular communication and broadband internet has decreased the need for landlines. Telcos that foresaw the decline of the landline and invested heavily in non-regulated cell service and fiber-optic networks remain healthy, viable businesses. Telcos that were unwilling or unable to make these investments are struggling.
Fortunately, LICT is in the first camp. LICT invested heavily in its network over the last several years with the explicit goal of building its non-regulated revenues and reducing its reliance on traditional telecom services. It is likely that non-regulated revenues will exceed 50% of total revenues in 2020.
LICT’s efforts to roll out high-speed broadband have helped offset the long-term run-off of landline revenues. In fact, LICT’s EBITDA grew at a 9% annual rate from 2013 to 2019. Free cash flow, as the company defines it (EBITDA – capex) grew at a 12% rate over the same time period. Now, it must be recognized that the company got a major boost from federal and state subsidies along the way. The Alternative Connect America Cost Model provides a major increase in subsidy revenue for rate-of-return carriers in return for meeting certain broadband access and speed thresholds in their service area. LICT’s annual A-CAM subsidy revenue now totals $31.9 million. LICT will receive this annual subsidy until the end of 2028. After that, the subsidy picture is uncertain. Personally, I fully expect another subsidy program to be enacted based on the continued need for infrastructure investment in rural America.
LICT has a notably strong balance sheet to pair with its healthy operations. The nature of telecom revenue streams lend themselves to a healthy amounts of leverage, particularly in an era of rock-bottom interest rates. Most telecoms feel comfortable with leverage of 2-5x EBITDA depending on their operating model and business trends. LICT once employed meaningful leverage, but has paid down debt to the point where it holds substantial net balance sheet cash. To bolster its flexibility, LICT recently closed on a $50 million line of credit from CoBank. The company drew down on this line of credit completely in March.
LICT’s free cash flow profile is enviable. On 2020 revenue of around $115 million, LICT will produce free cash flow exceeding $20 million. This is despite being in an elevated phase of the capital expenditure cycle. With practically zero debt to service and network additions fully covered, LICT is free to direct significant cash flow to returning capital or to acquisitions. I have wanted the company to make a significant debt-financed acquisition of another rural telecom for some time now, but it seems the company is more interested in aggressive share repurchases. And that’s fine! By continuing to buy back hundreds of shares each year, the company is actually creating an extremely interesting dynamic.
Following years of share repurchases, only about 10,000 LICT shares remain in the hands of non-insiders. Assuming the company dedicates its 2020 free cash flow to buybacks (without spending down any of its $80 million warchest) the company will be able to repurchase more than 1,200 shares. At this pace, it won’t be long until the company simply runs out of shares to repurchase. To me, the inevitable result of this dynamic is a much, much higher share price not terribly far in the future.
A strongly profitable business with growth opportunities, net balance sheet cash and an active capital return effort coupled with a more than reasonable valuation tends to be a good setup for patient investors. When I update this post in 2030 or so, I expect LICT will have treated investors very well.
Alluvial Capital Management, LLC holds shares of LICT Corporation for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.
Hi – thanks for the write-up. Do you know in what % of their footrpint they have an overlap with overbuilders and/or muni fiber players?
Nearly none at all. LICT’s coverage area is so remote that service is only viable with generous subsidies. This is both a risk and an advantage, though state and federal governments have been very supportive of expanding broadband service in rural America.
Your last few picks have done poorly, why would this be any better?
Perhaps you misunderstand the purpose of this blog. These are not “stock picks,” they are profiles of companies I find interesting and potentially under-valued. Some I own, some I do not. Some will do well, some will not. I don’t track the performance of the companies I write about here, because my goal in writing is not to identify companies that will outperform some benchmark. My goal is to entertain and inform readers and to increase awareness of unusual and over-looked companies. It beats reading the 15th article about Apple or Tesla.
Will LICT go up? As someone who owns a great deal of it, my opinion is obvious, but there are no guarantees in investing.
There are dozens of excellent investing blogs out there, many written by people far smarter and more experienced than me. If the content or quality of this blog disappoints you, I invite you to spend your time reading any of those instead.
Something to keep on eye on is the Moving Forward Act, a $1.5T bill with $100B allocated for rural broadband, which may be in the areas that LICT serves. It sounds like it passed the house, and parts may pass the senate.
Thanks. Yes, the federal government is very accommodating of rural broadband development. Probably both an opportunity for additional subsidies for rural telcos, and potentially a threat if it brings new competitors into their markets.
Rural telecoms have interested me lately and I’ve just started doing a dive into them. It seems like an industry filled with businesses that SHOULD be structurally sound, with recurring revenues and reliable cash flows.
However, we’ve seen a few telecom bankruptcies recently like Frontier, Windstream, Digicel, etc… Now obviously these aren’t apples to apples comparisons – none of these are rural telecoms, each has revenues in the multiple billions, and excessive financial leverage is a common theme here. But with that being said, each has very significant (if declining) broadband subs/revenues. I can’t wrap my mind around that asset not being able to produce cash flows. You lay a pipe in the ground with a certain number of passings. Not everyone is going to sign up for the service but in the cases of all mentioned above, they have a large subscriber base. There are some sales expenses up front, but after that broadband should just gush cash. Maybe the return isn’t worth it in some cases such as fiber overbuilding and whatnot, but you should still be cashflow positive.
So onto my slew of real questions – what is structurally different in the businesses between rural telecoms like LICT and Nuvera, and these bankruptcies we’ve seen? What prevents LICT or Nuvera from looking like any of the above in 5 or 10 years? I’m assuming at one point, each of these bankruptcies was a small, regional telecom producing enviable cash flows. What changed? Is it simply that they were encroached on by the big boys, Comcast and Charter, trying to compete on speed and price where they just can’t keep up? Or is it that they’re still trying to compete with copper wire in a game where fiber produces speeds that are 10-100x faster (I’m not familiar with the backbones of these companies)? What keeps companies like Comcast or Charter from competing with the rurals? Obviously the returns wouldn’t be there, splitting your subs per passing up like that, but what stops them from looking for that growth as they inch closer and closer to the market being 100% penetrated by gig speeds?
Sorry for throwing my word vomit at you, but I would appreciate any clarity you could provide me!
Good questions, and sorry for the slow reply.
Competition and financial leverage did in Frontier and Windstream. Each had to compete against aggressive and well-funded cable companies who were happy to take their DSL customers. The only hope for these companies was to upgrade their networks rapidly and offer a competitive product. Neither could do it, thanks to their huge financial leverage and dividend commitments. Billions each year flowed to lenders in interest and principal repayment and to shareholders.
Neither of these issues is the case for LICT and Nuvera. Each has a strong balance sheet and each generates excellent free cash flow. Neither has aggressive competitors, because over-building is simply not viable, financially. The only reason LICT and Nuvera are upgrading their networks with so much fiber is the presence of A-CAM funding. Without that, their low-density service areas don’t come close to offering enough potential revenue to justify building.
For the foreseeable future, Comcast and Charter will stick to densely-populated areas that offer much superior economics. The threat to LICT and Nuvera, if anything, is actually high-speed fixed wireless connections. To that end, both LICT and Nuvera are investing in spectrum to be able to offer these services.