Otelco Inc. (OTEL) research, news, and more from GeoInvesting

Company description

Wed, 02 Aug 2017 15:19:25 GMT

Otelco Inc. provides a range of telecommunications services on a retail and wholesale basis. Otelco Inc., together with its subsidiaries, provides a range of telecommunication services on a retail and wholesale basis. It offers local services, including voice access lines that provide local dial tone and calling features, such as caller identification, call waiting, call forwarding, and voicemail; long distance services; billing and collection services for other carriers under contract; directory advertising services; and other telephone related services comprising leasing, selling, installing, and maintaining customer premise telecommunications equipment, as well as the publication of local telephone directories and wireline voice telephone services. The company also provides network access services, which include the origination, transportation, and termination of calls of long distance, wireless, and other interexchange carriers; basic, digital, high-definition, digital video recording, video on demand, and pay per view cable television services; high-speed and dial-up Internet access, as well as ancillary services, which include Web hosting and computer virus protection; Internet protocol television; and other telephone related services. In addition, it resells satellite services for DirecTV; rents fiber to transport data and other telecommunications services; and provides private/hybrid cloud hosting services, as well as consulting and professional engineering services for mission-critical software applications of small and mid-sized companies. The company primarily serves business and residential customers residing in and adjacent to the exchanges in Alabama, Maine, Massachusetts, Missouri, Vermont, and West Virginia; and business customers in Maine and New Hampshire. As of December 31, 2016, it operated 94,029 voice and data access lines. The company was founded in 1998 and is based in Oneonta, Alabama.

Research

Tue, 10 Mar 2020 17:58:04 GMT

Otelco Inc. (NASDAQ:OTEL) ($8.30; $28.3M market cap), a telecommunications service provider announced Q4 2019 results:

Sales of $15.5 million vs $16.2 million in the prior year
EPS of $0.58 vs $0.66 in the prior year
“Focusing on both cost management and our revenue trajectory should continue to serve our employees, customers and stockholders well as we move through 2020.”

Closing remarks:

Nothing new to report
OTEL continues to put less emphasis on its obsolete legacy telecom business and invest in its fiber network, dampening its overall growth story.
It's worth noting that the company’s largest shareholder, Ira Sochet, added about 185,000 shares last week after several months of owning a 40+% stake in OTEL without adding shares.

Research

Fri, 30 Aug 2019 15:39:16 GMT

Otelco Inc. (NASDAQ:OTEL) ($12.01; $40.9M market cap), a telecommunications service provider sees continuing buying from its largest stakeholder Ira Sochet despite sub par Q2 2019 results reported earlier this month. In a 13D/A filed yesterday, it shows that Mr. Sochet has added 100,000 shares since his last 13D filing in late July 2019. Mr. Sochet now holds a 43.6% stake or 1.48 million shares of OTEL.

Although the stock is still up nicely since we first initiated coverage on OTEL in August 2017, shares fell sharply after the company reported third quarter financial results on August 14, 2019.

OTEL has been going through a major restructuring over the last few years, consisting of two primary initiatives.

Restructure its balance sheet to reduce interest expense and reduce leverage.
Upgrade its telecom infrastructure to fiber.

The balance sheet restructuring helped propel the stock since 2017 as earnings-per-share benefited from lower interest expense.

In order for the company to grow, it has to focus on continuing to build out its telecom infrastructure,so it can increase its subscriber base and offset churn from its legacy business.

Even though the company is still leveraged, its lower valuation compared to many of its peers continues to attract speculation that OTEL will be an ideal takeover candidate.

We are certainly monitoring the situation closely. We're happy to see that Ira stepped up to the plate and bought stock on the recent dip, even after buying stock at much higher prices.

Research

Wed, 14 Aug 2019 14:53:55 GMT

Otelco Inc. (NASDAQ:OTEL) ($14.96; $51.0M market cap), a telecommunications service provider, announced Q2 2019 results:

Sales of $15.7 million vs $16.9 million in the prior year
Non-GAAP EPS of $0.54 vs $0.90 in the prior year

During 2019, the Company expects to invest a total of $11.5 million to upgrade and maintain its network. "This investment level represents a 27.7% increase in investment in the business over 2018 and the second year of double digit increases in investment aimed at providing customers increased internet speeds to reduce customer churn. During second quarter, Otelco announced plans for the additional deployment of fiber to over 4,100 locations in Alabama, the deployment of VDSL throughout all of its service areas and the upgrade of its cable distribution network to DOCSIS 3.1 next year."

Legacy revenue still continues to drop off as the company builds out its network and invests in future growth opportunities.

Until the company begins to realize top line growth from its new network, EPS growth will likely be muted. However, we still think the company is an ideal acquisition target.

To see our full coverage on OTEL, go here.

Research

Wed, 31 Jul 2019 15:23:26 GMT

Otelco Inc. (NASDAQ:OTEL) ($14.68; $50.1M market cap), a telecommunications service provider, saw support once again from its largest stakeholder as shares pulled back from recent highs. After several more form 4 filings over the last two weeks, Ira Sochet filed an updated 13D/A showing he has increased his stake to 40.7% from 39.4%.

Research

Wed, 17 Jul 2019 04:00:00 GMT

Otelco Inc. (NASDAQ:OTEL) ($14.70; $50.1M market cap), a telecommunications service and provider sees support once again from largest stakeholder as shares pullback from recent highs. After reaching new highs of $18.31 in April, shares have pulled back to under $15. We have continuously covered the buying from Ira Sochet, the largest stakeholder in OTEL. A Form 4 filed yesterday shows he added 4,874 shares at an average price of around $14.55. This purchase comes on the heels of aggressive buying in late May and early June where he added 100,000 shares to his near 40% stake in the Company.

Research

Thu, 09 May 2019 15:28:06 GMT

Otelco Inc. (NASDAQ:OTEL) ($17.41; $58.9M market cap), a telecommunications service and provider, announced Q1 2019 results:

Sales of $15.8 million vs $16.7 million in the prior year
Non-GAAP EPS of $0.57 vs $0.59 in the prior year

"The Company’s multi-year plan to increase service speeds is expected to help reduce customer churn and stabilize revenues. In 2018, Otelco invested $8.0 million to grow its fiber distribution network and improve its support systems, including the $2.3 million invested during fourth quarter 2018. In 2019, fiber-to-the-premise (“FTTP”) will be the primary vehicle to increase data capacity for Otelco’s customers, with fiber-to-the-node (“FTTN”) and fixed wireless options being employed in more sparsely populated areas."

Legacy revenue continues to drop off as the company builds out its network. It looks like the first stage of the company’s turnaround - the shoring up of its balance sheet - is now complete. This, in turn, is allowing the company to invest in future growth, as shown above.

Until the company begins to realize top line growth from its new network, EPS growth will likely be muted. However, we still think the company is an ideal acquisition target, a sentiment that is partially driven by the fact that its largest shareholder, Ira Sochet, continues to buy stock even as it hits new highs.

To see our full coverage on OTEL, go here. You can also see more background on OTEL’s history via two Seeking Alpha articles linked below:

Research

Thu, 25 Apr 2019 04:00:00 GMT

Otelco Inc. (NASDAQ:OTEL) ($17.36; $58.8M market cap), a telecommunications service and provider, continues to see share accumulation from its largest stakeholder, Ira Sochet. In a Form 4 filed yesterday after the close, Mr. Sochet added another 31,000 shares to his large stake of over 1.2 million shares. Mr. Sochet owns roughly 35.5% of the outstanding shares.

Research

Wed, 17 Apr 2019 04:00:00 GMT

Otelco Inc. (NASDAQ:OTEL) ($17.72; $60.0M market cap), a telecommunications service and provider, saw its shares hit a new 52 week high on Monday, reaching $18.16 in the trading session. Even at new highs, the stock continues see share accumulation from its largest stakeholder, Ira Sochet. In a Form 4 filed yesterday after the close, Mr. Sochet added another 6500 shares to his large stake of over 1.2 million shares, roughly 35.4% of all outstanding shares.

Research

Thu, 11 Apr 2019 15:16:11 GMT

Otelco Inc. (NASDAQ:OTEL) ($16.96; $57.4M market cap), a telecommunications service and provider, continues to see share accumulation from its largest stakeholder, Ira Sochet. In a Form 4 filed yesterday after the close, Mr. Sochet added another 7000 shares to his large stake of over 1.1 million shares. Mr. Sochet owns roughly 35% of the outstanding shares.

Research

Tue, 05 Mar 2019 17:57:50 GMT

Otelco Inc. (NASDAQ:OTEL) ($16.95; $57.4M market cap), a telecommunications service and provider announced Q4 2018 results:

Sales of $16.2 million vs $16.7 million in the prior year
EPS of $0.71 vs loss of $0.26 in the prior year

“The flexibility provided by our new debt agreement and completion of the billing system conversion, coupled with Otelco’s participation in the FCC’s A-CAM program with its focus on broadband and fiber deployment, provides a solid foundation for our business,” noted Souza. “Our marketing, sales and customer service teams are targeted in their approach to offering fiber-based Lightwave services to every location we pass with each new mile of fiber. With these improvements, we are well positioned to enhance our customers’ experience, improve available data speeds and product offerings, and add new customers to the Otelco family of companies. Focusing on both cost management and our revenue trajectory should continue to serve our employees, customers and stockholders well as we move into 2019.

Research

Thu, 08 Nov 2018 16:33:29 GMT

Otelco Inc. (NASDAQ:OTEL) ($16.90; $57.2M market cap), a telecommunications service and provider announced Q3 results:

Sales of $16.3 million vs $16.9 million in the prior year
EPS of $0.67 vs $0.46 in the prior year

“We continued to execute our strategy of fiber deployment and debt reduction in third quarter,” said Rob Souza, President and CEO of Otelco. “Net income increased 46.4% for third quarter 2018, compared to third quarter 2017, while we invested $2.4 million in our network and operations. The ratio of debt, net of cash, to Consolidated EBITDA improved to 2.79, reflecting the voluntary prepayments made during the quarter.”

The billing system transition has required a lot of extra time and work from our employee team this quarter, and we appreciate their dedicated efforts beyond the normal requirements of operating the business,” continued Souza. “With this project behind us, we are well positioned with the new system to focus on enhancing our customer experience, improving available data speeds, adding new customers to the Otelco family and reducing our leverage to give the Company more financial flexibility for the future. Focusing on debt reduction, cost management and positively changing our revenue trajectory should continue to serve our employees, customers and stockholders well as we move into 2019.”

To see our full coverage on OTEL, go here.

Research

Thu, 20 Sep 2018 17:10:01 GMT

Otelco Inc. (NASDAQ:OTEL) ($16.50; $55.9M market cap), a telecommunications service and provider, announced it was awarded funding from the FCC’s CAF II auction for services in Western Massachusetts and is further reducing its leverage through voluntary prepayments on its CoBank debt.

During August 2018, the FCC employed a reverse auction to award additional Connect America Fund support for providing improved broadband service in rural areas. The Company is completing the post-auction requirements to receive just over $0.9 million for three contiguous locations in Western Massachusetts during the ten-year funding period. These CAF II awards support the construction of a fixed wireless network that will deliver services to four targeted communities. Network deployment is expected to begin in fourth quarter 2018, once FCC requirements, operational agreements and regulatory approval have been completed.

Otelco indicated in its second quarter 2018 earnings announcement that it planned to make another voluntary prepayment on its debt held by CoBank, ACB, as Administrative Agent, Issuing Lender and Swing Line Lender. On July 31, 2018, and August 31, 2018, the Company made $1.0 million and $2.0 million voluntary prepayments, respectively, lowering the outstanding loan balance to $77.7 million. At current interest rates, the additional payments will reduce annual interest cost by just under $0.2 million.

To see our full coverage on OTEL, go here.

Research

Tue, 14 Aug 2018 14:39:42 GMT

Otelco Inc. (NASDAQ:OTEL) ($15.20; $51.5M market cap), a telecommunications service and provider announced Q2 2018 results:

Sales of $16.9 million vs $17.4 million in the prior year
GAAP EPS of $0.85 vs $0.45 in the prior year
Non-GAAP EPS of $0.93 vs $0.62 in the prior year

“our employee team has been actively engaged in many initiatives for our customers and stockholders during the past quarter,” continued Souza. “We are focused on enhancing our customer experience, improving available data speeds, adding new customers to the Otelco family and reducing our leverage to give the Company more financial flexibility for the future. While the price of our stock has more than tripled in the last two years, our peers in the industry continue to trade at somewhat higher multiples than Otelco. Generating an improvement in revenue performance while maintaining our focus on cost management should continue to serve our employees, customers and stockholders well into the future.”

OTEL continues to be a story based on deleveraging and taking steps (with regulatory support) to invest in areas like FIber to offset declining revenues in legacy telecom services. OTEL Valuations are still below its comps, maybe a reason why Ira Sochet continues to aggressively to add to his already large position ( 25% stake) by purchasing shares in the open market.

Research

Tue, 10 Jul 2018 15:47:05 GMT

Otelco Inc. (NASDAQ:OTEL) ($15.00; $50.8M market cap), a telecommunications service and provider, continues to see share accumulation from its largest stakeholder, Ira Sochet. Similar to Joseph Manko with Repro Med (OTCQX:REPR), Mr. Sochet continues to accumulate shares of OTEL on the open market. Since our last update, which was in our June 27, 2018 email, Mr. Sochet has added another 39,421 shares at an average price of $15.00. He now owns 24.9% of the company.

Research

Wed, 27 Jun 2018 15:01:10 GMT

Otelco Inc. (NASDAQ:OTEL) ($15.30; $51.8M market cap), a telecommunications service and provider, continues to see share accumulation from its largest stakeholder, Ira Sochet. Since our last update on June 12, 2018, Mr Sochet has filed two more Form 4s showing he has added 23,396 more shares to his already massive stake. He now owns over 800,000 shares, or 23.7% of the company.

Research

Tue, 12 Jun 2018 16:17:37 GMT

Otelco Inc. (NASDAQ:OTEL) ($14.25; $48.2M market cap), a telecommunications service and provider, is also seeing continuous share accumulation from its largest stakeholder, Ira Sochet. In a Form 4 filed yesterday, Mr. Sochet added 14,710 shares at $13.85, bringing his total stake to 783,521 shares, or 23.1%.

We have highlighted a number of his purchases over the last several months. To see our full research coverage on OTEL, including speculation that the company could be an acquisition target, go here.

Research

Wed, 30 May 2018 17:47:27 GMT

Otelco Inc. (NASDAQ:OTEL) ($14.00; $47.4M market cap) - Yesterday via a form 4 filing, Director Norman Frost added 1000 shares at $14.49. While this transaction is small, we have observed continuous open market purchases from several directors over the past few months. We added OTEL, a telecommunications service and provider, to our Mock Takeover Candidate Portfolio in August 2017 at $8.15. Continued insider buying played a big part in our decision to maintain the stock in that portfolio.

In a related note, we are looking into some comments and possible information arbitrage that we noticed on Twitter regarding the possible buyout of OTEL by LICT Corporation (PINK:LICT).

Research

Wed, 09 May 2018 14:25:24 GMT

Otelco Inc. (NASDAQ:OTEL) ($15.80; $53.5M market cap), a telecommunications service and provider, announced Q1 2018 results:

Sales of $16.7 million vs $17.3 million in the prior year
Non-GAAP EPS of $0.62 vs $0.55 in the prior year

Quotes from management:

Holding our operating margins, in spite of continued declines in our residential subscriber base, remains our focus,” commented Rob Souza, President and CEO of Otelco. “And, we continue to work on minimizing the impact of service delivery cost increases during first quarter. In addition, we have made modest price-point adjustments and fee changes to help support operating margins. Our team continues to identify efficiencies in our customer service processes to meet customer expectations while improving the cost structure of our business. In addition, we are analyzing new revenue opportunities resulting from expanding the reach of our fiber network for both current and future customers.”

OTEL is not a growth play. And we need to take a deeper dive into the quarter and some one time costs since we expected better EPS. However, OTEL will continue to stay focused on repaying debt, reducing cost of capital, and returning value to shareholders. We believe OTEL is well positioned it continue to pay down its debt and increase its cash flow due to the terms of a new credit facility.

Research

Tue, 06 Mar 2018 18:08:51 GMT

Otelco Inc. (NASDAQ:OTEL) ($14.45; $48.3M market cap), a telecommunications service and provider, announced Q4 2017 results:

Sales of $16.8 million vs $16.8 million in the prior year
Non-GAAP EPS of $0.44 vs $0.67 in the prior year (both not taxed) We need to continue to look at the financials and the 10-K when its filed.

Quotes from management:

“In an industry seeing declines in residential subscribers every measurement period, it is exciting to be able to hold our revenue and operating margins constant during fourth quarter,” announced Rob Souza, President and CEO of Otelco. “The ACAM funding continues to help offset local service revenue declines. Our team is focused on meeting our customers' needs in an efficient manner, while we expand the fiber content of our network.

In the first year of its ten-year ACAM funding, Otelco placed approximately 81 miles of fiber passing over 1,900 locations and reaching 7.5% of its eligible ACAM locations.”

As we stated in our last update, OTEL will continue to stay focused on repaying debt, reducing cost of capital, and returning value to shareholders. We believe OTEL is well positioned to do this since the new credit facility allows for much more flexibility.

On August 7, 2017, we disclosed a long position in OTEL when it was trading at $8.20 and added the stock to our Mock “Takeover Candidate Portfolio”. The company initially caught our attention when it announced that it was considering strategic options in the Fall of 2016.

Research

Thu, 08 Feb 2018 16:48:42 GMT

Otelco (NASDAQ:OTEL) ($14.25; $47.6M market cap) - The company’s largest shareholder, Ira Sochet, filed a Form 4 yesterday indicating that he had purchased another 26,000 shares on the open market at prices ranging between $13.97 and $14.24. This brings his total stake up to 700,296 shares, about 22% of the O/S count of 3.35M shares. Recall, we pointed out his last purchase on December 4, 2017. We are currently long OTEL. See our research here.

Otelco Inc. provides a range of telecommunications services on a retail and wholesale basis.

Research

Mon, 04 Dec 2017 16:51:33 GMT

Otelco Inc. (NASDAQ:OTEL) ($12.60; $42.1M market cap), a telecommunications service and provider, today filed a 13D related to what we pointed on in our November 30, 2017 email that highlighted Ira Sochet’s purchase of 289,076 shares at open market prices between $11.60 and $11.95. Ira Sochet now holds 679,873 shares or a roughly 20.3% stake in the Company.

Research

Thu, 30 Nov 2017 15:34:23 GMT

Otelco Inc. (NASDAQ:OTEL) ($12.00; $40.1M market cap), a telecommunications service and provider., saw a large stakeholder/activist add aggressively to his stake. In a Form 4 filed yesterday, Ira Sochet disclosed the purchase of 289,076 shares at open market prices between $11.60 and $11.95. Ira Sochet now holds 679,873 shares or a roughly 20% stake in the Company.

On August 7, 2017 we disclosed a long position in OTEL when it was trading at $8.20 and added the stock to our Mock “Takeover Candidate Portfolio”. The company initially caught our attention when it announced that it was considering strategic options in the Fall of 2016.

Research

Tue, 07 Nov 2017 16:54:18 GMT

Otelco Inc. (NASDAQ:OTEL) ($10.00, mc $33.5m) reported Q3 2017 results and the completion of its strategic alternative review:

Sales of $16.9 million vs $17.4 million in the prior year
EPS of $0.46 vs $0.33 in the prior year

Quotes from management:

“The Company has concluded its previously announced review of strategic alternatives. These alternatives included a broad range of merger, sale and acquisition transactions, among other things. The Company and its financial advisor, The Bank Street Group LLC, contacted a wide range of prospective financial and strategic partners to determine their levels of interest in a sale, merger or other transaction involving the Company. However, none of the parties contacted by the Company or The Bank Street Group LLC presented a transaction that Otelco’s board of directors determined to be viable or in the best interests of the Company and its shareholders.

We believe the wireline telecommunications industry, in particular the rural wireline industry, would benefit from further consolidation. We will continue to look for opportunities to participate in that consolidation. In the meantime, Otelco remains focused on reducing our leverage. Our strong cash flow generation has enabled the Company to refinance our debt, significantly lower our cost of capital and provide the ability to return capital to shareholders through dividends,” commented Stephen McCall, Chairman of the Otelco Board of Directors. “The Board remains committed to maximizing shareholder value and will pursue any reasonable alternatives that present themselves.”

On August 7, 2017 we disclosed a long position in OTEL when the stock was trading at $8.20 and added the stock to our Mock “Takeover Candidate Portfolio”. The company initially caught our attention when it announced that it was considering strategic options in the fall of 2016.

We will keep OTEL on our Takeover Candidate Portfolio as the Company states it will continue to listen to offers as they present themselves.

The stock is still cheap when you look at its valuation vs. comps.

However, with the strategic review now completed and no sale of the Company, investors that bought OTEL as a potential takeover play may look to move on to other opportunities. We will let you know what we do.

Update:

In case you missed it, we put out an Otelco Inc. (NASDAQ:OTEL) followup message today via Twitter. OTEL's announcement today indicates that alternatives for a "broad range of merger, sale and acquisition transactions" are off the table for now since no viable opportunities presented themselves.

However, the release contains many elements that hint at EPS accretion and OTEL returning capital to shareholders:

New credit facility significantly reduces cost of capital; Will reduce annual cash interest expenses by approximately $0.80 - $1.00 per share. Attaching a low multiple of 5 translates to value creation of as much as $5 per share, this might be conservative because the debt reduction improves OTEL's risk profile.
New credit agreement now allows OTEL to pay dividends; This was not possible under old credit agreements and restricted OTEL's ability to return capital to shareholders.
OTEL will continue to stay focused on repaying debt, reducing cost of capital, and returning capital to shareholders. We believe OTEL is well positioned to do so since the new credit facility allows for a lot more flexibility.

Reasons For Tracking

Wed, 11 Oct 2017 14:52:43 GMT

**OTEL Research Update (Reasons for Tracking)

On August 7, 2017 we disclosed a long position in wireline telephone services company $OTEL ($9.65) when the stock was trading at $8.20 and added the stock to our Mock “Takeover Candidate Portfolio”.

The company initially caught our attention when it announced that it was considering strategic options in the fall of 2016.

Here are the highlights why we think the stock is a timely play:

OTEL is dirt cheap, trading at an EV/EBITDA multiple of 4.0, well below its peers of 8.5x
Industry consolidation picking up. A very similar peer, $FRP was acquired end of 2016 at 7x EBITDA/2x revenue
The company engaged telecom M&A specialist The Bank Street Group as a strategic advisor

Headquartered in Oneonta, Alabama, OTEL provides wireline telephone services in Alabama, Maine, Massachusetts, Missouri, New Hampshire, Vermont and West Virginia. The Company’s services include local and long distance telephone, digital high-speed data lines, transport services, network access, cable and over-the-top television, security and other telephone related services.

With approximately 98,000 voice and data access lines which are collectively referred to as access line equivalents, Otelco is among the top 25 largest local exchange carriers in the United States based on number of access lines. Otelco operates eleven incumbent telephone companies serving rural markets, or rural local exchange carriers. It also provides competitive retail and wholesale communications services and technology consulting, managed services and private/hybrid cloud hosting services through several subsidiaries.

On the 3rd of November 2016 the company announced, along with its results for the quarter ended September 30th, that it engaged M&A specialist The Bank Street Group as a strategic advisor. With the M&A space in telecom heating up, investors naturally assumed a sale of the company was likely and the stock moved from $4.25 to $6.25 between Nov. 3 and Nov. 15, 2016. Moody’s commentary froma report on M&A activity earlier in 2017 seemed to hint at the possibility of smaller telco providers seeing more acquisitions.

“Market saturation and tough competition have produced a stagnant US telecom market […] Yet regulators remain unlikely to approve consolidation within the traditional telecom sector, especially for large incumbents, so they must look elsewhere for growth.”

OTEL Management refrained from making further commentary. Note how management commentary aligns with Moody’s ideas about industry consolidation.

From the 3Q16 Earnings Call 11/4/16:

“As noted in our press release, we have recently engaged The Bank Street Group to help our management team and Board of Directors explore various strategic alternatives available to Otelco. We believe that the wireline telecommunications industry is poised for further consolidation. Obviously, our top priority in this process is to identify opportunities for Otelco that maximize shareholder value. And at this point, we are evaluating a broad range of options.

While it remains too early in the process to discuss any progress, it is important to note that there can be no assurance that our review of strategic alternatives will result in any transaction. At this time, we do not intend to make any further public comment regarding the strategic review and exploration process. And therefore I will not be answering any questions on the topic.”

Undoubtedly, money is available for big companies to acquire smaller ones, and telecom is no exception. For example, peer $FRP was acquired by Consolidated Communications for approximately 2x Revenue and 7x EBITDA.

One can easily make the case that OTEL could be acquired at $10+ based on multiple valuation ratios. The table below also shows that although OTEL seems to have a lot of debt compared to its market cap ($33m Mcap, $110m EV) its leverage ratio is not out of line compared to other communication service providers.

On the high end of the EV/EBITDA multiple, OTEL would fetch a valuation as high as $35 per share, but there are factors that could make the high end a little bit of a stretch. While the company is producing positive net income, it has to be considered that it is carrying about $84m net debt on its balance sheet and that its above average margins could revert back to the industry mean. In the trailing twelve months to June 2017, OTEL produced $27m in adjusted EBITDA and $65m in revenue.

The EV/S ratio of peers implies a value for OTEL of roughly $19.00 per share of.

This is essentially a company where there is a lot of debt so the equity value can rise a lot in case an acquisition takes place, while the downside is somewhat limited with a currently profitable business.

Information Arbitrage in Conference Call and Press Release: Verbiage on Acquisition Talks Changes

Encouraging comments concerning a potential transactions came from CEO Robert Souza as presented in its Q2 2017 press release and echoed on the Q2 2017 earnings call on August 2nd.

Conference Call

“At this point, we are in discussions with a number of entities and are evaluating a broad range of options, including a potential acquisition, merger or sale. It is important to note that until any definitive announcements are made, there can be no assurance that our review of strategic alternatives will result in any transaction. Our management team and our board continue to be actively involved in this process. However, we will not make any further comment during this call or address any questions at this time. We will continue to restrict public comments to those required by applicable law.”

So, for the first time, management actually mentioned they are engaging in actual acquisition talks. Compare the verbiage to the previous conference call from May 2017.

“At this point, we are evaluating a broad range of options including potential acquisitions, mergers or sales among others. However, it is important to note that there can be no assurance that our review of strategic alternatives will result in any transaction. Our management team and our Board continue to be actively involved in the process. However, we will not make any further comment during this call or address any questions at this time. We will continue to restrict public comments to those required by applicable laws.”

Caveats:

There is no growth potential in the business without significant capital expenditures or acquisitions.
High leverage could constrain a buyout premium, more than we have assumed.
While finding a buyer and executing a deal certainly takes time, the company is already more than half a year into the process without announcing meaningful results
The company might also turn around and choose to acquire another company themselves which changes the investment thesis

Research

Wed, 30 Aug 2017 17:11:37 GMT

OTEL ($9.35) - Shares of OTEL hit a 52 week high of $9.50 in yesterday’s trading session. We first highlighted OTEL on August 2, 2017 when the stock was trading at $7.00. We stated that earnings were up sharply despite weaker sales and comments from the press release indicated that the Company was further along in its strategic alternative process than suggested in past releases. On August 4, 2017 we stated we had initiated a long position and added it to our Mock Takeover Candidate Screen.

In a recent Seeking Alpha article titled, “Otelco: Undervalued With Great Upside Potential”, the author suggests that even though OTEL shares have run up nearly 100% this past year, in his conservative opinion he sees another double.

Thanks to one of our premium members, we took a closer look at implied share prices at different acquisition multiples, showing how much potential upside the stock could have in a takeover scenario.

Research

Mon, 07 Aug 2017 15:07:39 GMT

Initiated Starter Position and Added OTEL To Our New Mock Takeover Screen

On Friday, we issued the following tweet:

Later in the day, we created a Mock Takeover Candidate portfolio which will cover select stocks we feel are takeover candidates due to strategic review processes or hidden clues in filings or press releases.

On August 2, 2017, we discussed that $OTEL ($8.15) had caught our eye due to verbiage that indicated it was in discussions with a number of entities in its ongoing strategic alternative process. You can see our original note here.

Research

Wed, 02 Aug 2017 15:16:06 GMT

OTEL ($7.0) - reported earnings after hours yesterday with sharply higher earnings on weak sales. What caught our eye was the additional verbiage that includes discussions with a number of entities:

"In the fall of 2016, we announced the engagement of The Bank Street Group LLC to explore the Company's strategic alternatives," added Souza. "While the Company will continue to restrict public comments on the process, discussions are ongoing with a number of entities who have been engaged in reviewing both the Company's performance and its future possibilities. The discussions are consistent with other telecommunications industry announcements within the broadly defined telecom market." However, there can be no assurance that any transactions will occur as a result of these discussions.

This verbiage indicates that they are further along in the process than previously suggested in past press releases.