Arch Communications Group Inc.
To me it seams that Arch is showing good performance and risky and agresive growth in bad industry.
The paging industry is growing on average of 27% a year and it is experiacing a market shift from bussines clients to consumer clients, but there are signs that show that this industry is not favorable and has 3 big problems that make the industry fragile and vulnerable.
• There is fierce competition in the industry that has turned into a price war. This reduces the margins and drives out profitability. Curently the industry is consolidating (mergers and aqusitions), but it does not relieve the presure and the competition with ...view middle of the document...
This has lead to a situation where Arch is more leveraged than its competitors. Much of the potential profit is consumed by interest expense and if they continue to finance growth with debt interest expense will grow. Eventualy the company will reach a point where no aditional debt capital can be rised and they need to thing about increasing the size of equity capital, but currently it can not be done using earnings, because there are none.
I dont think that Arch will be able to reach a point in time where its profits are larger than its cost of capital. They plan to be profitable in 8 years, but to do so they have to keep up the growth, that will be increasingly dificult to finance as the company and leverage grows. Besides they operate in fragile industry, that can simply deminish and that is burdened by negative competitive forces.
The forecast is consistant because I think that at this point they have no other posibility left. They are sloving down the capital expenditures next year, but the survival of the company is posible only if the industry is stabile. As a highly leveraged company it will not be able to withstand any large changes in industry, because it will not be able to fianance the adaption needed. In such case probably all the big palyers will go bancrupt starting Arch.
First investors have to look at data for comparison. The industry wide EBITDA standart is good if all companies are similar, but Arch is more leveraged than the other companies in industrie. EBITDA does not record interest expense that affect net profit. Arch has biger interest expense than other companies, so the profits will be reduced more than that of the other companies. Depreciation expense should be the about the same all acros industry.
To keep its share price stabile or growing the company has to folow its plan hoping that the industry will be growing, no substitues will damage it and they will have acess to capital to finance growth.
I think that ivestment in Arch is risky.
The stock price curently is 12.5USD, and it is earning no dividend. Arch hopes to be profitable in 8 years. I dont belive that they will live to that, so the value of Arch’s stock is 0 for me. If we asume that they will pay in dividends 50% of earnings, when they are profitable the value after 11 years would be $102.86 and current value $75.60 (assumed required rate of return – 3.5%). The dividends would be 0 for first 8 years, 1USD year 9, 2.75USD year 10, 3.6USD year 11.
|Stock Valuation--Nonconstant Dividend Growth ...