A good friend recently got rid of his pager. Finally. When I asked what took him so long -- I had ditched mine a good three years ago -- he said he liked its reliability. He knew he had a means of being contacted when his cell phone failed.

Until relatively recently, that was a good reason to have a pager. Cell phones are notoriously buggy when it comes to indoor use, and dead zones, dropped calls, and poor reception are seemingly what people come to expect with them. Companies like Verizon (NYSE:VZ) and SBC Communications (NYSE:SBC) have gone a long way toward eliminating a lot of these problems on their networks, but the technology has not been perfected to the extent that I want to get rid of my land line just yet.

Still, the reliability of pagers remains perhaps their one selling point. You mean you didn't realize people still had pagers? Well, certain people do. Primarily employees of some large companies, as well as doctors, truckers, and others who must be able to stay in contact or be reached at a moment's notice. Maybe there will always be a market for pagers, but to look at numbers from USA Mobility (NASDAQ:USMO) -- the offspring of the industry's No. 1 and No. 2 players -- you'd be hard-pressed to make a case that the industry will be around much longer.

A few weeks ago, USA Mobility reported its first fiscal year numbers as a new company, and I had a chance to review it for the Motley Fool Hidden Gems newsletter. Hedge fund manager Whitney Tilson picked Arch Wireless, the leading pager company, in last April's issue of Hidden Gems. Arch merged with Metrocall to form USA Mobility in November of 2004.

The company, which is essentially synonymous with the industry because it has some 6 million of the nation's 10 million pager customers, is facing the same crisis that stared back at buggy whip and whale oil salesmen: The industry is not just slowly declining, it's rapidly evaporating, the result of the advent of new and generally better technology. Subscriber numbers are dwindling, though the rate of decline and actual subscribers lost are getting smaller. Revenue per subscriber, which had increased about 6% in the prior year, fell by a like amount last year, with the likelihood of a continued decline in the future. And the competing technologies -- cell phones, PCS devices, PDAs, and the like -- can perform many of the same functions as pagers, with a lot more features.

Regardless of the state of the industry, there is something to be said for USA Mobility as an investment, and not all of it is negative. The company generates cash, heaps of it. It borrowed some $140 million to help pay cash to the Metrocall shareholders after the merger and the company reports it expects to pay off the debt by the merger's anniversary date. Now that's some cash-generating prowess! It will once again be socking away the dough in its bank account, and while its debt covenants say it can't pay dividends, other smaller mergers might be considered or perhaps even a stock buyback program to enhance shareholder value.

Further, its subscribers, while getting smaller in absolute terms, are beginning to gel around the core group of people who are unlikely to give up anytime soon. The company may be shedding the last of the non-essential holdouts like my friend, but it will keep its die-hard users for awhile. It's just that it won't be making as much money off of them as it used to. As USA Mobility notes in its annual filing, the companies that make up the bulk of its customers receive volume discounts. The individuals who formerly used the service paid more; now that they're gone, only those who get discounted rates remain. But the cost of service will undoubtedly stop declining and level off at some equilibrium point, providing the company with a stable income stream -- assuming cell phones don't overcome their inside-the-building handicap.

The company also needs to reduce a lot of the overlapping services and facilities it inherited as a result of the merger. It sports some 18,500 transmission towers and has plans to reduce that number by half within four to five years. Which towers to eliminate and where will remain a complex problem if it wants to ensure its remaining customers continue to get reliable service while the company pays cost-effective rates.

My problem with USA Mobility as an investment really stems from its current rich valuation. It trades at a trailing PE of 45 and, with declining numbers at the top and bottom lines, I find it hard to imagine it can sustain such lofty valuations. My own back of the envelope calculations reveal a need for it to be cut by about one-third for it to be fairly valued, and halved before I would find it an attractive investment.

The company has confounded investors before and it may continue to do so again. The bottom line: We're not on the same page yet.

Tom Gardner has been several pages ahead of the market with Hidden Gems. His picks are beating the S&P 500 by better than 4 to 1. There's a 30-day free trial to see the other pages in Tom's investment playbook.

Fool contributor Rich Duprey would love to return to the halcyon days before instant communication put us in constant contact with the world. He does not own any of the stocks mentioned in this article.