Paging industry leader USA Mobility (NASDAQ:USMO) -- yes, there is still a paging industry, and there is a market leader -- announced two weeks ago that it wouldn't be filing its financial statements on time because of problems with how one of its predecessors accounted for income taxes and deferred tax assets. As is customary, the SEC threatened the company with a stock exchange delisting.
It's a little disturbing that the company didn't catch the snafu sooner. USA Mobility was created through a merger a little more than a year ago, when Motley Fool Hidden Gems selection Arch Wireless teamed up with Metrocall to form the nation's biggest paging service, with a 60% market share. The next-closest companies are VerizonWireless (a Verizon (NYSE:VZ) joint venture) at 13% and SkyTel at 8%. Tiny Teletouch (AMEX:TLL) owns just 2% of the market.
With lawyers and accountants poring over the books before the deal connected, and the restatements stretching back as far as 2002, you'd think someone would have noticed that Arch Wireless was treating the items wrong. It's a disconcerting error, but since the treatments won't affect revenues or cash flows (they will impact depreciation and amortization), the company's overall condition probably won't change too much.
That's good news, considering that USA Mobility is leading the way in a declining industry. The results the pager company did release showed that its customer base continued to dwindle, albeit somewhat more slowly. In the first quarter of 2005, subscribers eroded at a rate of 22.7%; by the fourth quarter, USA Mobility stemmed the rate of hemorrhaging to just 20.3%. In other words, it couldn't do much to cauterize the flow of customers fleeing paging. USA Mobility has 4.9 million customers, a little more than one-third of the 7.7 million customers the two separate companies had in 2003.
Revenue per unit, or RPU, also continued to decline, but there may be a silver lining here. While customers continue to leave paging, they are doing so at slower rates, and they're leaving behind those customers -- health-care professionals, government workers, and various large corporate clients -- for whom paging remains essential. Customers who did leave tended to have higher RPU costs than those remaining -- but that's understandable, since a paging service's biggest customers can generally command multiyear, multiunit discounts.
The top five industries that USA Mobility serves account for 60% of the company's revenues. Management can't presently say whether defections will ever drop precipitously, allowing the company to stabilize or even raise its rates. (Understandably, it doesn't want to alienate its remaining customers.) USA Mobility does see trends leading in that direction, but no one knows whether that stabilization will happen soon enough.
There's only so much duplicate service and expense the company can cut, and right now, those cutbacks haven't surpassed the loss of revenues from departing customers. USA Mobility still makes a ton of cash from the business -- it was able to pay off the loan needed to complete the merger in just a year's time, and subsequently rebuild its coffers -- but that can go on only for so long.
Last year, I calculated that with the stock trading at around $31 a share, it was richly priced. I estimated that a 33% drop might make it fairly valued, and a plunge of 50% or more would give me a margin of safety to consider picking up shares. Since that time, the stock is only off by 25%. In the Hidden Gems Daily Updates (30-day free trial required) fellow Fool Bill Barker warns that the company exhibits many of the dangers of a classic value trap, trading at cheap valuations all the way to oblivion.
Yet there may be a few silver linings here. The hurricanes that devastated the South last year proved the value of the paging system. Where land- or cell-based phone systems were literally underwater, USA Mobility's paging system was virtually unaffected. That just might prompt a number of customers to hang on to their pagers, and might attract a number of new clients. I'm not ready to proclaim the company a value trap yet.
USA Mobility trades at an apparent discount, and it doesn't appear that its business will vanish any time soon. Even so, I'd be hard-pressed to want to pick up its shares right now.
Page through further Foolishness:
- Metrocall Merger Could Lose Signal
- Pager Biz "Could Be Worse"
- Growth Signals From Forgotten Pager?
- Paging USA Mobility Users
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
