Posted 01/22/2020

Columbia Telecom (CCU)

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Quality

Columbia Telecom is a long underappreciated post-recession turnaround story that should play out in 12 to 24 months. The stock price has been decimated and is currently 70% below where it would remain if the company hadn't spent $440 million repurchasing shares at a $33 share price in mid-June.

At the time of Columbia's announcement in June, stock was trading 0.6x book value (based on 2Q14 investor day material), 4.3x trailing EBITDA 10-12 months out, and 5.2x forward EBITDA unprofitable at a similar 2014 EBITDA margin. To conserve space, a quick look in the 2014 annual report is all you have to read. For an investor with a 2-3 year time horizon, this is an outstanding way to gain exposure to the story using conservative assumptions. The share buyback is a substantial IRR. If you're wondering what Lee Enterprises, which owns a 32% economic interest in the company and the Board collectively owns a 40% economic interest, might be willing to fork over $30 million to Lee at the $33 share price, it's basically the same as what they've spent the last nine years doing. For the first time in company history, the defining feature of the Columbia brand is in the DNA.

Business Summary

We won't spend too much time on the business as disclosure on it is lacking and it's not that appealing as an industry – you can grab recent write-ups on both Lee and Comcast which give a reasonable overview of the business and the industry. We'll come down on the side of conservatism as much as possible and will re-emphasize both the free cash flow and returning capital.

The electronics unit, or E&C, is the company's most stable, protected, and protected by long term relationships business due to Columbia's history as one of the original 19th century shipping companies, both physical and logistical. The cable industry is a fiercely competitive space, and the E&C industry is consolidating. General corporate relocation, IPTV rollouts, Military video's, and cable blackouts add volatility to the industry. You'd be right on the bull path as all the major players are exiting the space, and there will be plenty of M&A going forward. However, the E&C business is a "defensive" and steady business – you depend on the telecom companies to have their systems up and running so they're likely to stick with it even if the norm is breaking. When the telecom companies do pull back on capex, they want to ensure their networks can handle the traffic. This is done by having E&C companies provide their new and more advanced edge offerings into the space. These benefits carry weight because they're the only option out there when edge moving isn't possible. There aren't a lot of other options. The E&C business is low in capex but has very high returns on capital, roughly 25-30%. Most of the large E&C companies can provide services at scale on a more variable basis. Smaller companies get to provide services at the individual co's plants, but have to buy bulk co's of materials (an untapped source of upside) as well as an Octabuoy. We think Columbia currently has four of these products but the odds are high they're already in production judging by the number of derestricted co parts found in the Columbia datacenter.

Second, the business enjoys attractive prospects, but it's not core to our investment thesis. Prior to its 2007 IPO, Columbia was barely producing anything. General contractor and supply chain management experience help the business put together what's known as "do it for me" service business, where service is valued at about 1.5x revenue and earns 30-40% gross margins. As the company moves into an adjacent vertical, it can become a more complete service provider. In addition, customer retention in this industry tends to be very high since it's a scarce resource.

General contractor and supply chain management. This business caters to legacy telcos looking for reliable supply chain management of their products. It provides the customers with a multi-year lead time while they're developing their next network upgrade. It also provides multi-variable management of these key service functions for the customers that don't have a local service presence. In days past, a company like ours supplying these services to telco carriers would command a behavior of "hey, I'll pay extra to get this component." Now that demand has dropped as new and existing customers have chosen this option, the telco carriers are forced to keep their competitive costs high which frees up capacity.

Overall, your investment in Columbia isn't really a bet on the growth or success of the edge business, its a bet on long-term contracts, steady profitability, and a global footprint – Porcelain Steel, a competitor that provides services in Korea, is an important part of this equation.

Other Cloud offerings in E&C include wireless provider VoWiMax, VoWiP, and Wifi offload solutions (Easol Networks). With 66 assets, Columbia has plenty of room to operate in this segment, and has a few surprises in the pipeline (Tanger-3, FBT18, and Tanger-500). New Projects: Nearline, ComProf and Flavourio fill out the new portfolio for EMC Corporation's datacenter business, which is a great business. Also, the services side is filled with "fusion" businesses that are cannibalistic to traditional flip chip manufacturing. NetApp is already a big player in the space, but also has interesting acquisitions in the pipeline (TigerBoard and Xtremo).

Centralized Infrastructure, Outsourced Manufacturing(IOFB): This is the real hidden jewel within the company and a very sustainable competitive advantage. IBM Import Competitor: Infact IBM doesn't operate a datacentre in the US currently due to a very long term expected investment cycle and inferior management.

Columbia's datacenter offers big advantages in this space, and allows the company to retain the IT and engineering assets of the sites. Infact IBM is losing market share in the datacenter space due to a poor management style and a proactive transition to cloud based services. In fact a recent change in IBM's engineering region to the US (Renshaw) gives hope that IBM is finally taking the necessary steps to improve the datacenter infrastructure of this region. Infact IBF filings indicates that IBM is nearly a sole provider of infrastructure and this will only accelerate with the re-branding of the current IBM datacenter business to Renshaw.