New Love for an Old Gadget
MENTION PAGERS AND WHAT immediately comes to mind are horse-drawn carts, typewriters, fountain pens and even eyeglasses -- all once vibrant, large industries that have faded (or are fading) to obsolescence and irrelevance in today's world, replaced by new and much better technologies, from cars and laptops to rollerballs and laser surgery.
The humble pager -- a once-common device for sending simple alerts to friends and colleagues -- is increasingly rare. Instead, people are carrying jazzy cellphones, "always on" BlackBerries and a growing array of other wireless e-mail gizmos.
The stocks of the only two significant public pager companies, Arch Wireless and Metrocall Holdings, have had good runs since both emerged from bankruptcy not so long ago, handsomely outperforming the broad market. But investors seem to think this is enough. Certainly, most yawn at the idea there is any real opportunity in a plan by these two players to combine into one bigger company. One big dinosaur is no more promising than two smaller ones, the thinking goes.
That might be a mistake, suggests Chris Fox, who runs a $550 million New York-based hedge fund for Cramer Rosenthal McGlynn, a private investment firm. Though pagers are a declining business, and subscribers have been quitting steadily for the past six quarters and are likely to continue doing so for some time come, Fox sees potential.
He notes the rate of decline has been slowing every quarter, from a drop of 12% in the final three months of 2002 to a loss of just 5.8% in the opening months of this year. At some point not far off, Fox sees the pager business settling at a bedrock, sustainable subscriber base.
Antiquated or not, pagers still offer some advantages. They are cheap, costing as little as $5 a month for a basic service. More to the point, they are far more reliable for passing on a phone number to call back or an urgent instant message than cell phones and wireless personal digital assistants, which have limited coverage and fall in and out of service zones all the time. Pagers, by contrast, work on radio technology that can be picked up virtually everywhere -- from a Maine mountain top, a Chicago basement, a Colorado ski run and even a private aircraft.
For people who must, absolutely must, be contactable quickly, and 24/7, a pager is the only solution. Think of the doctor on call for emergencies. Or the Homeland Security official who has to be alerted if there is a terrorist threat. Or, the computer technician on standby to cope with a new virus. Or Wall Street traders waiting for the right moment to dump stock. Or military officers, high level Government officials, off-duty cops and firemen, parents with sickly children or...the list gets rather long.
"Yes, profits will continue to fall as subscribers quit," says Fox. "But as you approach a certain point, a core level of determined users will remain -- and earnings and cash flow will then stabilize. Right now, the companies are highly profitable and, since pager infrastructure is already in place, and the companies don't have to recruit new users, build new cell towers or import expensive new wireless technologies, the revenue is flowing down to earnings. Lose some subscribers, and the basic dynamics don't worsen that much. The pager companies will still be cash-rich. That is not reflected in the stocks, which are priced to assume that profits ultimately disappear."
Arch trades at 27, or for little higher than four times free cash flow, compared with a multiple of about 20 for the broad market. Free cash flow amounts to 25% of the stock price, five or six times the S&P 500's free-cash-flow yield. Metrocall, at 66.48, is slightly less attractive but not greatly so. Both stocks sport modest market capitalizations; Arch's is $533 million, Metrocall's $363 million.
Right now the investment picture is clouded by the fact that Arch and Metrocall are proposing to merge, a deal likely to win federal antitrust approval. The terms are as complicated as they come, but if the deal is consummated, investors could win big time. Fox reckons Arch is worth as much as $60 to $65, while Metrocall could be worth north of $115.
If the deal were to collapse, the rewards would be less but not markedly so. On that basis, Fox values Arch at around $45, and Metrocall at close to $80. All the numbers are based on his conservative estimates for a continued decline in revenues. But, as he sees it, free cash flow will never disappear. To the contrary, on a core subscriber base even significantly smaller than current levels, it will remain prodigious, funding a war chest that can spin off cash to investors. A buggy whip, anyone?
Outsource This Stock
Scandals and white collar crime aside, few topics have been more sensitive or controversial in corporate America over the past year than the idea of outsourcing U.S. jobs abroad. Not all jobs, to be sure, but some, especially mobile ones in telemarketing and technical support. In a down U.S. economy, it was a no-brainer that costs could be cut if these operations were shifted to foreign climates, especially to low-wage countries like India where literate, highly educated and English-speaking staffers could be hired.
So it was that a number of firms jumped at the chance of providing technology services for these offshore operations, among them a host of foreign-based outfits with U.S. traded stocks, such as Satyam Computer and Wipro Technologies. U.S. outfits were also in the game, among them Infosys, Syntel and Cognizant Technology Solutions.
Most have richly rewarded stockholders, but few as well as Cognizant. At just under $25, the company's stock has risen 80% over the past 12 months compared with a 10% gain in the S&P 500. At this level, the shares are trading at about 60 times last year's earnings and 40 times Street projections for 2004.
That's rich -- perhaps too rich. Let's make one thing clear: Cognizant is a great little company, generally well-managed and more than capable of posting some handsome gains in revenues and earnings over the next couple of years. The question is whether it will deliver quite as much as the market is expecting. That's far from certain. The company did not return Barron's calls.
Let's look at the outsourcing game generally, the driver for Cognizant's high multiple. First of all, the Labor Department recently issued a report that noted there was little reality to the outsourcing hype -- that in this year's first quarter only 4,600 of the 182,000 jobs reported lost in the U.S. (about 2.5%) were moved overseas. That throws cold water on some of the huge estimates as to the size of the offshore boom -- and thus Cognizant's future growth.
OK, you say, so what? Cognizant has been benefiting from increased outsourcing and, even if the trend is smaller than we thought, won't that continue? The short answer is, almost certainly not. Both IBM and EDS, 1,000-pound corporate gorillas if ever there were some, are moving into the outsourcing game. That's not only going to make it harder for Cognizant to win new clients but will also drive up labor costs in foreign countries as the new players compete for good staffers.
Taken together, those factors could hurt Cognizant, slowing top-line revenue growth, denting rich margins, and slowing earnings growth -- factors not reflected in its rich stock price.
Instead of boosting revenues by the expected 50% this year and 35% in '05, some reckon Cognizant might only advance 30% and 20%. At the same time, margins could shrink from over 22% in '03 to maybe 20% this year and 19% in '05. That would leave '04 earnings of no more than 55 cents a share, versus the expected 61 cents, and '05 earnings of 61 cents instead of the targeted 80 cents.
That kind of disappointment would drive the stock significantly lower -- outsourcing stockholders across the board.
明日黄花 又成新宠
一提到传呼机，人们立刻就会想起马车、打字机、钢笔，甚至还有眼镜──这些曾经风靡一时的行业现在都已经或正在走下坡路，被汽车、笔记本电脑、圆珠笔及激光手术等更新、更好的技术所替代。
一度非常普及的传呼机现在已经很少见到了。现在，人们都在使用手机、BlackBerry手持设备或其他无线电子邮件设备。
仅有的两家上市传呼机公司──Arch Wireless和Metrocall Holdings自不久前脱离破产保护状态后大幅上扬，其表现明显强于大盘。但看来投资者认为这已经足够了。当然，对于这两家公司如果合并是否会带来真正的机会，大多数人是不感兴趣的。一个庞然大物，并不比两个较小的公司更有前途，这种观点颇为盛行。
“这可能是个错误，”克里斯?福克斯(Chris Fox)称。福克斯为私人投资公司Cramer Rosenthal McGlynn管理著一个5.5亿美元的纽约对冲基金。
福克斯认为，其中存在潜力，尽管传呼机业务属于夕阳产业，过去6个季度中退订呈现了稳定的趋势，而且这种状况可能还会持续一段时间。
他指出，下降的速度逐季放缓，降幅已经从2002年第四季度的下降12%到今年第一季度的下降5.8%。福克斯预计，不久之后传呼机服务的退订将出现停滞，留下的订户群将非常稳定，并具有可持续性。
不论是否过时，传呼机仍具有某些优势。它们非常便宜，每个月的基本服务费仅为5美元。而且，传呼机在传递要回复的电话号码或紧急讯息方面比手机或无线个人数字助理(PDA)更为可靠。手机或PDA的信号覆盖空间有限，经常会处在不再服务区内的情况。采用无线电技术的传呼机，几乎在任何地区都能接受到信号。
对于必须迅速联系到的人员，和每周7天、每天24小时都要保持联络的人员而言，传呼机是唯一的解决方案。比如时刻准备出急诊的医生、警惕恐怖分子威胁的国土安全官员、待命处理新病毒的电脑技术人员、等待恰当时机抛出手中股票的华尔街交易员，以及军官、高级政府官员、下班的警察及消防员、孩子患病的父母，等等。
福克斯说，随著用户的减少，利润还将继续减少，这一点无庸置疑。但当下滑到某种程度后，就将保持一个稳定的用户水平，收益和现金流也将趋稳。现在，这些公司的盈利潜力已经大为提高，因为传呼设备基础设施已经基本建设完毕，公司无需招募新用户，建设新基站，或引进昂贵的新无线技术，收入不断转化为利润。尽管损失了部分订户，但基本状况并未明显恶化。传呼机公司仍将有充裕的现金。这并未反映到股价上，这些公司的股价所体现的利润最终将完全消失的预期。
Arch的股价为27美元，约为其自由现金流的4倍多一点，而整个市场的平均股价是自由现金流的20倍左右。Arch的自由现金流约为股价的25%，是标准普尔500指数成份股自由现金流收益率的5至6倍。Metrocall的股价为66.48美元，吸引力稍低一些，但相差不大。两只股票的市值适中；Arch的市值为5.33亿美元，Metrocall为3.63亿美元。
目前，受Arch和Metrocall计划进行合并的影响，这两家公司的投资前景不明朗。这项交易可能会获得联邦反垄断部门的批准。合并条款纷繁复杂，但如果交易能够达成，投资者可能会成为大赢家。福克斯认为Arch的估价应为60美元至65美元，而Metrocall的估价应在115美元以上。
如果交易没有达成，投资者得到的会少一些，但差别不会很大。福克斯对Arch的估价为45美元左右，对Metrocall的估价接近80美元。所有这些数字都是基于他根据收入持续下滑作出的保守预期。但他预计，自由现金流决不会消失。相反，即使核心订户群明显低于目前的水平，自由现金流也将相当高，有足够的资金回报投资者。
