This article by MOI Global instructor John Lewis is excerpted from a letter of Osmium Partners, based in Greenbrae, California.
Tucows, an ICANN accredited registrar, provides domain name and email services through a global distribution network. The company also operates a rapidly growing MVNO (wireless service) called Ting, which features innovative pricing and category-leading customer service. The company also derives revenue from the sale of fixed high-speed internet access via fiber (Ting Internet) in select towns. TCX has a current market capitalization of approximately $693 million. (TCX is a holding across all funds.)
We trimmed some of our TCX position in 1Q19 in the high $70’s and mid $80’s as the company was approaching closer to fair value. The one analyst that covers has a $93.50 price target on TCX.
Tucows continues to build out 21st century utilities: Domain Names, Mobile Phone Service, and High Speed Fiber lines with the simple idea of being a low cost leader with best in class customer satisfaction. The management is A+, owns nearly $65 million in TCX stock and the CEO gets paid $575K a year after shooting the lights out for the last 17 years (19.3% ROIC over 17 years). He is a true owner operator. Our cost basis in TCX is $8.02 a share. The stock hit $90 a share in April and we trimmed shares of TCX in the high $70’s and $80’s range. We were not thrilled with the idea of selling given the long term capital gain implications. Also the thesis remains solidly intact with $6.00 per share in cash EBITDA this year and hidden assets that offset the debt. Over the last 20 years TCX has averaged 19.3% Returns on invested capital. We estimate over the next 4-6 years (4.5 years @ $50 million average CAPEX to reach around 85K owned Fiber lines) TCX will be on pace to generate $10-14+ per share in cash EBITDA and the stock will be valued in the $160-200 range vs. $65 today. This does not give a highly skilled capital allocator any credit for reinvestment bets in any other areas of the business (over the last 10 years the CEO has driven a 10x increase in Adjusted EBITDA per share). At current prices, TCX is about an 11% position in our fund.
For 1Q19, there were many moving parts that spooked the market as outlined below:
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Certain factual and statistical (both historical and projected) industry and market data and other information contained herein was obtained by Osmium Partners from independent, third-party sources that it deems to be reliable. However, Osmium Partners has not independently verified any of such data or other information, or the reasonableness of the assumptions upon which such data and other information was based, and there can be no assurance as to the accuracy of such data and other information. Further, many of the statements and assertions contained herein reflect the belief of Osmium Partners, which belief may be based in whole or in part on such data and other information. The analyses provided may include certain statements, assumptions, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies. Such statements, assumptions, estimates, and projections reflect various assumptions by Osmium Partners concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, assumptions, estimates or projections or with respect to any materials herein. Actual results may vary materially from the estimates and projected results contained herein. Past Osmium performance is not indicative of future results. Osmium takes concentrated positions. Osmium Partners disclaims any obligation to update this letter. A portion of the Partnership’s assets may from time to time be invested in securities that have limited liquidity. The Partnership’s investment strategy is to make concentrated investments in what it views as its best ideas. The Offering Memorandum and Limited Partnership Agreement offers a comprehensive overview of the risk factors involved in investing with Osmium Partners. The information contained herein is provided for informational purposes only. This is not an offer to sell, or a solicitation to buy, limited partnership interests in Osmium. An investment in Osmium is not suitable for all investors. Graphs/charts are provided for illustrative purposes only and should not be relied on to form an investment decision. Stocks mentioned in the newsletter do not constitute a recommendation to buy or sell the individual securities.