Friday, September 05, 2008

Palin Play

With stock prices in retreat, investors are looking or any theme, any source of momentum to fuel a bull-case scenario. How about a play on Governor Sarah Palin’s nomination as the Republican candidate for vice president? Is there anything in Alaska worthy of investor interest…anything other than the obvious ANWR pillage called for by Republicans and Democrats alike.

So many seem to think the desecration of the Artic National Wildlife Refuge in northeastern Alaska is justified for the sake of reducing the cost of fuel at the pump. As if it is a foregone conclusion that drilling for oil in some of the most valuable wildlife habitat in the world would actually lead to that result. Personally I want to see more facts before I buy that argument or any of the investment scenarios that might ensue.

In the meantime, I believe there are other more environmentally benign investment opportunities in the state of Alaska. The fact that Palin is on the campaign trail is not likely to have an impact on the investment case….but in the current market any investment theme will do.

I like Alaska Communications System (ALSK: Nasdaq), which was profiled in the July 2008 issue of the Small Cap SEARCH newsletter. ASC is an integrated telecommunications services provider located in the state of Alaska. The Company provides wireline and wireless services for business and consumers, including local and long distance phone service, wireless voice and data service, and Internet access services. ACS offers the only undersea fiber optic system connecting Alaska with the continental U.S. and the only 3G CDMA network in the state of Alaska.

ACS generated $390.9 million in sales and $131.4 million in EBITDA in the last twelve months. Of course, these results included recognition of $112.5 million in benefits from deferred tax assets. Performance in the June 2008 quarter may be more exemplary of profitability. Alaska Communications booked $94.4 million in net sales, providing $9.7 million in operating income.

The Company is moving aggressively to penetrate the Alaska market with wireless services by leveraging third party marketing relationships. In April 2008, Alaska singed a sales relationship with Arctic Information Technology IT to sell mobile Internet service. Arctic is primarily focused on business customers in Alaska, Canada and the continental U.S. Alaska’s wireless Internet offering is currently more than six times faster than any other mobile Internet service.

The ability to generate cash is one of the most attractive characteristics of the Company. ACS’s five-year cash conversion rate is 21.5%. That makes the dividend payment fairly reliable. Dividend yield for ALSK shares is 7.1% at the current price level makes the stock look attractive despite a lofty price earnings ratio of 28.8 times the consensus estimate for 2008. We note that the domestic telecommunications sector is currently trading at 15.1 times trailing EPS and 5.6 times cash flow. The premium EPS multiple might be justified by ACS’s higher profitability compared to the group average of 11.3%. On the basis of cash flow value, ALSK shares appear to be fairly valued.

The consensus estimates for ACS have moderated slightly in the past two months. We believe this is due in part to adjustments for inflation in labor, services and other direct costs. The consensus earnings per share estimates for 2008 and 2009, respectively, are $0.24 on $382.5 million in sales and $0.34 on $394.2 million in sales. The consensus opinion appears to be between accumulate and hold at this time and the median price target is $14.00 with a high target of $15.00.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. ALSK was profiled with generally positive remarks in the July 2008 issue of Small Cap SEARCH Newsletter published by Crystal Equity Research.

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