This Stock Is on the Free Fall and Insiders Are Selling

Shobha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In less than  three weeks, Inteliquent (NASDAQ: IQNT) has lost more than 72% of its market value and now its market cap is less than the cash the company holds on its balance sheet.  To top this, the company has no debt. Before you race to buy this stock, let us take a closer look at this company.

Inteliquent maintains an IP network which delivers voice, data and video. It lets its customers, such as AT&T and Sprint, use its network for a fee. Unlike its competitor, Level 3 Communications (NYSE: LVLT), the company is profitable. However Level 3 has a much bigger network, so Level 3 is the bigger player. Inteliquent was providing voice interconnection service in the US until it acquired Tinet. Tinet provided IP Transit and Ethernet services primarily to carriers, service providers, and content providers worldwide. After the acquisition, Inteliquent has evolved into a global IP-based network services company that focuses on delivering global connectivity for a variety of media, including voice, data, and video.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Revenue (in Millions)</strong></p> </td> <td> <p><strong>Operating margin</strong></p> </td> <td> <p><strong>Profit Margin</strong></p> </td> <td> <p><strong>Revenue growth</strong></p> </td> <td> <p><strong>Net income growth</strong></p> </td> <td> <p><strong>ROA</strong></p> </td> </tr> <tr> <td> <p> </p> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> <p> </p> </td> </tr> <tr> <td> <p><strong>Inteliquent</strong></p> </td> <td> <p>$277</p> </td> <td> <p>9.60%</p> </td> <td> <p>4.90%</p> </td> <td> <p>3.30%</p> </td> <td> <p>(49.00%)</p> </td> <td> <p>4.15%</p> </td> </tr> <tr> <td> <p><strong>Level 3 Communications</strong></p> </td> <td> <p>$6,341</p> </td> <td> <p>6.80%</p> </td> <td> <p>(8.30%)</p> </td> <td> <p>46.00%</p> </td> <td> <p>30.00%</p> </td> <td> <p>(4.00%)</p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> </tbody> </table>

The devil is always in the details

IP transit networks have higher maintenance charges, so Inteliquent’s profit margin is falling. The competition has also increased from a comparatively new player called Peerless Network. Not only is Inteliquent losing market share to Peerless NetWork, the fee Inteliquent charges its customers to use its network has also declined. So this is impacting the company’s revenue and profit margin negatively. During the recent quarterly release, it has mentioned that its revenue from one of its major customers will be significantly lower since it has lowered the fee for that customer. The customer has accused Inteliquent of breaching the contract and in this recent quarter, Inteliquent has paid a $9 million fine to the customer. That one-time fine along with falling profit margin has put the company in the red last quarter.

So let us take a look at the company’s operating measures for the last few years.

<table> <tbody> <tr> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td> </td> <td>2007</td> <td>2008</td> <td>2009</td> <td>2010</td> <td>2011</td> <td>LTM</td> </tr> <tr> <td>Profit Margin </td> <td>7.31%</td> <td>19.87%</td> <td>24.46%</td> <td>16.32%</td> <td>10.09%</td> <td>4.90%</td> </tr> <tr> <td>Operating margin</td> <td>20.72%</td> <td>29.28%</td> <td>37.87%</td> <td>27.09%</td> <td>17.37%</td> <td>9.60%</td> </tr> <tr> <td>ROA</td> <td>3.77%</td> <td>12.26%</td> <td>16.10%</td> <td>10.33%</td> <td>8.94%</td> <td>4.15%</td> </tr> <tr> <td>Revenue Growth</td> <td>61.83%</td> <td>41.31%</td> <td>39.70%</td> <td>18.31%</td> <td>34.26%</td> <td>3.34%</td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> </tbody> </table>

Remember I have mentioned earlier that the company has no debt, that was as of its last quarterly release. It has paid a special dividend of $3/share on Oct. 31. It has mentioned that it will raise debt to pay that special dividend. So now its market value may not be less than the cash on its balance sheet or it might have debt.

What intrigues me the most is, its insiders have sold the stock for $2.24/share recently. When a stock price falls like this, usually insiders buy that stock – to take advantage of this kind of opportunity and also to tell investors “We have confidence in ourselves." One can argue that maybe those selling their shares needed some cash. However, when there is more than one insider selling the stock, be cautious and look for another company to invest your money.

bnshobha has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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