A Company’s Mid-Life Crisis Gone Right
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
J2 Global Communications (NASDAQ: JCOM) is an international infrastructure company that emerged in 1995 and mainly deals with electronic fax. It’s had great success, but e-fax is becoming obsolete. In order to stay relevant, the company has been making some new investments (and not in red sports cars).
Over the past few years, JCOM has been delving into the world of virtual phone, email, and most importantly, cloud computing. This old geezer even expects $50 million in revenue from pipeline patents over the next four years. Fax operations currently account for 76% of JCOM’s revenue, which will continue to decrease as the company shifts to different sources of income. And the shift is happening fast: non-fax revenue increased by 35% year over year.
An Intrinsically Healthy Company
Even though JCOM relies mainly on old products and services, it’s still kicking. JCOM has strength in its management team. The CEO, Nehemia Zucker, has been focused on decreasing the cancel rate of customers, and increasing cross sales. JCOM uses native speakers for customer support in every country, which speaks to the quality of management. Employing these native speakers costs more, but helps retain customers and provide a competitive advantage.
And the advantage shows: the company has a 40.7% operating margin, nearly the highest amongst its peers. J2 also has a modest 2.8% dividend yield, which has increased for 5 consecutive quarters.
The Pac-Man of Small-Cap Stocks
You can’t teach an old dog new tricks. But if you’re JCOM, you can always buy new dogs.
JCOM has gobbled up 37 companies since 2000, using acquisitions to expand its operations. Retained earnings helped finance the takeovers and historically, the company has had very little debt. J2 only took on a large amount of debt recently to finance new investments. Last month, JCOM bought into a 9.9% share of Carbonite (NASDAQ: CARB), a cloud storage company. J2 gave an acquisition offer, but it was rejected by Carbonite without a counteroffer.
So now, JCOM is sitting on a huge pile of cash. But what's it going toward?
President Robert Turicchi says: “[W]e have seen that pipeline grow both domestically, and there are even international opportunities as well. I think in terms of what you're not likely to see it occur in is, number one, the Fax category."
No more investments in e-fax -- that’s a relief. The sentiment seems to be that the company wants to use its new $250 million from bond sales to finance a large merger or acquisition. No concrete plans have been made yet, but it should help to rejuvenate a firm with outdated products.
Growth and Value
JCOM boasts a healthy balance sheet, a competitive advantage, and strong growth. The firm posted record high revenue and EPS in Q3. Their current ratio stands at 0.43 after the company took on a healthy amount of debt to finance future growth. Retained earnings remain high, and the company seems very undervalued at a P/E of 12.14.
Despite the company’s small size, JCOM has great margins and management is very effective. The company is trading at about $31, down 6% from its recent 52-week high. I would use the recent discount as an opportunity to invest in JCOM as both a growth and value play.
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