Sunday, April 18, 2010

Warwick Valley Telephone Company's Extraordinary Orange County Poukeepsie Limited Partnership

Warwick Valley Telephone Company (WWVY) owns a passive 8.108% limited partnership interest in the Orange County-Poughkeepsie Limited Partnership (OCP). Verizon Communications (VZ) is the general partner and owner of the remaining 91.892%. WWVY carries the OCP investment on its balance sheet at $7.669 million.

OCP has for over two decades consistently produced extraordinary financial returns. It is arguably the most profitable company and strongest to be found anywhere.
For example, OCP has a 342.77% ROE on a HUGELY overcapitalized Balance Sheet where Equity amounts 98.7% of Assets.

Pretax Profit margin is “only” 83.7% (only maybe a company into “drugs”or pornography could possibly be as good – to some people phone service may be like a drug).

Over some 20 years OCP has achieved annual growth in Revenues and Profits, interrupted just one year, in 2006, when Verizon decided to cut rates drastically. Growth then picked up again and has been annual, reaching Revenues of $183.8 million and Pretax of $153.3 million in 2009 and is expected to be at least $206 million and $173 million respectively in 2010.
WWVY share of OCP earnings should exceed and pay it $14 million in cash in 2010 -- some $2.60 per WWVY share.

In our view the OCP itself is worth several times the $81 million ($15/share) which the WWVY Company market capitalization amounts to today, dragged down by its actively managed, cash flow positive, although in 2009 it reported net income losses, small land line ($23 million Revenue) telephone operations in the Warwick, N Y and nearby N J franchise area and newly acquired upstate N Y CLEC ($2 million Revenue) operations.

Were the operating telco to “live” on its own FCF, which is relatively material in amount, WWVY could pay, net of tax, the entire  present $14 Mil OCP payment it passively receives, in a dividend today of about $1.60/share ($14 Mil–$5.6Mil/5.4 Mil shares Mil) = $8.4 Mil/5.4 Mil shares) vs. the 96 cents present dividend. The value of WWVY based on its present 6.4% yield would rise from $15 per share to $25 as the total market cap of WWVY rose from $81 Mil to $135 Mil.

Were the company reengineered (e.g. telco sold), and the OCP made a pass-through entity, the $14 Million plus it is currently bringing in to WWVY could be paid out in full, amounting to $2.60/share. Accorded the very same current 6.4% yield ($0.96/$15) that WWVY's shares are yielding today, the OCP entity paying a $2.60 dividend would at the same yield trade at about $40.625 per share by itself ($2.60/$40.625 = 6.4%).

The OCP market value would become $219 million vs. today’s WWVY market value of $81 million. The operating telco business would still be worth something additional to shareholders whether it continued to be owned by them or sold for value.

WWVY will remain undervalued until such time as the above facts are realized and appreciated by investors or the WWVY the company rids itself of the operating business and ideally enables the remaining holding, the investment in the OCP, to become a pass through entity with a current run rate dividend of about $2.60 which should grow annually.

It should be noted that on the 23rd of April shareholders are to vote on two non-binding shareholder auction proposals to maximize value were included by the board in its 2010 Proxy and will be voted upon. Oddly, this is the first time in corporate history I believe that two identical shareholder proposals were in a company's proxy.

Even should WWVY's shareholders and board not see the light, the OCP should continue its growth while the land line business, as is the case nationwide with most all telcos, will continue at best to be a sub performer.

Value will out
one way or another in the fullness of time. Perhaps sooner if shareholders were to vote wisely in their own interests. Unfortunately shareholders in this company have in the past demonstrated an unwillingness to vote in their own best interests when presented with multiple opportunities. Hope springs eternal however, so if not now, later.