Bridge and Tunnel Crowd
Lamplighter really likes companies that bridge eras. The setup is simple. There's a legacy business. Its shareholders bought the company years ago, when that business flourished. They held on. Now it’s fading. Shareholders maybe aren't paying as close attention as they could. The company owns another business that's flourishing. It grows faster. It earns more on its investments. It's too small to make an impact. Yet.
At some point the small business grows enough to become the big one. The legacy business becomes less and less important. The key to the whole thing is the flourishing business outrunning the fading one and becoming the thing other investors — new investors — care about.
Lamplighter thinks about these situations as ships passing in the night, or cars going opposite directions on a bridge. Which one will reach the other side first?
It's a productive setup for the shop.
Country roads
IDT falls squarely in this genre. Headquartered in Newark, it runs legacy telecoms and remittance businesses. Both those face extinction. It also has a payments terminal business suited for small independent shops; it has a digital remittance business; it has a call center business. These are flourishing. We've talked about the shift a couple of times. Whether the whole company thrives or flounders depends on those businesses out pacing the extinction of the traditional ones.
This doesn't always work out. Sometimes the growth businesses fall flat. Sometimes the fading businesses go away more quickly than expected. Sometimes the fading businesses prove to be stubborn.
IDT reported earnings at the end of September. Its growthy businesses did great: up 21% over the prior quarter; up 35% over the prior year. That didn't surprise anyone.
Its sleepy, fading telecom business… also grew!? It grew earnings 10% from the prior quarter. Good. Fine. Plenty of companies can squeeze margin out of a drying fruit. But it also grew revenue 2% over the prior year. The difference between a dying business and a struggling one on value is huge.
When Lamplighter introduced IDT in 2023, it expected about $45 M in cash flow from the traditional communications business last year. That expectation penciled-in a 5% decline each year. It also considered a 15% decline as a downside. Instead, that business generated the same amount of cash this year as last year. Compared to then, it's worth about $320 million or 80% more than Lamplighter expected.
IDT is up in the past year. Its share price rose about 30%. Investors haven't ignored the uplift. They haven’t completely bought-in either.
In the driver's seat
Investors can find value in the tension between a company owning two businesses whose prospects are driving in different directions. Usually, this means one business grows and another fades. Sometimes they both flop. But sometimes, even for just a little while, they both head in the same direction, like IDT. Those situations can deliver a nice package of returns to investors.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.