Alluvial Capital opened a new position in New Ulm Telecom Inc (OTCMKTS:NULM) during the third quarter of 2017. In its 2017 Q3 investor letter (a copy of which can be download here), Alluvial Capital discussed its investment thesis on New Ulm Telecom and two other companies. Here is what David Waters – who founded Alluvial Capital – said about New Ulm Telecom:
New Ulm is a new position for Alluvial. While shares of the company have moved up substantially this year, the market has yet to adequately price in the impact of the FCC’s new funding mechanism on rural telecom providers like New Ulm. The Alternative Connect America Cost Model or “A-CAM” provides these companies with generous subsidies to fund the buildout of broadband services in under-served rural areas. Broadband services are the future for rural telecom providers facing long-term declines in traditional wireline services. Despite the additional capex that New Ulm will be required to deploy, the net effect is a notable uplift in free cash flow. In 2016, the company produced $1.23 per share in free cash flow. This year, I expect New Ulm to produce at least $1.40 per share in free cash flow. Future years will see continued increases based on revenue growth from broadband services. Even before A-CAM, New Ulm’s data and video services were growing healthily and more than making up for declining traditional telephone revenues. Data revenues grew at a 20% annual pace from 2012 to 2016, while video revenues grew at 12%. I expect the new A-CAM subsidies to only strengthen these trends. The investment case for New Ulm is further bolstered by the firm’s conservative balance sheet.
Compared to most telecom companies that carry debt loads of two to three times EBITDA or more, New Ulm’s debt is only 1.4 times trailing EBITDA, and declining quickly. New Ulm could very easily borrow to fund productive capital expenditures, or to return capital to shareholders. I hope they will!
At ten times 2017 free cash flow and with that free cash flow poised to increase, New Ulm makes a very attractive and conservative holding with ample upside potential.
New Ulm Telecom Inc (OTCMKTS:NULM) is a communications company, with a market cap of more than $77 million. Headquartered in New Ulm, Minn., New Ulm Telecom provides voice, digital TV, internet, managed services, computer sales and computer repair services. The firm serves communities of New Ulm, Glencoe, Goodhue, Hutchinson, Litchfield, Redwood Falls, Sleepy Eye and Springfield as well as Aurelia, Iowa.
Shares of New Ulm Telecom have been performing impressively this year, gaining over 47% year-to-date. During the last 12 months, the stock has climbed more than 95%.