Low Free Cash Flow Multiples, High Yield

IDT has drifted into obscurity since the competitive long-distance telecom wars of the 1990s. During the company nevertheless provides landline telephone services to consumers, most of its current $1.5 billion in annual earnings are derived from: termination services for completing long-distance telephone calls, and prepaid calling services. In spite of the recent spinoff of its energy businesses, IDT nonetheless keeps a number of other tasty tidbits up its sleeves - which we'll get to later.

The time of the October 2011 spinoff of Genie Energy

At the time of the October 2011 spinoff of Genie Energy, IDT stock was adjusted downward to reflect the deconsolidation of Genie's operations as then as $106 million of cash from IDT's balance sheet to fund Genie. From an operational perspective, the spun-off businesses were in substance cash-flow neutral to IDT, with IDT Energy nominally cashflow positive and Genie Oil & Gas consuming marginal amounts of cash to develop its oil shale prospects.

Consider that as of the close on March 29, 2012, IDT stock carried a market capitalization of $211 million, but the company's most recent 10-Q lists $155 million worth of cash equivalents, restricted cash, and short- and long-term investments. IDT has $29 million in long-term debt; but most of this is mortgage debt covering a company-owned office building in Newark, NJ - which the company has expressed an interest in selling or if not disposing of given the right possibility. IDT's assets as well include wireless spectrum licenses and VoIP (Voice over Internet Protocol) patents that the company is seeking to monetize; a $6.8 million deal for a portion of the spectrum is already pending regulatory approvals.

Working capital deficit of $18 million

Although at first sight glance IDT's balance sheet shows a working capital deficit of $18 million, out of the current liabilities, deferred revenue of $77 million will not require cash settlement. Accounts receivable, accrued expenses and accounts payable all stand at levels within the range over the last several years. In doing so the working capital deficit appears to be the direct result of the cash transfer to Genie, and should resolve itself over the then and there few quarters as IDT continues to generate cash.

On a normalized annual basis IDT's main telecom business units should be capable of generating $40-$50 million of operating cash flow. Back out potential annual capital expenditures of $12 million and IDT is currently trading at a low free cash flow multiple of 5.5 to 7.5. In terms of dividend coverage, the annualized dividend of $0.60 per share multiplied by the ~22 million common shares outstanding translates into a ~$13 million commitment. The current quarterly dividend seems so then-covered and sustainable assuming normalized annual FCF of $28-$38 million. It should as well be noted that IDT has 5.4 million shares remaining on its existing stock repurchase authorization, equivalent to 25% of all outstanding common shares. The company has plenty of cash on hand to buy back those shares, a opportunity which should lend furthermore support to the stock at current levels.

While continued pressure on gross margins is inevitable, management has sought to offset this pressure by growing revenue. IDT is working to expand retail distribution, most recently inking an agreement with Rite Aid to market prepaid calling cards in drugstores nationwide. The company's Boss Revolution prepaid calling service will expand into Europe this year, with hopes of launches in Latin America and Asia hereafter. CEO Howard Jonas has ambitions to use the Boss Revolution platform for an expansion into the money remittance and payments business, targeting lower-income and immigrant clients in both developed and developing countries who are already natural users of the company's prepaid calling services.