Description

IDT Corp trades at almost a 37% discount to a conservatively calculated “readily ascertainable net asset value,” including $10.64/share of net cash, with zero credit to assorted small ventures and projects. The discount exists because the company is a mish-mash of media and telecom businesses put together by a tight-lipped founder who retains control. Although I don’t see any particular catalyst to get the share price going, the downside here seems minimal, so I don’t mind buying and holding.

IDT was founded by the current Chairman, Howard Jonas, who remains the controlling shareholder with 58% of the votes. His life as an entrepreneur started while an undergraduate at Harvard, selling travel brochures out of his station wagon. In the 1980s, he stumbled upon a way to provide very cheap international phone calls to customers (the “callback” method), and that jump-started his life as a telecommunications mogul. Jonas used the success of that business to turn IDT into a telecom and media-focused venture capital-like vehicle, and in the aggregate, he’s done very well. IDT went public in 1996, and since then, book value has grown from $0.64/share to $11.27/share today, for a CAGR of 35%. A big part of this growth can be attributable to a home run in its investment in Net2Phone, which it took public in 1999 and sold to AT&T at the peak of the bubble in 2000.

IDT has so many pieces to it that it’s difficult to talk about it without getting bogged down in details, but I’ll give it a shot. From a valuation perspective, the key support is this: IDT has, in round numbers, $11/share in cash and a highly profitable prepaid calling card business worth $9/share. So those two assets by themselves are worth $20/share, compared to the stock price of $14. On top of that, you get various businesses with revenues over $1 billion, with profitability ranging from excellent to negative, and with prospects ranging from bright to questionable. I don’t attempt to value all the assorted odds and ends, but the more established ones I peg at a $3/share value. So in total, I estimate a value of $23/share, meaning you can buy the stock at a 37% discount to its value. IDT reports in five segments, so for compatibility’s sake, let me run through a rough approximation of how I would value them as reported.


Reported Segment Sum of Parts:

IDT Telecom (Calling Card unit): 10x free cash flow, or $9.33/share
IDT Telecom (Wholesale and Consumer units): 0.2x revenues, or $1.40/share
IDT Entertainment: 5x FY05e operating income, or $0.93/share
Net2Phone: Market price for NTOP shares, or $0.48/share
IDT Solutions: Zero
IDT Capital: Zero
Net Cash & Securities: $10.64/share
TOTAL VALUE: $22.78 per share

The calculations above use 102.0 million shares as the base – this assumes exercise of ALL options, including those out-of-the-money and unvested, and adds the exercise proceeds to Net Cash. Also, Telecom and Entertainment are 95% and 94% owned, so the figures are adjusted for that.


Explanation for Sum of Parts Valuation:

IDT Telecom (95.2% owned, Liberty Media owns 4.8%): This segment includes the prepaid calling card business mentioned above, and also a wholesale and a consumer retail telecom business. These three pieces all take advantage of IDT’s own low-cost network, which is particularly strong in connecting to foreign markets. The general long-term outlook is flattish in wholesale, low growth in calling card, and good growth in retail, although the competitive nature of the markets makes these outlooks very uncertain. The calling card unit by itself generates $1.2 billion in revenues and $100 of free cash flow. This should conservatively be worth 10x free cash flow, giving you the $9 per share value I mentioned above. The wholesale and consumer units have $750 million of revenues and are losing a little money combined, but I figure they’re worth something, and 0.2x revenues sounds pretty conservative. For comparison, a long-distance provider like AT&T trades at 0.7x revenues, and the RBOCs trade more like 1.5x.

IDT Entertainment (94.4% owned, Liberty Media owns 5.6%): This is a hodge-podge of movie and TV-related assets, including several animation studios and home video distributors. The animation studios are actually quite good, doing much of the work for The Simpsons and King of the Hill, for example, and it’s recently began producing their own feature films as well. Margins are so-so because there’s not much overhead leverage with the studios’ small size. The distribution businesses are highly profitable, with good franchises in anime, horror, children’s, and fitness videos. Run rate revenues and operating income for the segment are $200 million and $20 million. Because a lot of these businesses were acquired in the past couple of years, there’s enough uncertainty that I’ve decided to value this segment at a very conservative 5x operating income. And on top of this, there are a lot of projects in the works which provide no current revenues, and to which, therefore, I have not ascribed any value. These include two animated feature films to be released in 2006 (one directed by Christopher Reeve before he recently passed away), a partnership with Stan Lee (creator of Spiderman), a partnership with Todd McFarlane (creator of Spawn), some low-budget thriller/horror films, and others.

Net2Phone (21.8% owned, rest is public): Net2Phone is a Voice-Over IP company, trading publicly under the ticker NTOP. I simply value this at the stock price.

IDT Solutions: This is the old Winstar fixed wireless business, which IDT bought out of bankruptcy a couple of years ago. IDT hasn’t been able to get this to work, and are winding down the operations and trying to salvage a couple of interesting uses for the technology and assets. I value this at zero.

IDT Capital: These are miscellaneous ventures, including the original travel brochure business. Currently losing money in aggregate, I value this segment at zero.

So, the valuation summary is that for $14.31 you’re getting a conservatively valued $22.78/share in assets. With almost $11 of that in cash and an almost negligible burn rate, it seems like the downside is minimal.


Appealing and relevant points to an investment in IDT, in no particular order, are as follows:

1) In contrast to virtually every other telecom company, Jonas never got too caught up in the spending frenzy of the telecom boom. Here are three excerpts from the 10-K that describes their judicious approach to growth: “We did not increase our leverage and did not participate in the network overbuild which plagued the industry”, “Throughout our history, we have sought to exploit profitable niches within the telecommunications industry”, and “Our smart-build approach refers to the incremental approach we take to expand our network – we add new facilities only when we determine that such investments are justified by existing or imminent traffic volumes.” The bottom line is, IDT is very methodical in spending capital, and certainly don’t like to bet the farm. The negative of this cautious approach is that it results in what you have here – a ridiculously overcapitalized company with lots of different bits and pieces. However, I think the positives way outweigh the negative here. IDT emerged from the telecom bust largely unscathed, and in a hyped industry like media and telecom, it gives me comfort that the company won't squander the cash hoard on something stupid. And unlike most stocks with a big cash component, you don’t have to worry about a big burn rate eroding the cash pile. IDT is pretty close to cash flow break even, with a $27 million burn in FY04. Once Winstar is wound down and the up-front film production costs are over with (within a year or two), this is a cash flow positive company.

2) Jonas has proven to be an astute, opportunistic investor. For example, they incubated NTOP for several years with a long-term investment horizon, but was a very happy seller at bubble prices to AT&T. And although the purchase of Winstar hasn’t worked out, I like the bargain basement attitude –Winstar spent $5 billion during the boom building out its network, and IDT bought its assets for $42 million out of bankruptcy. If you were to look at IDT as a combination vulture/venture capital portfolio, all it needs is a moderate winner every now and then for the stock to be worth well in excess of my $23/share value.

3) IDT has a very powerful friend in John Malone and Liberty Media. Liberty owns 14% of IDT, having befriended Jonas some years ago, and Liberty has co-invested with IDT in a couple of deals. I don’t know exactly in what direction this partnership could develop, but Malone is always a good person to know in this industry. (This morning, Liberty and IDT announced that Liberty will exchange its stake in NTOP for more IDT shares, upping Liberty’s stake to 17%. IDT’s stake in NTOP will rise to 42% after the exchange. I have not incorporated this into the analysis of this write-up, but it won’t affect it much.)

4) IDT has three classes of stock outstanding, two of which trade – Class B shares (tkr: IDT) and Common shares (tkr: IDTC). While IDT shares only have 1/10 the voting power of IDTC shares, IDT is more liquid, and hence, trades at a slight premium. Since Jonas controls the company, voting benefits are mostly moot, but I’m recommending IDTC shares if only for the discount.


The business risks are fairly spread out among the different pieces. I do want to highlight the agency risk, though. Although he avoids the spotlight (and investors), Jonas is apparently an ambitious man who has hinted that he aspires to be a media mogul, to have the ability to influence the views of lots of people. There is the danger that a pursuit of “moguldom” might conflict with his duty to minority shareholders. I’m not really too worried about reckless spending at IDT, since its historical actions have proved the exact opposite, but still, given an opportunity to bet big, you never know if Jonas will be able to resist. A side effect of this also is that it seems unlikely that IDT will return a big slug of that cash to shareholders anytime soon – Jonas will want to retain it for future firepower.

Catalyst

Nothing significant, but possible ones are 1) good use of cash, 2) reaching cash flow positive, 3) a successful film or two.