Cash Flow Concerns--Debt, Preferred Stock & ITS Stock Protection
Anyone who has seen my previous posts about ORCC know my feeling about this company and the industry. I have never doubted that adoption for the services that ORCC and its competitors offer will continue to increase. Although online banking and bill pay is maturing, I believe that adoption rates have considerable room to grow.
My concerns with ORCC were always about its valuation. Although I had concerns prior to the acquisition of Princeton, I became very bearish on its prospects after that acquisition. I believed then and continue to believe now that acquisition will destroy any meaningful value that ORCC could have created. The rationale for the acquisition was weak in my opinion, but the real damage was caused by ORCC's need to take on so much debt and other financing (i.e. preferred stock) to make it happen.
On to the present (Q3 2008). The market seems to have corrected (and then some) for all stock valuations. ORCC has underperformed the market by a substantial amount, but I am still worried about its valuation even at the current price. One may wonder how much lower it can go, but I am now starting to get concerned about ORCC's ability to fund itself over the next few years.
My primary concern is that ORCC is going to need to come up with or find a way to finance $140M related to retiring the $75M in preferred stock it issued at the time of the Princeton acquisition (115% of the amount issued + 8% annual dividend). Although this is not due until 2013, ORCC is also required to retire $85M of debt over the next five years also. That is going to put a tremendous strain on cash flow.
One other thing I see in their Q3 release in the cash flow is a "repurchase of shares issued related to the ITS acquisition". I have to assume this relates to the stock price protection they agreed to at the time of the acquisition, but this seems low considering the price protection was on 2.2M shares and my calculation is that they would owe around $2.30 / share to make up the difference to the ITS shareholders. I know ORCC could have made up some of the difference with additional shares, but I would be disturbed if they were willing to issue shares at their current stock price. ORCC is very lucky that they did not extend the price protection any longer as the difference between the current stock price and the price protection they guaranteed would have crushed the company and increased the cost of the ITS acquisition by 4x.
In summary, I think business trends will continue to help revenue grow, but slowly (low teens at best). I think this growth is at risk if they lose any customers and that could happen in this environment. Even if the revenue growth is fine, I fail to see how they are going to generate enough cash to meet their future obligations related to their debt and preferred stock. One could argue that ORCC can refinance and maybe the market will be open to an offering when the time is right, but I struggle to see how they can get that much financing with the cash flow levels they will generate. I am not sure where that leaves the common shareholders or Tennenbaum.
As always, I am very curious about other points of view. This board is often quiet, but I would love to hear what others think about the future of ORCC.
My initial question is why the payments for the ITS stock protection is only $112K in the quarter? If I am reading the 10-K correctly,
How about we ignore the whole thing. Clearly this stock is undervalued and myself and my team of 20+ years expect this to be trading in the mid 5's over the next 2-3 months. Lognterm this is 10+ stock. Great buy here, no need for the negativity there's enough already priced into this market.
Obviously everyone is entitled to their own opinion. I realize the stock is at a price that looks very low relative to its trading range over the past few years; however, I was hoping for more discussion on the rationale for statements like "clearly this stock is undervalued".
Any discussion about valuation should be focused on cash flow to the common shareholders. What reasons suggest that the value of that cash flow discounted to the present are worth more than the current share price indicates?
Please ignore the last part of the original post as it is a mistake. The post should have ended before the "My initial question is why the payments for the ITS stock protection is only $112K in the quarter? If I am reading the 10-K correctly" since I had already covered that in the post.