A reader and I briefly discussed an idea over Twitter, one which looked promising by the numbers, but reading the 10-K brought up many questions. It ended up in the pass pile even though the valuation shows that it is trading at 61% to its liquidation price. That company is XO Holdings (XOHO).
With net nets, and any other long holding, I prefer an easy to understand business. A business that can make money and produce free cash flow. I feel these two points are important if the company is to ever come out of net net territory. Catalysts are definitely welcome, but no catalyst is 100% certain and if it fails then what? You're only left with the business.
Xo Holdings Inc. (OTC BB:XOHO)
XOHO is a telecommunications services provider that delivers an array of telecommunications services to the telecommunications provider, business and government markets. XOHO operates their business in two reportable segments through XO Communications, LLC, a wireline business and Nextlink, the wireless business.
First of all, telecom is a difficult business to understand. Unless you are directly related to the telecommunications industry with plenty of experience, it will leave most people scratching their heads. I graduated in Telecommunications Engineering and work in the industry but admit that I definitely don't fully understand the different techniques, standards and technology that is being used today. So in terms of easy to understand, XOHO is defintely a no.
Below are some points I came up with quickly regarding XOHO
Good
- FCC licenses currently prevent overcrowding of a single market. (Also limits growth if the market is saturated)
- Fiber optic network attracts new customers.
Bad
- Heavy capital expediture. Constantly need to maintain and upgrade networks. High fixed costs + extra for growth.
- Need to pay leases on wireline (including fiber) and wireless networks
- Extremely competitive industry
- In the past 10 years, it has only had one positive FCF year.
- Substantial amount of preferred stock needs to be redeemed in the next year.
