Portfolio Update: Consolidated Communications ($CSNL)

Today I will begin breaking down the earnings (or other major happenings from Q2) for each of the major positions in the Rogue Funds portfolio. I will do one post per position to spread out my time and information. July contained perhaps the most volatility I have ever experienced in running a concentrated value investing portfolio so some of the top positions are going to be interesting.

Note: I will not be doing an article for all positions that the fund maintains, only major positions.

Consolidated Communications

Lots of Volatility

Consolidated experienced huge volatility this quarter with almost no major changes in the underlying business. See the chart below:

So, what exactly happened? I’ll break it down for you, starting with the end of the last quarter:

-        After management stated they wanted to slow down their fiber buildout to focus on in person marketing and selling, the market completely dumped (down to $2.25/s). As I stated before, I actually thought this reduced risk for the company as it allowed them to avoid a liquidity issue. Either way the market dumped after Q1 earnings.

-        The market then shot back up after Searchlight put out an offer of $4/s for the stock (this is unlikely to pass with most major shareholders having a DCA of well above $4). To me this seems like a lowball offer that will either be negotiated much higher or outright denied.

-        In July, Wildcat Capital Management issued a letter to the special committee saying they valued CNSL at a conservative $14/s based on relative valuations and a 5-year valuation of $28/s. This caused the stock price to skyrocket past the $4 acquisition price. They also highlighted that CNSL could gain more than $200m in BEAD money which would guarantee enough liquidity for their fiber buildout.

-        Less than a week later, WSJ dropped a bombshell article about possible lead pipelines costing fiber companies hundreds of millions, if not billions. This caused an immediate fall off from >$4 to nearly $3/s (the fund accumulated large amounts of CNSL at this price).  Soon it became clear that the WSJ article didn’t have much substantiation leading to a slow climb in the share price.

-        In the Q2 earnings report, CNSL reported great earnings and a large uptick in fiber penetration and an increase in inventory. They also reported lead cables accounted for less than 1% of their cables and haven’t been laid in 60+ years. This has allowed the price to begin trading almost exactly at the $4 mark.

This was one hell of a quarter and I expect continued volatility in the coming weeks as the special committee comes to a decision on the Searchlight acquisition. I think we might see some small, short-term volatility followed by a strong push as management continues to deliver on the fiber buildout. If BEAD money is received this could cause CNSL to go parabolic as liquidity issues disappear.

Earnings Breakdown

-        Fiber uptake was much better this quarter and it looks like the boots on the ground marketing is already showing strong success. Other promising revenue signs:

• Door to Door Reps were up over 6x (to 127) and rapidly growing.

• Fiber net adds picked up nearly 50% q/q.

• ARPU for Fiber is up nearly another dollar to $68.29.

• Fiber broadband revenue is up over 10% q/q with copper staying flat.

-        EBITDA Guidance is still on target.

-        Passings were pretty much flat (as they were focusing more capital on growing fiber)

-        Total net adds seem to be accelerating from inflection point along with fiber penetration.

-        Lead Cables are a non-issue.

-        Average Cost per passing in Q2 was $865/passing and I expect this to drop as management reported that this was due to handling certain rural areas and that they still expect full year passings to be closer to mid $700s.

-        Capex was high due to an increase in inventory which should carry over to cheaper capex in cheaper years.

Summary of our View

The first thing to discuss is the acquisition offer. It is our opinion that the acquisition offer will (and should be) shot down sometime in the next month as Consolidated seems to already be moving past their inflection point. The acquisition was an extremely low offer when management doesn’t need the cash and since they decided to slow down, liquidity concerns have become much less concerning. Liquidity becomes even less of a concern depending on how much BEAD money they can get (I expect it to be substantial). Overall, I maintain our previous cash outlook for the company which means we maintain our minimum valuation of at least $16/s. Management is firing on all cylinders right now and it would be extremely disappointing to see this company get acquired for anything less than $12/s. This is one of the most undervalued opportunities in the market, if not the most undervalued opportunity, and it is our funds biggest position.

Disclaimer: The author of this idea has a position in securities discussed at the time of posting and may trade in and out of this position without informing the reader.

Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC and CSA filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises may buy or sell shares without any further notice.

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