My analyst team at MSM thinks it may have found what will be a classic successful ‘Big Cap Microcap’ (BigCapMicro) case study in a company that provides healthcare communication solutions internationally, delivering clinical information to care teams to enhance patient outcomes (clinical communication technology to hospitals). MSM Published its CliffsNotes on Spok Holdings, Inc. (NASDAQ:SPOK) last week, as mentioned in a Premium Tweet announcing the availability of the notes.
I am currently long the stock via call options.
The company has two divisions, wireless (traditional paging) and related software services (Spok Care Connect) to manage the flow, delivery and analysis of communication. Some of its services include subscriptions to one-way or two-way messaging, voicemail services, call center services, equipment loss or maintenance protection, and selling devices to resellers who lease or resell them to their subscribers.
“The Spok Care Connect platform is composed of three primary solutions which drive our value proposition up, improving patient outcomes by connecting clinical teams with the people and information they need when and where it matters most. First, with respect to patient customer relationship management, our contact center consoles enable agents to connect staff and external callers in a fast, reliable, and professional manner, providing best-in-class service to care teams, patients, and their families.
Second, efficient clinical workflows help drive the complex work of care teams, and Spok Care Connect helps care teams streamline them through smart alarm management and notification systems.
Finally, patient-focused care team collaboration provides secure mobile and web messaging for fast and reliable care team communication.”
I presented the idea of the BigCapMicro concept via case studies in a 2017 article, Microcap Stocks with Big Cap Appeal, showcasing microcap stocks that produce large cap revenues, resulting in sometimes explosive stock price increases. It compliments the subject matter of this article, so we hope you can take a look at that quick read to gain a little more context.
The last time I came across a hated BigCapMicro name was Bluelinx Holdings Inc. (NYSE:BXC), a $1.0 billion revenue lumber product supply company highlighted on GeoInvesting that was being priced for bankruptcy. Investors were tired of hearing about the turnaround. Well, the stock went on for a magical run from around $10 to $100, even rising over $30 in one day during its run💁♂️.
Part of the essence of our Tier One Microcap selection process starts with finding older companies sitting around doing nothing or disappointing investors. Then change comes along that leads to a breakout from a multi-year growth rut, so to speak. It’s easy to overlook or even “hate” companies viewed as being run by management with a dreaded “status-quo-is-good-enough” attitude who don’t regularly make the necessary operational adjustments to reward shareholders.
Spok Holdings, Inc. was founded in 1986, and is by no means one of the oldest companies highlighted on GeoInvesting. However, even though the company has been generating revenue well in excess of $100 million, as MSM has pointed out, investors have likely handed out some demerits due to:
- A failed attempt to exact change through the acquisition of a communication software company in 2011 that was draining cash flow.
- It’s inability to maintain profitability as evidenced by reporting negative GAAP net income numbers on an annual basis since 2017.
- Management’s inability to grow revenues to offset a slow, but unstoppable churn of its old school wireless paging solutions business (although churn is slowing).
And who knows what other “skeletons” we’ll find as we continue to dig!?
Basically, many investors who have a history with the company, including some I have communicated with, want nothing to do with it. For example, institutional ownership has gradually decreased over the last 8 years, from 86% in 2014 to 66% today.
This could help set the stage for a flurry of large buyers to enter the stock should a successful turnaround take hold. And things are looking interesting from a profitability standpoint. The company reported two consecutive quarters of strong profitability, with a total adjusted EPS of $0.34 during Q2 and Q3. Shares are trading at a meager run-rate P/E of 12X and throwing off a sustainable dividend yield of 15%.
What we have here is a simple scenario, where SPOK’s story appears much brighter and safer than it has been in years, with a risk premium that is way too high as inferred by the dividend yield. The yield must come down substantially (via an increase in stock price) to rectify this disconnect.
So, what happened to make SPOK worth looking into?
In February 2022, SPOK succumbed to earlier pressure from Acacia Research and its activist partner, Starboard Value Hedge Fund, by enacting restructuring moves, including raising its dividend, selling the losing acquired software biz (SPOK-GO), a $10 million stock buyback program and expense cuts,
“Over the past three quarters, Spok has generated $16.9 million of pro forma free cash flow, and has returned $18.8 million in cumulative capital to shareholders since the implementation of the strategic business plan.”
With SPOK-GO no longer a burden, the company is now looking for ways to grow its revenue. For example, pertaining to its software revenue, the company holds leading market share positions in the mid and large tier hospital market, but a meager 5% share in the small hospital market which it can target for growth:
“For our software-only market share by bed size, we currently have 287 or 5% of hospitals with one to 199 beds, we have 388 customers or 30% of the market for hospitals with 200 to 599 beds, and we currently have 156 customers or 50% of the market for hospitals with 600 beds or more. And although we have a dominant market share of large hospitals with 600 beds or more, we are currently working on new and innovative ways to serve small mid-sized hospitals with a hosted model from our Plano data center.”
Moving back to the juicy dividend, they’ve inverted their quarterly dividend from $0.13 in all years prior to 2022, to $0.31 for the first 3 quarters of 2022.
A 15% dividend yield is certainly appealing and even more so if we are looking at substantial increases in EPS that will overshadow this gift, potentially resulting in stock price increases.
Furthermore, what’s not to like about a company slated by analysts to report the highest gross margin trend in the company’s publicly listed history, over 80%?
Here are a few more things to chew on:
- SPOK has 80% recurring revenue,
- It’s the leader in its industry
- It has zero debt
Arguably, the company is in better shape than it was when Acacia Research made a bid for the company at $10.75 in August and B. Riley Financial withdrew its $12.00 2020 bid for the company due to the failure of SPOK’s board to engage. So, could we be in store for a higher bid from a suitor in the near future? Well, what we do know is that management has not taken a sale of the company off the table:
“The Board and its advisors continue to engage with potential acquirers regarding a sale of the Company, including Acacia Research Corporation regarding its offer to acquire the Company. There can be no assurance that the strategic alternatives review process will lead to a transaction or the sale of all or part of the Company.”
So, even if they fail at finding a way to grow revenue, we could have a safety net in terms of the company being acquired. And with insiders only owning about 13% of the stock, we do not think they will be able to put up a good fight to get in the way of an acquirer.
One thing that is interesting to point out is that insiders have more than doubled their ownership in the stock since April, possibly attempting to get into position to fight a hostile takeover. If true, more insider buying could lift shares, which currently sit at 40% higher than their July lows.
Will the haters start to come around?
Looking back, if I would have invested in the company during its period of investor disappointment, I might have never wanted anything to do with the story. I’d have perceived the stock as a loser, stuck in a losing investment, or in the least, in a nonperformer with a $0.13 dividend as a small consolation prize tying up my funds for years.
But luckily, I didn’t, nor was I even aware the company existed. This has allowed me to look at the story with an open mind (half glass full). I’ve talked to several investors who just hate the company, but that’s just fine with me. The more people hate this stock, the more I like it.
If management sentiment gleaned from the company’s Q3 2022 conference call comes true…
“In total, Spok has generated close to $1 billion in cumulative free cash flow since our formation back in 2004, and we’re not even close to being done yet, as you’ve seen from this year, and you will see going forward.” (Source: Sentieo)
…as well as its Q2 2022 conference call:
“We think our stock represents a compelling value and you’re going to get paid a very nice yield, while you wait for appreciation, and we think appreciation will be coming.”
…it’s our contention that everyone will soon be loving the name.