GCI, Alaska’s hidden gem? Stockholders ponder low stock price

Petroleum News Alaska Staff

“Why is our stock so low when we’ve accomplished so much?” aked Ron Duncan, GCI president, at the 2000 annual shareholders meeting June 8 at the Sheraton Anchorage Hotel.

Although the company’s financial performance has improved dramatically since earnings disappointments turned analysts cold on the stock in 1998, the stock continues to trade in a narrow range near five dollars per share.

GCI has seen gains in all major operations — cable, local phone access, Internet and particularly in long distance services which include fiber optic transmission, Duncan said.

Demand for the company’s $120 million undersea fiber optic line connecting Anchorage, Fairbanks and Juneau to the global network via Seattle has exceeded the company’s own expectations, he said.

“It has been an extremely successful investment for us,” Duncan said. GCI plans to add state-of-the-art wavelength multiplexing equipment to boost cable capacity four to eight-fold by coding signals into various color bands that traverse the fiber simultaneously, he said.

Duncan said the stock was significantly undervalued and gave three possible reasons.

“One, we did sin in 1998 when we missed earnings expectations,” he said, adding that the earnings disappointment caused analysts to drop the stock, losing it valuable attention in the investment community.

“Two, GCI is a small company, far away,” Duncan said. Again, he added, this is a disadvantage in attracting the notice of institutional investors who might load up on the stock in sufficient amounts to cause the price to rise significantly.

“Three, the recovery in our economic performance is really pretty young,” he said. “Each quarter we put behind us, the better we will look.”

Beating the drum on Wall Street

GCI executives plan to accompany analysts on visits to fund managers and brokerage houses, he said.

Duncan was unsure how much of the company’s stock price woes were due to the “Alaska discount,” the obscurity and vulnerability due to the company’s narrow geographic focus.

“If we are going to stay an independent company we may have to expand outside the state,” he said, adding that the company was eyeing opportunities to leverage its expertise outside the state.

But the Alaska market for telecommunications is $1.1 billion to $1.2 billion and growing, and GCI hasn’t reached the limits of growth in the state, Duncan said.

GCI has $300 million of the Alaska market and has an upside potential of $500 million to $600 million, he said.

GCI could make better use of its distribution network and will joint venture with outside partners to produce custom content for its system, Duncan said.

Duncan said GCI intends to demonstrate to Alyeska Pipeline Service Co. that the Kanas Telecom Inc. fiber optic cable system along the trans-Alaska oil pipeline is reliable, and bring Alyeska back onto the system for pipeline operations.

GCI provides management services for the Kanas line under an agreement with Kanas and MCI Worldcom Inc.

Is GCI stock undervalued?

This columnist will attempt to put the stock price in perspective relative to others in the communications field.

Investors should perform their own due diligence and not make investments based on this analysis which was based on information from sources deemed reliable.

The price-earnings ratio isn’t useful for GCI, which has negative earnings.

The price-sales ratio is much more useful to compare negative earnings companies, such as the dot-coms. Some dot-coms have had price-sales ratios as high as 60, compared to an average of 3 for all stocks.

The price-sales ratio is found by dividing the preceding 12 month revenue per share into the share price. A ten dollar stock with five dollars of revenue per share would have a ratio of two.

“Price to sales ratio is the best value ratio to use for buying market-beating stocks,” said James O’Shaughnessy, author of “What Works on Wall Street” and manager of the Cornerstone mutual funds.

O’Shaughnessy considers a price-sales ratio below 1.5 to be an indicator of a bargain priced stock.

In GCI’s case the revenue per share is a bit over five dollars, so at a recent closing price of five, the price-sales ratio is 0.87.

The average price-sales ratio of long distance carriers is 2.11. Applying that ratio to GCI’s 1999 revenue of $279.2 million would indicate a likely total market capitalization of $589 million or $11.50 per share.

But GCI is more than a long distance carrier. Long distance provides the lion’s share of revenue, $193.4 million. At the ratio of 2.11 long distance lends $408 million of market capitalization.

Cable TV provides $61.1 million of revenue and when multiplied by the CATV industry average price-sales ratio of 8.49, it would be the most valuable part of the company at $519.1 million.

Local phone service adds $15.5 million of revenue and at the 3.34 local telecom industry price-sales ratio, it would be worth $52 million.

Finally, Internet revenue of $9.1 million taken at the ISP industry average price-sales ratio of 8.6 would add $78.4 million to the company’s value.

Add these numbers up and we find a market cap of $1.057 billion or $20.60 per share. Low price-book value and price-cash flow ratios relative to industry averages further indicate that GCI may be substantially undervalued.

The company is doing a lot of things right. It is positioned in hot fields such as cable TV and fiber optics and has only just begun to tap the capacity of those systems. Its technology is state of the art and it is an able marketer. The company is thus poised for revenue growth.

Alaska may have a gem hidden in its own backyard.