I usually try to never invest in stocks that trade above $5, and when I do it seems that on average I lose money. But, I couldn’t resist jumping into JCOM after reading a short thesis of the stock in a recent Barron’s article.

JCOM’s main business is the highly popular eFax service, and related brands that allow people to send/receive faxes by email. The company also now provides incredibly useful voice services for small to medium-sized businesses.

I’ve followed JCOM’s financials for years, and even a cursory analysis of the company’s books over the years, will reveal a fantastic business and an incredibly shareholder-friendly management team.

Revenue is recurring. Ongoing cap-ex is de minimus and so Free cash-flow is copious. The balance sheet is pristine, with no debt. And Management has actually reduced shares outstanding via buybacks without the usual huge option grants that simply derail any benefit from most buyback schemes. Finally, management makes acquisitions mostly with cash, rather than stock, providing reassurance that the acquisitions are made in an economically rational manner with a value perspective.

So what’s not to like, especially when such a business is being offered at about 8X EV/Free Cash-Flow?

The short thesis is simply that fax is dying business and that the company’s growth is exagerrated by acquisitions. 

My reponse to shorts is as follows:

• While Not Growing, Fax Isn’t Going Anywhere Anytime Soon In The Absence of Alternatives
  

Of course fax is not a growth industry, but in the absence of alternatives, fax remains a key method for a large majority of businesses, to send important documents. Therefore, until and if digital signatures ever gain widespread usage, JCOM’s fax services will always be in demand and customers will not abandon the service in droves as shorts would have you believe. I have personally used JCOM’s fax services for a decade already, and I’m sure I’ll be using them in ten years from now since the service is indispensable for several document transfers, and inexpensive enough for the times I need the service. Incidentally, I’ve spoken with the CEO of a major surgery center and eFax is a key component of their document communication solutions, and will remain so for the foreseeable future. I’m sure most other long-term customers feel the same way.

• JCOM Is Not Just About Fax: The Company’s Voice Business Has Huge Potential and is Growing Rapidly

What many investors do not realize is that JCOM has quietly been replicating its strategy in the fax market, with a whole new array of services for the voice market. Services are offered thru such sites as: https://www.evoicereceptionist.com/, and http://www.onebox.com/. As with the fax services, I personally use JCOM’s voice offerings for several businesses, and the service is incredible.

While voice is still a small part of JCOM’s overall revenue, the customer base is growing rapidly and I am certain this business will continue to grow enormously over the next 3 to 5 years, even with a long recession.

• A Value-Drive Acquisition Strategy When Done with “Non-Dilutive” Cash to Eliminate Competition Is a Positive, Not a Negative

I usually agree with shorts that any company that pursues dilutive growth thru acquisition by paying exorbitant prices for crummy businesses with stock is doomed to fail. I’ve seen this with INAP and PTEC, to name two perfectly excellent businesses that have been destroyed by overvalued acquisitions paid for with stock.

However, if history is any guide JCOM is different. The company pays for acquisitions with cash and the acquisitions are made at very reasonable, and in fact deeply discounted, valuations. Moreover, the company is acquiring smaller businesses that directly compete with JCOM. They are not entering a new business, in which they have zero experience. By eliminating smaller competitors, JCOM is able to further solidify its leadership position, increase revenue, and simultaneously reduce costs. This is all done without diluting shareholders at all.

• Financials Remain Impeccable

Even during the biggest recession in decades, JCOM has been able to record record free cash-flow, remain debt free, and buy back shares. In the last quarter alone the company generated $30 million in free cash-flow. This is not a business that has any financial difficulties.

• Slower Growth is Already Priced In

As mentioned above, JCOM’s enterprise value to free cash-flow multiple is at about 8. This type of depressed valuation for a company with an excellent financial track record, already reflects expectations of significantly slower growth ahead. Therefore, if JCOM surprises investors and is able to accelerate growth, particularly as the recession eases and the voice services division continues to grow, the company’s EV/FCF multiple can expand significantly.

Overall, given the depressed valuation, the pristine balance sheet, and ample free cash-flow, I see little long-term risk in JCOM’s shares at current prices. At the same time, there is substantial upside should investors begin to focus on the many positive aspects of the business, I have mentioned here.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in JCOM. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.