NaviSite (NAVI) Offers an Interesting Investment Opportunity
Posted on June 7, 2009
With the recent proposed acquisition of FiberNet Telecom (FTGX), a long-term investment of ours, we’ve been searching for other attractively priced enterprise hosting and colo operations, that remain under the radar of most investors.
One company that seems to offer an interesting investment opportunity is NaviSite (NAVI). While NAVI remains very highly leveraged, we believe that potential strategic divestitures at the company in the coming year, could create substantial value by reducing debt and focusing investors on what, despite past troubles, remains a very attractive business. As the capital structure is enhanced, it’s possible that NAVI could become an acquisition candidate.
Notably, recent financial results at the company, show a business with solid recurring revenues, and improving free cash-flow metrics. EBITDA on annual basis is currently running at about $34 million and we believe the company’s EV/EBITDA multiple, which we estimate at about 5, can expand as debt is paid off and operations continue to show stability and ultimately renewed growth.
Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in NAVI. 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.
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This site may include market analysis and we may own shares in the stocks mentioned in our reports. 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.
Good call on FTGX. I also remember your excellent call on INAP when it was trading at around .40 split adjusted and your other good call to sell INAP when it had run up becuase of the Vitalstream merger.
I’ve been in NAVI since it was around .40. Do you see this as a longer term hold? I guess it depends on whether they can make the divestitures they need to delever the balance sheet.
Hi Guy,
Long-term hold? We’ll see how it plays out. It depends as you mention on the speed of potential divestitures, as well as on how quickly the market prices in the future positive factors here. Sometimes the market is very quick to recognize value, though at other times it takes awhile.
Hi Yehuda,
What’s your target price on NAVI?
Thanks.
Hi Tango,
I do not believe in price targets, since I don’t think any outside investor/analyst can truly determine the fair value of any publicly-traded stock. My sell decisions are instead based upon specific time frames (e.g. I tend to hold for at least a year for tax purposes), satisfactory returns, and/or significant news items which cause a major unforeseen price movement in the stock.
Hi Yehuda, wanted your thoughts on two things: 1) The sale of the Navisite Lawson/Kronos business for 56 million and 2) the recent Vonage report. On the issue of Navisite, I don’t know what kind of revenue and cash flow this business spun off for Navisite but I have to say I was surprised as I was expecting the sale of various colo centers instead. However, I like the fact that Navisite seems to be focusing much more intently on Cloud Computing and spinning off non related businesses to pay down debt. I think given the company’s size that strategically this is a good move if they can execute on this going forward.
Vonage results continue to point to a real turn around in operations, but I think the toxic debt they have will continue to weigh on the shares for some time. That said, Lefar and management seem to be doing a very good job of getting Vonage on a solid footing. But I remain concerned that he and his team are working mostly for the debt holders at this time and not the shareholders. But I guess that’s a major reason why the stock is at such a low price
Hi Guy,
With regards to VG, I am in complete agreement. The company’s toxic debt is weighing on the shares, despite an incredible operational turnaround. For example, in the last quarter, while EBITDA was $34 million, interest expense ate up $13 million of that. So you are correct: debt holders are making out well, while shareholders continue to suffer. For now, I’m neutral on VG until they provide further information as to a possible debt refinancing.
As for NAVI: I’m as clueless as everyone else. I do not know what kind of revenue/cash-flow the sold off operation generated. So it’s very hard to judge what the value of the company is now. Cloud computing is the typical technology hype that comes around every few years in technology. I doubt NAVI has anything unique in this area, though I could be wrong. I don’t really understand the technology all that well.