Wednesday, May 1, 2019

A Current AIM Small Cap Equity Holding: GTT Communications (GTT, $41.85): “Complete Cloud Coverage This Morning” By: Edward Eisenhauer, AIM Student at Marquette University


GTT Communications (GTT, $41.85): “Complete Cloud Coverage This Morning”
By: Edward Eisenhauer, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

GTT Communications, Inc. (GTT-US) is a global telecommunication company headquartered in McLean, Virginia and engages in a unique provision of cloud networking services. These services include private networking, internet, optical transport, and unified communications.

• GTT’s C-Suite runs an aggressive M&A growth strategy targeting companies that expand their scale of operations, while also sporting industry leading liquidity.

• GTT’s key addressable market is the global cloud computing market, which is expected to grow by a 5-year CAGR of 28.3% to $70 billion.

• GTT attracts customers through its capital expenditure light model allowing them to more quickly and efficiently service customers globally than their competitors.

• In 2018, GTT doubled their amount of quota-bearing reps which should accelerate organic growth from low single digits to high single digits. Management expects this growth to carry through 2020. 

Key points:

GTT has a history of and continues to run a focused inorganic growth strategy which is resulting in 5-year sales and EBITDA CAGRs of 56.8% and 70.4%. The strength and success of this strategy are depicted by an industry leading current ratio of 1.2 despite its largely debt financed acquisitions. Its peers, Frontier Communication Group and Altrice USA Inc., have current ratios is .5 and .3 respectively. In 2018, management has stated that they plan to boost their organic growth and has seen improvement thus far in 2019.

GTT’s capital expenditure light model is the differentiating factor, as they are able to service customers faster and cheaper than their peers. This idea is supported by a CapEx-Sales ratio of 6.44, compared to 18, 15, 13, and 11 by its closest competitors. This business model, in conjunction with the rollout of 5G and the rapidly growing cloud telecommunication services, gives GTT immense growth opportunities and a competitive edge in attracting additional customers.

What has the stock done lately?

The stock is up 25% in the last month stemming from realized synergies from $3.3B of acquisitions and additional 2019 acquisitions that have broadened GTT’s TAM. In 1Q19, GTT saw an increase in cross selling of newly integrated products and expects it to continue to grow. Because of GTT’s low cost model, they have a unique position within the rollout of 5G that has excited Wall Street.
 
Past Year Performance: 

GTT’s stock struggled in 2018 dropping from $53.05 to $21.68 in Dec. 2018. Much of this is attributable to the global market sell off in late 2018 but was magnified by low liquidity and high debt after $3.3B in acquisitions during a time of economic uncertainty. YTD, GTT has risen 76%, currently trading at $41.85. Even after such a rise is price in 2019, analysts are optimistic about strong growth opportunities and a relative valuation still undervalues the company to a high degree.  




Source: FactSet

My Takeaway:

GTT has a special business model different than any other company in their space and will lead to greater growth and success in the future than their peers. Management has proved time and time again their excellent ability to grow inorganically, choosing firms that expand their geographical footprint and service capabilities.  


Source: FactSet

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