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
