The market has grabbed GTT Communications (NYSE: GTT) under one arm and a fake Elvis under the other and headed for Las Vegas.
Managers have undoubtedly watched in shock as the market slapped a nearly $800 million value on the telecommunications services provider. Never mind that GTT is losing money and its forward price to earnings is an unbelievable 38 to 1. The market still insists on betting on GTT, humming “Viva Las Vegas” all the way.
But trouble lies ahead. Really, there’s so much trouble all around that a half-dozen happy Elvis impersonators couldn’t even beat the affects of investing in GTT at its current price of ~$22.
Investors may read other viewpoints here. Meanwhile, here are the top seven reasons GTT is due for a haircut and sideburn trim:
*1. From Shell To Risky Roll-up
Many of GTT’s financial issues can be traced back to its very foundation.
The company, formerly called “Mercator Partner Acquisition Corporation,” was simply a shell in 2005, looking for a business to run.
After it settled on providing telecommunications and Internet services, GTT began acquiring companies. It created 45 subsidiaries as it rolled up about half-a-dozen companies into its portfolio. It added a division of MegaPath just last February that cost a whopping $144 million plus $7.5 million in GTT stock.
This undoubtedly difficult-to-manage assemblage of small companies has found itself scrambling to compete for a sliver of cloud-based business against established companies such as AT&T, Xo Holdings, Verizon and Microsoft.
TheStreetSweeper has seen many roll-up companies and despises most of them. We have warned investors about the fluctuations and risks associated with roll-ups such as Tangoe (TNGO $19.55 then, now ~$7), Swisher Hygiene (SWSH $8 then, now ~$1) and Revolution Lighting (RVLT $4 then, now ~$1.).
So now we're inducting GTT into our Rock'n Roll-up Hall of Fame. But, first, let's look at the financial issues that GTT can thank for their help in making this unfortunate honor possible.
*2.Neck-Deep In Debt
GTT depends on a mountain of debt to keep the doors open – and feed its appetite for acquisitions.
The company is now shouldering $215.6 million in debt. Cash has dwindled to just $19.4 million. So the company's debt is over 10 times the cash in its piggy bank.
Now GTT is loaded with debt and losing buckets of cash.
*3. Net Losses Become Substantial
Indeed, GTT hasn't seen six months' worth of operations in the black since ... yikes! ... 2010.
The chart below, based on SEC filings, shows how GTT has consistently disappointed investors:
So GTT’s losses dramatically deepened beginning in 2013.
In fact, SEC filings indicate the company just suffered the second worst 6-month loss since the company’s inception a decade ago.
*4.Historical Earnings Misses
Last quarter, management credited GTT sales improvement primarily to acquisitions. But investors actually lost 32 cents per share – an enormous miss since Wall Street expected a loss of only 6 cents.
As bad as Wall Street's expectations have been for earnings, GTT performs even worse. The chart below shows a pattern of disastrous earnings misses.
(Source: Yahoo Finance)
Those negative earning misses rest heavily on the stresses, distractions and billowing costs tightening like a noose on this habitual acquirer.
*5. Shareholders Lose, Executives Hit $8 Million Payday
GTT did see recent year sales jump ~32 percent to $207 million, while the stock rose about 152 percent to ~$7.20 during the same year.
Yet a closer look at GTT's financials shows the net loss soared 10 percent to $23 million ... meaning shareholders lost 85 cents per share.
But how was the compensation for the leaders who oversaw the loss of 85 cents on every share stockholders own?
Incredibly, the chart shows total compensation for the top four execs soared to $8.8 million:
*6. Insiders Yell “Sell, Baby, Sell!”
Meanwhile, insiders appear to be signaling to investors that selling shares in McLean, Virginia-based GTT is a far better idea than buying.
Both officers and directors have stayed busy selling over 340,000 shares the past year. A company director, Howard Janzen, unloaded more than 41,000 shares just in June. Here’s a snapshot:
(Source: Nasdaq.com, click for entire chart)
*7. Institutional Owners Duck Out
By a wide margin, big institutions are selling off their GTT compared to those buying the stock. A whopping four times more shares were sold out than the number of shares picked up in new positions, as shown below:
(Source: Nasdaq.com, click for entire chart)
We can safely bet that these institutions would not sell now if they expected the stock to rise.
So here’s the deal. GTT’s dangerous roll-up strategy, massive debt, substantial losses, crazy executive compensation, selling by insiders who know the business better than anyone, institutional selling, and ridiculously high stock price all point to disaster lurking ahead.
TheStreetSweeper believes GTT’s financial state will force the company to attempt to sell millions of shares that would dilute current shares. But a stock offering would be difficult for three reasons: First, the GTT story would be a very hard-sell in today’s market. Second, any potential GTT investors who glimpsed the outrageous 38 to 1 price-to-forward-earnings ratio would run. Third, any investors who conducted 30 minutes of due diligence would run even harder.
So GTT may be in dire straits as it runs low on cash needed to conduct business and execute its acquisition strategy.
Instead of throwing fistfuls of dollars at GTT, we’d rather hang onto a Las Vegas one-armed bandit all night. At least that might be fun.
We think GTT should fetch about $10 per share – and that is very generous.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in GTT and stand to profit on any future declines in the stock price.
* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].