Taking Profits in Towerstream (TWER)

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November 16, 2009 | SIN Picks | | Author Asif

I am coming out of a nearly four month blogging hiatus to once again write about wireless broadband provider Towerstream (TWER) following a question I received from a long time subscriber who wanted to know my current thoughts about Towerstream. The company had released their third quarter results earlier this month and he wanted to know if I would add to my position or let it ride. After reviewing Towerstream’s results and reading a research report by Canaccord Adams issued on November 6 that reiterated a Buy rating on Towerstream with a $2 price target (20% above current levels) I would have normally been inclined to hold on to my position.

As I tweeted on November 4th, results were impressive with the company posting a 32% increase in revenue year-over-year and a small revenue increase on a sequential quarter basis despite challenging economic conditions. The company improved its gross margins to 75% when compared to the third quarter of 2008 and continued to inch closer towards achieving profitability. Even though eight out of the nine markets they operate in are EBITDA positive, it looks like it might be mid to late 2010 before the company becomes cash flow positive. Churn increased on a year-over-year basis to 1.71% but is down when compared to the previous quarter. Unfortunately ARPU (Average Revenue Per User) declined both for new and existing customers. While there is a lot to cheer about their recent results, as I mentioned in my previous blog entry titled Towerstream Catapults 40%, the catalyst that drives the stock higher from current levels will be the awarding of the grants that Towerstream has applied for under the government’s $7.2 billion broadband stimulus plan.

To get further insight into Towerstream’s applications, I mined the applications database on the “Broadband USA” website and found 17 grant applications by Towerstream ranging in size from $4.33 million (San Francisco) to $14.56 million (Houston, Texas). Given that Towerstream’s revenue last quarter was $3.78 million, receiving just a single grant could have a material impact on Towerstream’s results and profitability, despite the likelihood that the grant revenue may be spread out across multiple quarters.

While looking through Towerstream’s applications, I also noticed that all but four of the 17 applications had public notice responses from companies like Cox Communications and AT&T that claimed that the areas Towerstream was proposing to cover already had broadband access. The NTIA, one of the two government agencies responsible for awarding these grants, started awarding the grants on October 5th.

Should the NTIA and the Department of Agriculture reject Towerstream’s applications the stock may drift lower from current levels. Instead of waiting to see the outcome of the grant applications, I think it might be best to follow in the footsteps of Towerstream’s CEO Jeff Thompson who sold 40,000 shares last week and book profits. At an Enterprise Value/2009 Estimated Revenue ratio of 2.8, the stock appears to be fully valued at current levels if you take the broadband stimulus grants out of the equation. I am estimating $4 million in fourth quarter revenue to arrive at the 2.8 ratio. The stock is up 31% since our original purchase in July 2008 and up 141% since we added to our position back in the dark days of November 2008 when the company was trading below the cash on its balance sheet.

The closing price on November 16th will be used as the selling price for the position. I am going to invest half the proceeds from the transaction into Activision Blizzard (ATVI), making it the largest position in the SINLetter Model Portfolio. Given that my last update about Activision was in the portfolio performance section of the May 2009 investment newsletter, I will shortly post a blog entry detailing my reasons for making Activision not only the biggest position in the SINLetter portfolio but also my personal (after tax) portfolio.

Voluntary Disclosure: I currently own shares of Towerstream and Activision Blizzard in my personal portfolio. Following the publishing of this blog entry, I will sell Towerstream from my personal portfolio and add to my Activision Blizzard position.

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