Extinction

Businesses die all the time. Sometimes they go over a cliff. Lehman Brothers took this route or, more recently, Silicon Valley Bank. Other times they fade out of customers’ minds and existence gradually, then suddenly. Think Kodak or Borders—if you're old enough.

Already I've lost most of you. Investors like growth. They like excitement. They like potential. They like stories.

Never mind that this is how Warren Buffett started out back in the 50s—driving around picking up shares of dying businesses for 1x earnings.

There's a lively, but limited expedition of investors that dig around dying companies. Their ranks have thinned in recent years as markets have gone up and to the right.

But there's money there.

Digging a little deeper

If a business trades for $100 and it'll make $200 in the next two years and then it goes dark that's a great investment! You doubled your money. If it makes $25 a year for the next 5 years, that's still an 8% return. That’s about the long-term return of the stock market. If you’re taking less risk than the average investment, that’s a good result.

What if it makes $11 a year, but that falls a little bit—say 5%—each year? Is that a good investment?

Finding fossils

IDT owns a few of these dinosaur businesses. Ones that are dying slowly, not falling off a cliff. Lamplighter's covered IDT before.

These businesses span calling cards to international remittances. They're fading. They're nearly a third smaller today than they were in 2021, their peak. That's shedding about 12% per year.

But they'll make some money next year. And the year after that. And after that. Shrinking has slowed a bit recently. That's good for IDT. Management has kept busy taking cost out of the business. This has kept cash flows up.

Our example of a $100 business that earns $11 this year and fades about 5% each year—what IDT's legacy businesses have done—winds up giving investors about an 8% return. This is what clever, sophisticated investors have been paying for similar businesses.

For the birds

That value leaves about half of IDT's market price attributable to its other businesses. Ones taking flight in today's markets with modern solutions. Fast growing businesses. Businesses harvesting high margins. Businesses likely to out-earn IDT's extinction ones within the next 24 months or so.

These businesses have boomed. They’ve just about doubled earnings each of the past three years. Revenues come from returning customers. Those customers are spending more with IDT each year.

For all this though, investors pay less than the average company in the market. The median company grew earnings just less than 10% last year at a lower margin than IDT's growth businesses. Fine, but not world beating. Given that, IDT deserves a premium. The wedge between what IDT deserves and what the market expects from it gives investors the opportunity to own it at a bargain.

Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.