This morning I initiated a small position in Lodgenet - LNET. There is much to question (durability of business model) and much to hate (tons of debt). But at the end of the day, it's tough to ignore the copious amounts of cash that this thing generates:
Cash Flow From Operations
2008 - $90 million
2009 - $86 million
TTM - $100 million
Free Cash Flow
2008 - $25 million
2009 - $65 million
TTM - $80 million
This all adds up to a P/CF multiple of 0.8 and a P/FCF multiple of 1.0! Now of course, this doesn't take debt into account, so lets take a look at that.
As of Q3 2010, LNET's net debt stood at $382.4 million. (in other words, more than 4x it's current market cap) That said, however, LNET has been able to bring down it's net debt from $611.3 million in Q1 2008 to the previously mentioned $382.4 million in it's most recent quarter. This means that on a quarterly basis LNET is eliminating nearly $23 million in net debt. So with that in mind lets take a look at a couple more multiples. As of today, LNET's Enterprise Value / EBITDA stands at 4.6 and Enterprise Value to Free Cash Flow is 6.0.
As the title suggests, the biggest risk is the stability of these cash flows. LNET dominates the market that it's in, but with the Internet and other emerging technologies, it is difficult to say how much longer it's business will be considered relevant. This investment, or should I say speculation, reminds me of Deluxe Corp in 2000. Many had written the company off, thinking checks would become extinct. However, management allocated the company's cash flows accordingly and was able to create substantial value for shareholders. (Deluxe's stock doubled within the next 2 years) In this case, management is intensely focused on free cash flow and paying down debt. Simply delevering the balance sheet should create extraordinary value for investors. In summary, an investment in LNET is simply a bet that the company will survive (that is be relevant) much longer than the market is currently expecting.
