Dear Mr. Berko: My broker is touting a low-priced telephone company called Cincinnati Bell and seems to have an inside track on the company. He thinks that changes in the direction of the company’s business to a fiber-optic cable communications company could make it very profitable, as well as a takeover candidate in a few years. He predicts a price in the high $20s in the coming 18 months. If you think there’s a 50-50 chance that will happen, I will buy 15,000 shares. What do you think?
— TR, Springfield, Ill.
Dear TR: I suspect that your broker is smoking too many of those left-handed Luckys!
Yes, things have changed significantly since 1874, when Cincinnati Bell (CBB-$3.86) charged its subscribers $300 a year for a phone line not more than 1 mile in length. Today CBB is a diversified telecommunications and technology company with 3,100 employees and $1.3 billion in 2014 revenues. More than a dozen years ago, before the iPhone and iPad, before Netflix and streaming, before Facebook and Twitter, CBB was a $30 stock with lots of promise. But leaping changes in technology turned CBB into a turtle on Xanax.
Serving the Cincinnati and Dayton metro areas, CBB operates in three business segments: wireline, IT services and hardware and wireless. Most investors, however, ignore this company and consider CBB a Neanderthal because it provides traditional land-based phone services in a communications market that is being forced out of business by cable and wireless competition. But investors may not realize that in 2012, the board decided to sell off its data storage and wireless phone businesses and use the proceeds to fund a dramatic bet into a fiber-optic cable company. With fiber optics, signals are sent via extremely thin strands of glass, and the technology is 100 times faster than conventional cable.
And CBB’s new business looks as if it’s really beginning to pay off. In 2014, the company’s fiber optics division had $310 million in revenues, which was just under 25 percent of total revenues, and some CBB observers believe that the amount will exceed $600 million by the end of next year. Though revenues for 2015 are expected to decline by about 9 percent because of CBB’s exit from its wireless business, very positive trends are developing for 2016. Last quarter, CBB added 11,600 new high-speed Internet customers (it now has 124,600 subscribers) and more than 97,000 video subscribers.
The company will probably lose 4 cents a share this year and eke out a small profit in 2016. Sometimes making a profit is like trying to milk an anvil. But analysts who follow CBB anticipate strong long-term margin benefits when CBB exits the wireless business. Meanwhile, already identified cost reductions and savings, plus growth in its fiber optics division, should allow CBB to post respectable earnings by 2017. CBB doesn’t pay a dividend, but its long-term debt of $1.6 billion is the lowest it’s been in a dozen years. Though this has been a rotten-egg investment during the past decade — trading as low as $1.75 — some analysts (Morningstar and Market Edge) think CBB could regain respectability and trade in the mid-$5 range soon. I believe there’s a 70-30 chance CBB can reach the $5 to $5.50 level in the next 18 months. But I think your broker’s high-$20s prediction smells like GAPO, or gorilla armpit odor.
However, if you insist on taking a flyer, I suggest buying only 6,000 shares ($23,160) and then purchasing 500 shares of Cincinnati Bell’s 6.75 percent Series B cumulative convertible preferred stock (CBB-B), trading at $49.64 and yielding 6.84 percent. This was a $150 million initial public offering of 3.1 million shares in April 2000 at $50 a share. Investing half in the common stock with zero dividend and half in CBB-B will give you a 3.42 percent current return while you’re “waiting for Godot.” CBB-B is not rated; however, the preferred’s 84-cent quarterly dividend was just paid.
