Steel City Capital recently released its Q3 2020 Investor Letter, a copy of which you can download here. During the third quarter of 2020, the fund returned 1.6% net of fees, while the S&P 500 Index was up 8.5%. You should check out Steel City Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Steel City Capital highlighted a few stocks and Anterix Inc. (NASDAQ:ATEX) is one of them. Anterix Inc. (NASDAQ:ATEX) provides wireless communications applications. Year-to-date, Anterix Inc. (NASDAQ:ATEX) stock lost 23.6% and on October 26th it had a closing price of $33.68. Here is what Steel City Capital said:
“Anterix (Long): In mid-September ATEX held an investor update call that was widely expected to include the announcement of its first commercial contract. This expectation was evidenced by the ~15% run-up in ATEX’s share price between the announcement of the call and the day it was held. When management failed to deliver the goods, shares promptly sold off and today sit ~25% down from their pre-call high.
I think it’s important to distinguish between management’s communication (poor) and the facts underpinning the investment opportunity (strong). The market’s reaction is an apparent punishment for management’s ineffective communication but largely belies the facts that were shared on the call, nearly all of which are bullish.
First, management announced that the material terms of ATEX’s first contract with the utility Ameren have been agreed to by both parties. The contract is in the process of being approved by Ameren, including a trip to that company’s board. At the time of the update call, management was optimistic they would be able to announce a complete contract within several “weeks.” Having exceeded this time frame, investors are rightly frustrated and have kept the stock in the “dog house.” While I share this frustration, I also remain highly confident that the Ameren contract will be the first of many and am not inclined to split hairs on a matter of mere weeks given the upside potential I see in the stock. To that end, I have been taking advantage of the market’s current pessimism and have added to the Partnership’s position.
Second, management indicated ATEX’s pipeline of potential customers is extremely strong. They are in discussions with up to 40 utilities that could potentially account for contracts covering ~75% of the company’s spectrum. With this pipeline information in hand, management was able to confidently reaffirm its 2024 financial target for run-rate revenue of $125 million based on contracts being signed with 6-11 of the nation’s top investor owned utilities.
In addition to the pending Ameren announcement, there has been a flurry of publicly reported engagement with utilities that gives me confidence additional contracts will ultimately materialize. For example:
- Xcel Energy – a gas and electric utility providing service in Colorado, Michigan, Minnesota, New Mexico, the Dakotas, Texas, and Wisconsin – has said it plans to test a private wireless LTE network in the 900 MHz spectrum band.
- Evergy has an outstanding RFP for a private LTE network buildout.
- Southern California Edison has added private LTE to its 2021 General Rate Case as well as its 2020-2022 Wildfire Mitigation Plan.
- Delmarva Power, a subsidiary of Exelon, has applied for an experimental license to evaluate 900 MHz broadband operations. Exelon’s customer base is larger than Ameren, Every, and Xcel combined.
- The New York Power Authority (NYPA) announced a project to pilot a private LTE network and has filed for a 900 MHz experimental license.
- Dominion Energy applied for a 900 MHz experimental license on October 16, 2020. Dominion operates across 20 states, making it one of the largest investor owned utilities in the country.
Finally, there appears to be an increasing preference from customers to pre-pay their spectrum leases up-front or over the first two years of the lease. Per management, “Prepayments of investor owned utility spectrum leases appear to be an easier path forward for them, providing them with the ability to capitalize their spectrum investment.” Capitalization of lease assets is a key component of the value proposition to utilities as it enables them to earn a return on, and not just a return of, their investment. The present value of any such prepayments at today’s rock-bottom interest rates would be highly favorable for ATEX. As an added benefit, any such up-front payments would reduce or potentially eliminate the prospect of future capital raises at ATEX.
At today’s $580 million market cap, ATEX’s spectrum – which is backed up by a viable business model and growing customer interest – garners a valuation of $0.30/MHz-Pop, well below the $0.70-$1.00/MHz-Pop fair market value of other low band spectrum assets.”
In July, we published an article revealing Steel City Capital’s bullish investment thesis on Anterix Inc. (NASDAQ:ATEX) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on Anterix Inc. (NASDAQ:ATEX).
In Q1 2020, the number of bullish hedge fund positions on Anterix Inc. (NASDAQ:ATEX) stock decreased by about 8% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t believe in Anterix’s growth potential. Our calculations showed that Anterix Inc. (NASDAQ:ATEX) isn’t ranked among the 30 most popular stocks among hedge funds.
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Disclosure: None. This article is originally published at Insider Monkey.
