The chief executive officer of Exchange Income Corp. says the company's second-quarter results – which include a surprising jump in profits – refute critics who question the company's earnings power and its viability.
Late Tuesday, Exchange Income reported flat revenue but EBITDA, or earnings before interest, taxes, depreciation and amortization, of $28.4-million – a 14-per-cent increase over the prior year.
The company's WesTower subsidiary reported $8.8-million of EBITDA, a 169-per-cent increase from 2013's second quarter. The EBITDA margin was 4.9 per cent, versus 1.6 per cent in the prior-year period. (All figures exclude a $600,000 loss on a building destroyed by a tornado.)
The future of WesTower, which builds cellphone towers for wireless companies, is central to a thesis by Veritas Investment Research that Exchange Income's shares have a fair value of $8.50. AT&T, WesTower's primary customer, seems to be scaling back its capital expenditures this year, based on its own disclosures and guidance of double-digit revenue declines provided by MasTec, a WesTower competitor.
Veritas said it believed that WesTower, which reported EBITDA margins between 2 per cent and 3 per cent in the four quarters prior to Tuesday's results, would not meet earnings expectations in 2015 because of the AT&T spending cut and financial disclosures that suggested it wouldn't be able to collect from AT&T.
Rather than the $130-million in 2015 EBITDA some analysts were forecasting, Veritas said, Exchange Income was more likely to post $95-million. And a greater deterioration in the business could challenge its ability to pay off debt, making the stock potentially worthless.
When the Veritas analysts issued their report on July 9, Exchange Income traded at $21.48 a share; it quickly fell below $20. The shares recovered from a July 31 low of $17.16, but following a Globe and Mail column about the Veritas report on Aug. 7, the shares fell as low as $14.30.
In an interview on Wednesday, CEO Mike Pyle said that while the company doesn't provide 2015 guidance, the second-quarter profits put Exchange Income on a path higher, and sooner, than the Veritas numbers. And the remainder of Bay Street analysts covering the company, who typically have "buy" ratings and target prices in the $20-plus range, essentially reject the Veritas critique, he said.
"They predicted we couldn't fix WesTower," Mr. Pyle said. "I suggest to you our Q2 results say that's not true."
"Their [2015 EBITDA] assessment is clearly not looking particularly good when we made $28-million in the last quarter," he said. "The balance of opinion in the marketplace is that [Veritas's forecast] is wrong."
The key will be in 2014's second half. Mr. Pyle said the company expects a revenue decline for WesTower of up to 10 per cent, with capital expenditure issues in the wireless industry offset by the ability to win business, including a new contract with another company that could be worth "up to $100-million [U.S.] over multiple years."
Margins "may be smaller" in the next two quarters, he says, "but we're not going back to zero-per-cent margins."
WesTower has "not been good enough" in its billing practices and will do a better job of collecting from AT&T, Mr. Pyle said in a conference call, addressing the numbers that suggested a collections issue.
Michael Yerashotis, the Veritas analyst who was the lead analyst producing the report, says the firm stands by its research.
David Milstead