For the longest time, shares of Fusion traded based on potential. There was the potential of growth through acquisition, the potential of organic growth, and the potential of synergies kicking in and driving EBITDA. Meanwhile, it always seemed like Groundhog Day, with management time and again discussing the potential of FSNN while not delivering enough to satisfy impatient investors, who tend to think Rome was built in day.
The result of this was that Fusion became by far the cheapest stock in my universe on some levels, like price to EBITDA. Yet, it was also expensive on others like Debt to EBITDA which stood at a 9 times multiple based on trailing numbers. I always knew FSNN had big upside, but knowing what would help it realize this was impossible to forecast.
That all changed when Fusion announced the Birch acquisition. Investors can now look at FSNN shares, which are at double the price of pre-merger trading, and realize that the potential is becoming the reality. And, as this reality becomes clearer, it’s easy to appreciate that Fusion is still a very cheap stock. How long it will remain so is the question, as their are several key catalysts coming for the Company in the next couple months.
What to expect from Fusion still in 2017…
I believe there will be three catalysts for FSNN in the coming months, each of which could be positive for the stock as they make clear to investors the value here.
The first catalyst will be a vision for free cash flow. This is been the knock on Fusion forever, generating bigger revenues and EBITDA, but without any free cash flow resulting from the growth. When you have a company building a platform, this is often the case that the building of the platform overwhelms cash flow in the early years. This was certainly the case with Amazon, but the growth was so phenomenal that company got a hall pass.
Fusion has been trudging for so long, investors are tired of waiting for free cash flow to help support the valuation. Well, that wait is going to be over in the not too distant future, and I fully expect to hear details about this on the upcoming earnings conference call. In my opinion, detailing how they will be wildly cash flow positive in 2018 will be the first catalyst to help get shares trading higher.
Next up is a refinancing of their debt. As was discussed in a Reuters article on October 20th, they are in the process of lining up banks to lead a complete refinancing of their debt and Birch’s.
“There is strong interest in this transaction, as the market increasingly recognizes Fusion’s unique and compelling single-source cloud strategy,” according to CEO Matt Rosen. This transaction is expected to close by year-end and the pricing will be a strong indication of the market’s belief in Fusion’s core business. If this deal closes in a timely manner at attractive rates, as would seem likely by the Company’s comments, it may be a great catalyst for the stock as it will give confidence towards future numbers.
If they get the debt done, that means the merger is done as well. You can’t do one without the other. Meaning, Fusion can’t refinance Birch’s debt unless it has completed its acquisition of Birch. And, that is the biggest potential catalyst staring at FSNN investors.
Once this transaction closes, investors will wake up to the following facts:
- Fusion is one of the largest cloud services companies in the US
- It has a complete product offering and has ditched its legacy CLEC business
- It is trading at below 2X EBITDA
When Fusion acquired Birch, they used $3.85 as a price to value their shares. At that price, the combined company would be trading at a market cap of $365M. Guidance is for EBITDA of $150M post merger, with related synergies. Which puts FSNN at about 2.5X EBITDA at $3.85 and well under 2X right now.
From Tailwinds’ perspective, a valuation of 5X EBITDA is a very reasonable assumption of where this could go in the near-term. Frankly, it would make sense that it trade at a higher multiple, as its peers do, but 5X is a great starting point. Thus, a move to $3.85, where they valued the acquisition, is not stretching any valuations, yet would be an almost 50% move from today’s price of $2.65.
I own shares in Fusion. With three potential catalysts coming up, each of which will help clarify the incredible value in FSNN shares, I expect this to be one of my better performing stocks through year-end.
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