Replies to post #13555 on United Communications Partners Inc (UCPA)

[naturalborninvestor]

It's really intriguing. They excel in growing revenues, but the increased sales don't benefit them because the growing cost of providing those sales eats up their extra profits. This is a very uncommon occurrence. The company exhibits constant, or even increasing economies to scale: The more they sell, the more costly it becomes to them to provide that service. The opposite should be true.

There is only one way to counter that tendency: higher margin business. Judging by the CEO letter, this is the route management is aiming for with some achievements in the first half of 2016. But ultimately, surviving on 8.5% margin is going to be all but easy. The company is cash-strapped despite having $2.5m, more than the UCP market cap, in liquid assets.

We are also continuing to increase sales of services not directly linked to media investments, creating growth in gross profit.
...
The Gross profit margin for the six months ended June 30, 2016, is 8.2% compared to 8.4% the same period last year. The gross profit margin has increased in three months ended June 30, 2016, compared to the first three months ended March 31, 2016 – from 8% to 8.46%

This company exhibited 20% gross margin when they were still providing creative services like advertisement production. Maybe that is a route to re-consider.