FYI: Here's what CSFB has got to say about CLEC's. Interesting.
During February the CSFB CLEC index underperformed the major indices, posting a 30% decline versus a 9% decline in the S&P and a 22% fall in the Nasdaq. We note that the sector's positive movement during January, when the average CLEC stock rose 47%, all but disappeared, largely owing to the reversal in market sentiment during February, particularly within the technology sector. With just over half of the CLECs that we have under coverage having reported 4Q00 results, we thought it would be helpful to discuss some of the overall trends we have witnessed thus far.
Strong customer demand remains for CLEC services. Recent economic weakness notwithstanding, CLECs continue to see robust demand for local voice and high-speed data services (including Internet access and related services). Although pricing for long distance voice and wholesale Internet backbone services remains soft, we have yet to see much, if any, weakness in local voice and data service pricing, nor do we expect to see any for some time.
The execution gap continues to separate the leaders from the pack. Continuing on a trend that we saw in both the second and third quarter reporting cycle, the top players in the CLEC sector, namely FCOM, MCLD, XOXO, and WCII, have reported solid results with quarterly performance either meeting or exceeding our expectations for revenues, EBITDA, and line additions.
Funding remains the key investor concern. During January, the debt markets opened up to several of the stronger CLECs, including MCLD ($750M of High Yield raised), XOXO ($518M of High Yield raised), and TWTC ($450M of High Yield and $300M of Equity raised). Although no additional money flowed into the sector during February, we would not be surprised to see additional funding announcements from WCII and XOXO by midyear 01. We note that of our top picks, MCLD remains fully funded while FCOM, XOXO, and WCII are funded into early FY02, or approximately 12 months from today.
Strong CLECs continue to stay the course. Consistent execution by strong management teams at CLECs such as CPTL, FCOM, MCLD, XOXO, and WCII enables each of the leaders to stick to its established business plan. Some other competitors, however, have needed to "right size," or scale back, their current business plan in an effort to match network deployment with available capital.
Bottom line, we continue to believe that investors should maintain an overweighted position in the CLEC sector. We base this recommendation on such factors as attractive growth opportunities available to new entrants (as evidenced by strong access lines installations, revenues, and margin improvement); attractive buying opportunities in light of the sell-off in the market; and the potential benefit from consolidation activity.
STOCK PICKS:
XO Communications STRONG BUY
McLeodUSA STRONG BUY
XO Communications (XOXO)—XO Communications (formerly NEXTLINK Communications), our top pick in the CLEC group, is a facilities-based CLEC headquartered in Northern Virginia that provides local, long distance, and data services to small and medium business customers in 60 markets throughout the United States. With the strongest asset portfolio of the CLEC group, XOXO offers a wide variety of services by utilizing its own fiber and leasing ILEC local facilities and its large portfolio of fixed broadband wireless licenses. As of YE00, XOXO offered fixed wireless services in 25 markets, up from only 5 at 2Q00 end. Besides its deep intracity fiber optic networks, XOXO owns 24 strands of the Level 3 (LVLT, $25.31, Not Rated) nationwide fiber optic network as well as an empty conduit and an option on conduits 6 through infinity on the LVLT network. In addition, XOXO purchased European network assets from LVLT, including over 3,700 intercity route miles, local fiber in 9 markets, and 2.5 Gbps of transatlantic capacity for a total cost of $163 million. On June 16, XOXO closed the acquisition of Concentric for $2.9 billion in stock, a deal that should accelerate the company's data-rollout initiatives in the U.S. and Europe. Led by CEO Dan Akerson (veteran of both MCI and Nextel) and his impressive management team, XOXO is well funded ($1.9 billion in cash on its balance sheet at the end of 3Q00 and $625 million available on its $1 billion credit facility). We anticipate more acquisition moves by the company, particularly in the international arena. Target price: $61.
McLeodUSA (MCLD)—We view McLeodUSA as a key core holding in the CLEC sector based on current valuation, consistently strong operating results, and one of the best management teams in the business. Headquartered in Cedar Rapids, Iowa, the company provides an integrated telecommunications package including local, long distance, and data services to small- and medium-sized businesses in second- and third-tier markets in the Upper Midwest and Rocky Mountain States. In addition, the company is one of the largest publishers of telephone directories in the U.S. On January 30, McLeodUSA reported 4Q00 results with revenues in-line with expectations and with both EBITDA and line additions solidly ahead of estimates. Acquisitions made over the prior year appear to be progressing on plan as both Splitrock and CapRock have been fully integrated into McLeodUSA operations as of the end of 4Q00. The acquisition of CapRock Communications, a Southwestern facilities-based integrated communications provider, extends MCLD's footprint into four new states and adds 5,200 route miles of long-haul fiber. (The merger was completed on December 7, 2000.) The company completed its merger with Splitrock Services on April 3, 2000. The acquisition boosts the company's data growth by increasing McLeodUSA's time to market by 18-36 months. In addition, the acquisition will enable the company to provide data services on a nationwide basis through Splitrock's pervasive ATM-to-the-Edge (TM)-based data network serving all 50 states. In early January, McLeodUSA successfully raised $750 million in a high-yield debt offering (upsized from $450 million), a sign of strength for both the company and the industry, as the market for high-yield CLEC paper had essentially been closed since the early spring of 2000. Target price: $39. |
