TALES OF THE TAPE: Broadwing CEO Upbeat After Tough 2001
09 Jan 14:00
By Bob Sechler
Of DOW JONES NEWSWIRES
AUSTIN, Texas (Dow Jones)--Broadwing Inc. (BRW) Chief Executive Rick
Ellenberger quips that his outlook heading into 2002 may strike some as
"inappropriately optimistic," considering his company's 58% plunge in market
value last year and its recent layoffs.
Take, for example, Ellenberger's opinion of Broadwing's stock price. Shares
of the telecommunications company, which were hammered in 2001 along with
those of many of its peers, ended December at $9.50, compared with about $23 a
year ago. The stock was trading Wednesday at $9.46.
"That's ridiculously low," Ellenberger said. "This is going to be one of the
great buying opportunities in this company's history."
He sees plenty of potential growth drivers heading into 2002 - such as his
expectation of achieving a previously stated goal to be free cash-flow positive
by midyear - although Broadwing won't provide any specific financial guidance
until it releases fourth-quarter results at the end of the month.
"I'm hopeful that (investors) are going to see reasons to get behind the
stock far more aggressively than they have before" as the year progresses,
Ellenberger said.
But Wall Street remains skeptical. Ten of the 19 analysts who cover Broadwing
maintain "hold" ratings on it, according to Thomson Financial/First Call, while
six have "buy" ratings on it and only three have "strong buy" ratings.
A.G. Edwards & Sons analyst Anthony Ferrugia, who cut his rating on the
company to neutral - the equivalent of a hold - from buy last month, said the
outlook for broadband, or high-speed network services, remains too cloudy to
support significant stock appreciation for Broadwing.
"There's a lot of uncertainty with respect to what broadband growth is going
to be going forward, even in a recovering economy," Ferrugia said.
Still, he and some other analysts who followBroadwing agree that it's a
solidly run company that remains relatively better positioned than many of its
peers. The company, based in Cincinnati, Ohio, was formed out of Cincinnati
Bell's 1999 acquisition of IXC Communications Inc., an Austin-based operator of
a continental fiber-optics network.
Broadwing's diverse business has helped protect its revenue stream somewhat
amid the ongoing telecom-sector downturn. The sector's fallout hit Broadwing
and other emerging providers of Internet access and long-haul data transport
particularly hard in 2001 as growth in demand failed to keep pace with the
nationwide buildup in network infrastructure.
"Like everybody else, (Broadwing) has been unable to escape the realities of
the long-haul broadband business," Lehman Brothers Inc. analyst Daniel Zito
said. "But the perception is that this is a cash-generating business in the
old Cincinnati Bell, with a decent amount of visibility."
Zito has a buy rating on Broadwing, calling it "the best-positioned emerging
bandwidth player."
But, like Ferrugia, he's cautious on the stock's valuation based on continued
uncertainty regarding the outlook for broadband - which is Broadwing's biggest
potential growth driver. Zito's 12-month price target of $14 indicates he
doesn't see the shares achieving their previous heights anytime soon.
Last year's slowdown in corporate spending in the sector - exacerbated by
the demise of many dot-com outfits, which were big consumers of high-speed
Internet services - sent broadband investors hurrying for the exits, and it's
unclear when and to what degree spending will rebound. In late November,
Broadwing was spurred by the continued slowdown to lay off about 900
employees, or 15% of its work force, as part of what it said was a
reorganization designed to "better align ... costs against a changing telecom
landscape."
Still, Broadwing managed to hold out longer than most, with its stock price
relatively steady through last year's second quarter. Some competitors, such as
Level 3 Communications Inc. (LVLT) and Williams Communications Group (WCG),
fell earlier and harder, finishing 2001 down 85% and 80%, respectively.
In addition, Broadwing surpassed analysts consensus quarterly financial
expectations through much of 2001 before lowering its full-year outlook when
it reported third-quarter results in October. At the time, Broadwing said it
expected full-year revenue to come in at $2.35 billion to $2.38 billion, off
about 5% from the former estimate of $2.5 billion but still at least 15% above
the previous year's $2.05 billion in sales.
"Our stock price makes it feel like (2001) was a bad year, but our (revenue)
growth seems like a good year," said Ellenberger, who sounds little like the
leader of a struggling company in an out-of-favor sector. "We've been growing
(sales) despite the economy, and we're a market-share gainer in the midst of a
downturn."
Those are among the factors he cites for his optimism. He also thinks a less
crowded competitive landscape in 2002 and a developing industrywide trend
toward consolidation will work in Broadwing's favor, in part by shoring up
industry pricing. By some estimates, 27 telecom companies filed bankruptcy last
year, while many others are on the ropes.
"A lot of the clutter, a lot of the weaker companies, are going away,"
Ellenberger said.
Meanwhile, Ellenberger thinks there's a possibility Broadwing will be player
in the consolidation, either as a buyer or as a candidate to be bought.
Broadwing "will be in a lot of people's gun sights" as an acquisition target
because of its relatively strong financial performance and its state-of-the-art
assets, he said, although he added that he's "not anxious" for anything to take
place at what he considers its currently depressed share price.
As for the ongoing uncertainty regarding overall broadband demand and
corporate spending, Ellenberger isn't making any predictions on the timing of a
turnaround, acknowledging that there remains "a pretty hazy crystal ball"
heading into 2002. Still, he said there's no doubt the technology has a bright
future, and he thinks his company will play a part of it.
"Broadband, like almost any new infrastructure technology, doesn't launch
itself on the first day and see nothing but perpetual growth up," he said.
Even so, the most bullish of Broadwing analysts say the timing of a rebound
remains the key for the company's stock price.
Hibernia Southcoast Capital analyst James Ott, who has a strong buy rating
on Broadwing, called the issue "critical" for the company, but he said he
expects to see signs of a spending turnaround within the first half this year.
"When that happens, (Broadwing) stock is going to have to react to it," said
Ott, who has a $16 price target on the shares. "At this price, you're paying
next to nothing" for the company's fiber-optics network.
-By Bob Sechler; Dow Jones Newswires; 512-236-9637
(END) DOW JONES NEWS 01-09-02
02:00 PM |
