(This from Governali and Littlefield at their new firm)
Goldman, Sachs & Co. Investment Research
Metromedia Fiber Network Inc.
* * Initiated Coverage and Added to U.S. Rec List * *
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* We have initiated coverage of Metromedia Fiber Network and added the *
* stock to our U.S. Recommended List. We believe that Metromedia is an *
* excellent way for investors to participate in the opening of local *
* markets and and the soaring demand for broadband, with less execution *
* and operating risk. We estimate losses of $0.42 in both 1999 and 2000. *
* Our year-end 1999 price target is $60.00. *
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Frank J. Governali, CFA
Kathryn D. Littlefield
===================== NOTE 8:33 AM July 07, 1999 ======================
Stk Latest 52 Week Mkt Cap YTD Pr Cur
Rtg Close Range (mm $) Change Yield
--- ------ ------- ------- ------ -----
Metro Media Fiber Network In RL 37.06 48-4 5762.6 121% 0.0%
--------------Earnings Per Share---------------
MFNX Mar Jun Sep Dec FY CY
2000 FY -0.42
1999 FY -0.42
1998 FY(A) 0.02
-Abs P/E on- -Rel P/E on-- EV/NxtFY LT EPS
Cur Nxt Cur Nxt EBITDA Growth
----- ----- ----- ----- -------- ------
MFNX FY -88.2X -88.2X -3.1X -3.4X NA NA%
===========================================================================
Company Profile
Metromedia Fiber Network (MFN) is a wholesale supplier of dark-fiber
capacity in major metropolitan markets. Its customers include other
telecommunications companies as well as corporate users that want to manage
their own networks. Simply put, MFN is a distribution company, selling
capacity to customers on its distribution medium fiber. It builds
networks and sells them without providing actual services to end users.
Investment Summary
* MFN has cornered a niche market. We believe that MFN is the only
carrier seriously pursuing the in-city network construction business. It
is deploying more fiber in each market (no less than 432 strands per route
mile) and is extending its reach to more key buildings and central offices
than any other carrier. Because of the tremendous number of fibers it is
deploying, MFN is inherently the lowest-cost provider of dark fiber in each
of its markets.
* Economics improve every time more fiber is pulled. A high positive
correlation exists between the number of fibers that MFN pulls through its
conduits and its return on invested capital. This relationship develops
because the capital expenditure on fiber pulls in existing conduit is about
50% of the original construction cost, yet revenues per fiber mile do not
change. Thus, when new fiber is pulled through existing conduit, we expect
higher invested capital turns. In addition, because the fixed operating
costs remain virtually the same despite new fibers, NOPAT margins should
also improve. The end result is higher returns on invested capital.
* If MFN's business plan is so attractive why aren't other carriers
following suit? MFN likes to explain that it is the single carrier
seriously pursuing an in-city fiber construction strategy for two reasons:
(1) It thought of the idea first, and (2) by the time others caught on to
the attractive economics of its business, their window of opportunity had
past. In other words, MFN believes that its head start earned it a
tremendous competitive advantage. It can offer other carriers or
commercial users access to the largest cities, whereas any new market
entrant would take considerable time to duplicate MFN's large city builds.
And, any new market entrant building in slightly smaller cities would be
disadvantaged by not being able to also offer customers access to the large
cities in addition to the smaller ones.
* THE Economics of buying fiber from MFN is more attractive to carriers
than building (in most cases.) If a carrier wants to own fiber on a
densely built intra-city network, it will, in most cases, find it more cost
efficient to buy the fiber from MFN than build it itself. Some carriers,
however, may argue that they can build a network for less than they can buy
fiber from MFN, and this may be true sometimes. For instance, in Chicago,
carriers can easily gain access to underground tunnels that run deep below
the major central offices. However, MFN's network is dense in all of its
target markets. It targets access to key office buildings in each city as
well as the central offices. Thus, although carriers can, in some cases,
build their own networks for less, these networks are not as extensive as
MFN's network.
* network Construction CONTINUES. To date, MFN has nearly completed
construction on its New York, Philadelphia, and Chicago networks and has
commenced construction in San Francisco and Dallas. MFN's current business
model identifies 16 cities, both domestic and international, to be built by
2002. We expect the company to continue to expand its network construction
and have included this expectation in our long-term model. We estimate
that MFN will be in as many as 87 cities within ten years. Our discounted
cash flow-derived valuation target is premised on the successful execution
of this expanded model.
* AboveNet Acquisition makes sense. MFN recently announced plans to
acquire AboveNet, a company often referred to as the ISP's ISP. In other
words, AboveNet, a wholesale provider of web hosting and transport
services, is essentially to the ISP world what MFN is to the telecom
services world a network access facilitator. In acquiring AboveNet, both
carriers operate only on a wholesale basis. Therefore, MFN does not
compromise its neutral position in the industry. Both are arms merchants.
We think that the companies together gain a larger addressable market, with
the potential for stronger operating margins. The market has reacted very
negatively to this acquisition, we think for two reasons. (1) It may seem
to dilute MFN's previously very simple business model. (2) Some think that
the price was too steep. At current levels, these concerns have been
overly discounted in the stock, making a current investment in MFN
insulated from additional downside risk. We have not yet adjusted the MFN
model to account for the Abovenet acquisition. However, we are confident
that it will add to our price target.
* Our YEAR-END PRICE TARGET IS $60. We achieve this target by using a DCF
model with a 14% discount rate and a 10 times terminal-year EBITDA
multiple. Comparable company valuation analysis really is not possible
with MFN, given its unique industry position.
Risks
* Competition IS POSSIBLE. Another company could decide to copy MFN's
business model and become a viable competitor. However, we firmly believe
that MFN has a significant time-to-market advantage, at least in the
largest markets, and that demand for its fiber will be strong, given that
it is the single-largest source as well as a neutral player in the market.
* Execution IS A SIGNIFICANT CHALLENGE. The most significant risk
associated with MFN's business plan is failure to complete construction in
each of its target markets. To date, however, management has illustrated
that it can build networks on schedule (if not ahead of schedule).
Important Disclosures (code definitions attached or available upon request)
MFNX : CS
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