WCII: Stock Way Oversold; Reiterate Buy & $70 Target
Salomon Smith Barney
Jack Grubman
Wednesday, September 29, 1999
--SUMMARY:--WinStar Communications, Inc.--Telecommunications Services
*WCII closed down more than 20% amid concerns regarding Q3'99 & 2000 est.
*We are updating our numbers for 2000 due to guidance from WCII, however,
we are maintaining our Q3'99 est. of $115.5 mil in revs, $74 mil in EBITDA
losses & 75,000 net adds for Q3'99.
*Our new rev est is $651 mil (was $688), our EBITDA loss est is $156 mil
(was $151), & our net adds estimate is 390,000 (was 415,000). Our new net
adds est implies 5,000 incremental net adds/qtr & may prove to be
conservative.No change to avg rev/line or gross margin est of 48% for 2000
*There is NO change to our DCF driven price target of $70.
*Strategic importance of the asset is still in tact.
*We believe WCII was way oversold yesterday & would be aggressive buyers on
any continued weakness in WCII. We reiterate our Buy & $70 price target.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 12/98 EPS $(2.54)A $(2.77)A $(2.83)A $(3.80)A $(12.61)A
Previous 12/99 EPS $(3.72)A $(3.53)A $(3.40)E $(3.30)E $(13.95)E
Current 12/99 EPS $(3.72)A $(3.53)A $(3.40)E $(3.30)E $(13.95)E
Previous 12/00 EPS $N/A $N/A $N/A $N/A $(15.45)E
Current 12/00 EPS $N/A $N/A $N/A $N/A $(13.40)E
Previous 12/01 EPS $N/A $N/A $N/A $N/A $N/A
Current 12/01 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1S Prior:No Change Price (9/28/99).....:$42.19
P/E Ratio 12/99.....:N/Ax Target Price..:$70.00 Prior:No Change
P/E Ratio 12/00.....:N/Ax Proj.5yr EPS Grth...:0.0%
Return on Eqty 98...:N/A% Book Value/Shr(99)..:-5.30
LT Debt-to-Capital(a)N/A% Dividend............:$N/A
Revenue (99)........:440.00mil Yield...............:N/A%
Shares Outstanding..:79.0mil Convertible.........:Yes
Mkt. Capitalization.:3333.0mil Hedge Clause(s).....:#
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
--OPINION:------------------------------------------------------------------
WinStar closed down more than 20% amid concerns regarding Q3'99 and 2000
estimates. We are updating our numbers for 2000 due to guidance from
WCII, however, we are maintaining our Q3'99 estimates of $115.5 million
in revenues, $74 million in EBITDA losses and 75,000 net additional lines
for Q3'99 (which were reconfirmed by WCII's CEO and which have not
changed since the company reported its Q2'99 results in mid-August).
We updated our model to reflect new guidance for 2000 and as a result we
are reducing our revenue estimates from $688 million to $651 million, our
EBITDA loss estimate from $151 million to a loss of $156 million, and our
net adds estimate from 415,000 to 390,000. Our new net adds estimate of
390,000 for 2000 implies 5,000 incremental net adds per quarter and may
prove to be conservative. We are not reducing our average revenue per
line or our gross margin estimate of 48% for 2000 as we expect the
company to see gross margins improve as more lines are brought on their
own network. During last quarter the percentage of all lines that were
on-net was 27% and is expected to reach 30% during Q3'99 with gross
margins expected to improve sequentially from 24% in Q2'99 to 30% in
Q3'99. On a per share basis our loss estimate for 2000 actually improved
from $15.45 per share to $13.40 per share due to lower interest expense
than our previous estimate.
While we understand that the range was wide on the Street for both
revenues and EBITDA losses, our previous revenue and EBITDA estimates
were within 5% of the company's guidance for 2000 and we do not view this
as a significant change for a high growth company on figures that are one
year out. Said another way, if an aggressive growth company like WCII
can come within 5% of our revenue estimate and 3% of our EBITDA estimate
then we believe the company is doing well. There is NO change to our DCF
driven price target of $70.
2000 previous 2000 new
Revenues $688.2 $651.3
EBITDA loss (151.4) (156.3)
Net line adds 415,000 390,000
We believe WCII was greatly oversold yesterday in reaction to this
adjustment in 2000 numbers. In fact, WCII's market cap based on fully
diluted shares outstanding of 79 million was reduced by more than $900
million for a only a 5% reduction in revenue, which implies that WCII
should be a $18-$19 billion market cap company. The stock is only
trading at 6.7x 2000 revenues vs 9.0x on average for the CLECs that we
cover.
We would like to reiterate the strategic importance of WCII's assets and
know of several RBOCs which will be using WCII technology to attack each
other where they have contiguous suburban properties.
NET/NET: We continue to believe WCII is a good strategic asset whose
operations will only improve as more lines are brought on their own
network. We believe the stock was way oversold yesterday and would be
aggressive buyers on any continued weakness in WCII. We reiterate our
Buy and $70 price target. |
