Fahnestock's Bauer and Lee on TGNT today:
Investment Opinion: Because of Teligent's volatility, we have maintained a “long-term” buy rating on the
stock to reflect our bullishness on the prospects for wireless CLECs and supplemented this rating with “short
term” trading calls. If we changed our rating on this stock every time it hit our target price and pulled back
to an attractive territory we would be forced to change ratings almost on a monthly basis. Key points:
· TGNT shares have been in overvalued territory since late July. On July 28, 1999 TGNT shares peaked
at $75.63 capping off a six-week run up that boosted the stock price by nearly 60%. What was the
company saying? In a Dow Jones News story released on the day when the stock peaked, a Teligent
spokesman noted “While we do not have any announcement planned, there has been an increasing focus in
recent days on the fixed-wireless solution as a way to break the bandwidth bottleneck in the local loop.
That focus has resulted from the deals that have recently been announced by Sprint and MCI in the MMDS
spectrum.” What were investors saying? Maybe - just maybe - the wireless Cable TV companies being
purchased by Sprint and MCI (to offer high-speed wireless Internet access for residential customers) would
whet the appetites of these behemoths for some REAL wireless capacity – the kind owned by Teligent.
What were we saying? This may look cheap as a company but it's expensive as a stock.
· Since July TGNT shares have declined by nearly 40%. At its peak TGNT shares were trading at a 9%
public market discount – a level that has historically proven to be unsustainable - period. Despite the
pullback to the $55 - $65 level during August and September, TGNT's public market discount (of roughly
20% to 30%) remained in rich if not outright overvalued territory for most of this period. As noted in our
ongoing commentary on this stock, we've been surprised by TGNT's ability to defy gravity for such a
prolonged period of time. In fact we were starting to wonder if the stock wasn't beginning to discount next
years numbers (although other CLECs aren't). The recent pullback has returned TGNT to a 45% public
market discount which has historically signaled “attractive” territory. Where do we begin to aggressively
buy the stock again? When its public market discount expands to the 50% range (about four to five points
lower than the current price.)
Valuation
Our discounted cash flow model (attached) summarizes the key fundamental and valuation assumptions
that drive our Net Asset Value for Teligent. The top two thirds of this table reflect our fundamental forecast.
The bottom third highlights our valuation assumptions. The mathematics that support our $83 per share (year
end 1999) net asset value estimate runs as follows: The net present value of Teligent's free cash flows
(EBITDA less capital spending) discounted at 14% for 10 years approximates $922 million. The net present
value of Teligent's liquidation value 10 years hence (based on a multiple of 10x cash flow and discounted at
14%) approximates $5.5 billion. The sum of these two estimates ($6.4 billion) reflects Teligent's gross asset
value. After subtracting roughly $505 million of net debt, the company's net asset value approximates $5.9
billion or $58 per share. These figures are detailed in the box in the lower left hand of our 10-year DCF
model. The box in the lower right hand side of our 10-year DCF model highlights the sensitivity of our target
price to different discount rates and terminal multiples. Although a strong case can be made that our 14%
discount rate is too steep and our 10x terminal multiple is too light, these metrics historically have successfully
identified undervalued CLEC stocks and, as such, we think they represent reasonable (and useful) valuation
metrics.
Teligent's historical public market discount(s) have mirrored its peer group.
The accompanying two charts offer a historical perspective of Teligent's estimated 1998 -1999 year
end net asset value(s), its stock price action over this period, and the stock's corresponding public market
discount to these estimates at any point during this period.
· Top Chart: This chart depicts Teligent' price action from February of 1998 to the present. A line
representing year-end 1998 consensus net asset value estimates and our year-end 1999 estimate for the
company has been superimposed on this price action.
· Bottom Chart: The bottom chart tracks Teligent's public market discount i.e., the spread between the
company's stock price and its estimated net asset value, at any given point in time over the past 18 months.
· History: During 1998, consensus net asset value estimates for the Company clustered in the $50 per share
range. These estimates were raised to the $60 level at the beginning of 1999 (to reflect the inclusion of one
more year of positive cash flow and one less year of negative cash flow as the discounting period is shifted
one year out). After the Company reported 1Q99 results, consensus estimates for year-end 1999 were
raised to the mid-$80 level (which mirrors our current $83 estimate). By combining our year end 1999 net
asset value estimate with these historical consensus estimates, it is possible to chart TGNT's public market
discount to its estimated net asset value over the course of the last 18 months. Over this period the stock's
public market discount has “bottomed” in the 55% range five times, and peaked at around 30% eight
times. Given the stock's volatility (which is largely a function of its limited float), the relatively skinny
band within which this discount expands and shrinks is remarkable. Over the past 18 months, TGNT
shares have rarely traded at less than a 20% public market discount and never traded below a 61%
discount. In this regard the stock trades like dozens of Cable TV, Cellular, PCS and CLEC stocks which
have preceded it in the public market. |
