from Fahnestock's Bauer & Lee:
WinStar Communications, Inc.
Fiber Deal Increases Visibility of Gross Margin Expansion; Reit. BUY.
Investment Opinion: We are reiterating our BUY rating on WinStar. Our year-end target price of $65
reflects a 30% public market discount to our revised 1999 net asset value of $91 per share and offers a 60%+
upside potential from the current price levels. Key points:
· Buying Fiber from Metromedia: Today WinStar announced that it has entered into an agreement to
obtain dark fiber capacity in 38 major markets in the U.S. and three major international markets from
Metromedia Fiber Network (OTC- MFNX). As part of the agreement, Metromedia Fiber Network will
deliver dark fiber to WinStar in 38 markets including Boston, Atlanta, Dallas/Forth Worth, Los Angeles,
Seattle and Houston as well as three international markets - London, Amsterdam and Cologne - where
WinStar is either currently providing services or has obtained licenses to do so. As a result, WinStar will
have dark fiber rings in a total of 50 of the 60 U.S. markets that it plans to serve (the company previously
announced an agreement to purchase dark fiber in 12 markets). In addition, this agreement includes dark
fiber on Metromedia Fiber Network's German ring, which provides intercity connectivity between major
markets in that country. Finally, this agreement also provides that Metromedia Fiber Network will deploy
fiber into buildings designated by WinStar in each market, including its hub sites and central offices,
thereby adding another way for the company to expand its broadband connections to customers.
· Financial Terms: WinStar will pay approximately $300 million over 20 years, which includes imputed
interest, beginning upon delivery of the dark fiber. This deal will significantly expand the company's local
presence in the U.S., adding both metropolitan ring capacity and fiber-lit buildings to its network in those
markets.
· Bottom Line: WinStar's network expenses are expected to be reduced by $1.2 million ($2.5 million vs.
$1.3 million) per month, resulting in at least 5% of gross margin improvement next year. Our current
forecast calls for gross margins to improve from 35% at 4Q99 to 53% by 4Q2000, resulting in a full-year
2000 gross margin of 47% (vs. 29% for full-year 1999). Although we are making no changes to our 2000
numbers, the visibility of the company's guidance on its profitability has greatly improved. WCII is
currently trading at a steep 56% discount to our 1999 net asset value of $91. Historically discounts of 50%
or more for healthy companies are rare, short lived, and represent excellent buying opportunities. We think
this deep discount reflects recent skepticism over the company's ability to achieve its initial goals on
profitability with lower (than expected) 2000 revenues. As the visibility of the company's near-term
fundamentals continues to improve, we expect this discount to shrink to a historically more normal 30%
level and fuel a 60%+ increase in the stock. |
